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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended August 26, 2006

OR



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

Commission file number 0-23818

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 Number)
|                                                               | 
|1521 Poplar Lane, Forest Grove, Oregon                         |  | 97116                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             

(503) 359-9300

(Registrants telephone number)

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 the filing requirements for the past 90 days. Yes x  No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer  x            Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act).    Yes ̈No x

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.    Yes ̈No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes ̈No x

The number of shares of the Registrants Common Stock outstanding as of October 5, 2006 was 20,399,834 shares.





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##### Table of Contents

MERIX CORPORATION

FORM 10-Q

TABLE OF CONTENTS



|                              |  |                                                                                                         |  |    |  | 
|----------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | -- |  | 
|Part I. Financial Information |  | 3                                                                                                      
|                              |  |                                                                                                        
|                              |  | Item 1.
Consolidated Financial Statements                                                               |  | 3 
|                              |  |                                                                                                        
|                              |  | Consolidated Balance Sheets as of August 26, 2006 and May 27, 2006                                      |  | 3 
|                              |  |                                                                                                        
|                              |  | Consolidated Statements of Operations for the 13-Week Periods Ended August 26, 2006 and August 27, 2005 |  | 4 
|                              |  |                                                                                                        
|                              |  | Consolidated Statement of Shareholders Equity from May 27, 2006 through August 26, 2006                |  | 5 
|                              |  |                                                                                                        
|                              |  | Consolidated Statements of Cash Flows for the 13-Week Periods Ended August 26, 2006 and August 27, 2005 |  | 6 
|                              |  |                                                                                                        
|                              |  | Notes to the Consolidated Financial Statements                                                          |  | 7 
|                              |  |                                                                                                        
|                              |  | Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations           |  | 33
|                              |  |                                                                                                        
|                              |  | Item 3.
Quantitative and Qualitative Disclosures About Market Risk                                      |  | 41
|                              |  |                                                                                                        
|                              |  | Item 4.
Controls and Procedures                                                                         |  | 41
|                              | 
|Part II. Other Information    |  | 42                                                                                                     
|                              |  |                                                                                                        
|                              |  | Item 1.
Legal Proceedings                                                                               |  | 42
|                              |  |                                                                                                        
|                              |  | Item 1A.
Risk Factors                                                                                   |  | 43
|                              |  |                                                                                                        
|                              |  | Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                     |  | 54
|                              |  |                                                                                                        
|                              |  | Item 6.
Exhibits                                                                                        |  | 54
|                              |  |                                                                                                        
|                              |  | Signatures                                                                                              |  | 55



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PART I.    FINANCIAL INFORMATION

ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS

MERIX CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, unaudited)

|                                                                                                                                         |  |                    |         |                 |   |        
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | --------------- | - | -------
|                                                                                                                                         |  |                    |         |                 |   |        
|                                                                                                                                         |  | August 26,    2006 |         | May 27,    2006
|ASSETS                                                                                                                                   |  |                    |         |                 |   |        
|Current assets:                                                                                                                          |  |                    |         |                 |   |        
|Cash and cash equivalents                                                                                                                |  | $                  | 20,443  |                 | $ | 12,616 
|Short-term investments                                                                                                                   |  |                    | 14,000  |                 |   | 18,525 
|Accounts receivable, net of allowance of $3,087 and $2,683, respectively                                                                 |  |                    | 79,318  |                 |   | 75,379 
|Inventories, net                                                                                                                         |  |                    | 28,382  |                 |   | 24,384 
|Assets held for sale                                                                                                                     |  |                    | 2,176   |                 |   | 1,987  
|Other current assets                                                                                                                     |  |                    | 8,748   |                 |   | 7,155  
|                                                                                                                                         |  |                    |         |                 |   |        
|Total current assets                                                                                                                     |  |                    | 153,067 |                 |   | 140,046
|                                                                                                                                         |  |                   
|Property, plant and equipment, net                                                                                                       |  |                    | 123,667 |                 |   | 122,862
|Goodwill                                                                                                                                 |  |                    | 90,306  |                 |   | 89,889 
|Definite-lived intangible assets, net                                                                                                    |  |                    | 13,154  |                 |   | 13,916 
|Leasehold land use rights, net                                                                                                           |  |                    | 6,421   |                 |   | 6,433  
|Deferred financing costs, net                                                                                                            |  |                    | 5,419   |                 |   | 5,653  
|Other assets                                                                                                                             |  |                    | 100     |                 |   | 131    
|                                                                                                                                         |  |                    |         |                 |   |        
|Total assets                                                                                                                             |  | $                  | 392,134 |                 | $ | 378,930
|                                                                                                                                         |  |                    |         |                 |   |        
|                                                                                                                                         |  |                   
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                     |  |                    |         |                 |   |        
|                                                                                                                                         |  |                   
|Accounts payable                                                                                                                         |  | $                  | 58,682  |                 | $ | 47,260 
|Accrued compensation                                                                                                                     |  |                    | 8,158   |                 |   | 12,114 
|Accrued warranty                                                                                                                         |  |                    | 2,317   |                 |   | 2,319  
|Other accrued liabilities                                                                                                                |  |                    | 12,557  |                 |   | 11,020 
|Income taxes payable                                                                                                                     |  |                    | 537     |                 |   | 134    
|Current portion of long-term debt                                                                                                        |  |                    | 7,579   |                 |   | 7,655  
|                                                                                                                                         |  |                    |         |                 |   |        
|Total current liabilities                                                                                                                |  |                    | 89,830  |                 |   | 80,502 
|                                                                                                                                         |  |                   
|Long-term debt                                                                                                                           |  |                    | 89,255  |                 |   | 91,077 
|Other long-term liability                                                                                                                |  |                    | 1,126   |                 |   | 1,108  
|                                                                                                                                         |  |                    |         |                 |   |        
|Total liabilities                                                                                                                        |  |                    | 180,211 |                 |   | 172,687
|                                                                                                                                         |  |                    |         |                 |   |        
|                                                                                                                                         |  |                   
|Minority interest obligations, net of tax                                                                                                |  |                    | 4,128   |                 |   | 4,118  
|                                                                                                                                         |  |                   
|Commitments and contingencies (Notes 12 and 21)                                                                                          |  |                    | -       |                 |   | -      
|                                                                                                                                         |  |                   
|Shareholders equity:                                                                                                                    |  |                    |         |                 |   |        
|Preferred stock, no par value; authorized 10,000 shares; none issued                                                                     |  |                    | -       |                 |   | -      
|Common stock, no par value; authorized 50,000 shares; issued and outstanding August 26, 2006: 20,170 shares; May 27, 2006: 19,806
shares |  |                    | 205,771 |                 |   | 204,831
|Unearned stock compensation                                                                                                              |  |                    | -       |                 |   | (1,096)
|Retained earnings (accumulated deficit)                                                                                                  |  |                    | 2,020   |                 |   | (1,623)
|Accumulated other comprehensive income                                                                                                   |  |                    | 4       |                 |   | 13     
|                                                                                                                                         |  |                    |         |                 |   |        
|Total shareholders equity                                                                                                               |  |                    | 207,795 |                 |   | 202,125
|                                                                                                                                         |  |                    |         |                 |   |        
|Total liabilities and shareholders equity                                                                                               |  | $                  | 392,134 |                 | $ | 378,930
|                                                                                                                                         |  |                    |         |                 |   |        

The accompanying notes are an integral part of the Consolidated Financial Statements.



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MERIX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts, unaudited)



|                                                                          |  |                               |         |                 |   |       
|------------------------------------------------------------------------- |  | ----------------------------- | ------- | --------------- | - | ------
|                                                                          |  |                              
|                                                                          |  | For the 13-Week Period Ended:
|                                                                          |  | August 26, 2006               |         | August 27, 2005
|                                                                          |  |                              
|Net sales                                                                 |  | $                             | 105,916 |                 | $ | 51,787
|Cost of sales                                                             |  |                               | 85,649  |                 |   | 44,172
|                                                                          |  |                               |         |                 |   |       
|Gross margin                                                              |  |                               | 20,267  |                 |   | 7,615 
|                                                                          |  |                              
|Operating expenses:                                                       |  |                               |         |                 |   |       
|Engineering                                                               |  |                               | 1,583   |                 |   | 1,492 
|Selling, general and administrative                                       |  |                               | 11,713  |                 |   | 4,875 
|Amortization of identifiable intangible assets                            |  |                               | 762     |                 |   | 751   
|Severance and impairment charges (Note 15)                                |  |                               | -       |                 |   | 1,135 
|                                                                          |  |                               |         |                 |   |       
|Total operating expenses                                                  |  |                               | 14,058  |                 |   | 8,253 
|                                                                          |  |                              
|Operating income (loss)                                                   |  |                               | 6,209   |                 |   | (638) 
|                                                                          |  |                              
|Interest income                                                           |  |                               | 335     |                 |   | 633   
|Interest expense                                                          |  |                               | (1,763) |                 |   | (437) 
|Other expense, net                                                        |  |                               | (627)   |                 |   | (99)  
|                                                                          |  |                               |         |                 |   |       
|Income (loss) before taxes and minority interests                         |  |                               | 4,154   |                 |   | (541) 
|                                                                          |  |                              
|Income tax expense                                                        |  |                               | 500     |                 |   | 4     
|                                                                          |  |                               |         |                 |   |       
|Income (loss) before minority interests                                   |  |                               | 3,654   |                 |   | (545) 
|                                                                          |  |                              
|Minority interests in net income of consolidated subsidiaries, net of tax |  |                               | 11      |                 |   | -     
|                                                                          |  |                               |         |                 |   |       
|Net income (loss)                                                         |  | $                             | 3,643   |                 | $ | (545) 
|                                                                          |  |                               |         |                 |   |       
|                                                                          |  |                              
|Net income (loss) per share:                                              |  |                               |         |                 |   |       
|Basic                                                                     |  | $                             | 0.18    |                 | $ | (0.03)
|                                                                          |  |                               |         |                 |   |       
|Diluted                                                                   |  | $                             | 0.17    |                 | $ | (0.03)
|                                                                          |  |                               |         |                 |   |       
|                                                                          |  |                              
|Shares used in per share calculations:                                    |  |                               |         |                 |   |       
|Basic                                                                     |  |                               | 19,944  |                 |   | 19,376
|Diluted                                                                   |  |                               | 25,012  |                 |   | 19,376





The accompanying notes are an integral part of the Consolidated Financial Statements.



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MERIX CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

AND ACCUMULATED OTHER COMPREHENSIVE INCOME

(in thousands, unaudited)



|                                                                                            |  |                     |  |                                |         |                                            |   |                                                  |  |       |         |  |   |     |  |   |        
|------------------------------------------------------------------------------------------- |  | ------------------- |  | ------------------------------ | ------- | ------------------------------------------ | - | ------------------------------------------------ |  | ----- | ------- |  | - | --- |  | - | -------
|                                                                                            |  |                     |  |                                |         |                                            |   |                                                  |  |      
|                                                                                            |  | Common Stock        |  | Unearned
Stock    Compensation |         | Retained Earnings    (Accumulated Deficit) |   | Accumulated Other    Comprehensive Income (Loss) |  | Total
|                                                                                            |  | Number of    Shares |  | Amount                         |         |                                            |   |                                                 
|                                                                                            |  |                     |  |                                |         |                                            |   |                                                  |  |       |         |  |   |     |  |   |        
|                                                                                            |  |                     |  |                                |         |                                            |   |                                                  |  |       |         |  |   |     |  |   |        
|BALANCE AT May 27, 2006                                                                     |  | 19,806              |  | $                              | 204,831 |                                            | $ | (1,096)                                          |  | $     | (1,623) |  | $ | 13  |  | $ | 202,125
|                                                                                            |  |                     |  |                                |         |                                            |   |                                                  |  |       |         |  |   |     |  |   |        
|Net income                                                                                  |  | -                   |  |                                | -       |                                            |   | -                                                |  |       | 3,643   |  |   | -   |  |   | 3,643  
|Foreign currency translation adjustment                                                     |  | -                   |  |                                | -       |                                            |   | -                                                |  |       | -       |  |   | (9) |  |   | (9)    
|Issuance of stock under defined contribution plan                                           |  | 38                  |  |                                | 435     |                                            |   | -                                                |  |       | -       |  |   | -   |  |   | 435    
|Issuance of restricted stock to employees                                                   |  | 79                  |  |                                | -       |                                            |   | -                                                |  |       | -       |  |   | -   |  |   | -      
|Exercise of stock options                                                                   |  | 254                 |  |                                | 1,172   |                                            |   | -                                                |  |       | -       |  |   | -   |  |   | 1,172  
|Shares repurchased, surrendered or canceled                                                 |  | (7)                 |  |                                | (48)    |                                            |   | -                                                |  |       | -       |  |   | -   |  |   | (48)   
|Elimination of unearned stock compensation in accordance with the adoption of SFAS 123(R)   |  | -                   |  |                                | (1,096) |                                            |   | 1,096                                            |  |       | -       |  |   | -   |  |   | -      
|One-time non-cash benefit for estimated forfeitures of restricted stock previously expensed |  | -                   |  |                                | (82)    |                                            |   | -                                                |  |       | -       |  |   | -   |  |   | (82)   
|Share-based compensation expense - restricted stock awards                                  |  | -                   |  |                                | 161     |                                            |   | -                                                |  |       | -       |  |   | -   |  |   | 161    
|Share-based compensation expense - option awards                                            |  | -                   |  |                                | 398     |                                            |   | -                                                |  |       | -       |  |   | -   |  |   | 398    
|                                                                                            |  |                     |  |                                |         |                                            |   |                                                  |  |       |         |  |   |     |  |   |        
|BALANCE AT August 26, 2006                                                                  |  | 20,170              |  | $                              | 205,771 |                                            | $ | -                                                |  | $     | 2,020   |  | $ | 4   |  | $ | 207,795
|                                                                                            |  |                     |  |                                |         |                                            |   |                                                  |  |       |         |  |   |     |  |   |        





The accompanying notes are an integral part of the Consolidated Financial Statements.



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MERIX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)



|                                                                                         |  |                               |         |                 |   |        
|---------------------------------------------------------------------------------------- |  | ----------------------------- | ------- | --------------- | - | -------
|                                                                                         |  |                              
|                                                                                         |  | For the 13-Week Period Ended:
|                                                                                         |  | August 26,      2006          |         | August 27, 2005
|CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:                                             |  |                               |         |                 |   |        
|Net income (loss)                                                                        |  | $                             | 3,643   |                 | $ | (545)  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                               |         |                 |   |        
|Depreciation and amortization                                                            |  |                               | 5,970   |                 |   | 4,469  
|Contribution of common stock to defined contribution plan                                |  |                               | 435     |                 |   | 319    
|Share-based compensation expense, net of $82 thousand one-time adjustment (Note 13)      |  |                               | 477     |                 |   | 5      
|Minority interest in net income of consolidated subsidiaries                             |  |                               | 11      |                 |   | -      
|Loss on impairment and disposal of fixed assets                                          |  |                               | 7       |                 |   | 502    
|Changes in assets and liabilities:                                                       |  |                               |         |                 |   |        
|Accounts receivable, net                                                                 |  |                               | (4,356) |                 |   | 1,809  
|Inventories, net                                                                         |  |                               | (3,998) |                 |   | (2,400)
|Other assets                                                                             |  |                               | (1,568) |                 |   | (1,093)
|Accounts payable                                                                         |  |                               | 9,474   |                 |   | 1,259  
|Accrued compensation                                                                     |  |                               | (3,956) |                 |   | (1,748)
|Accrued warranty                                                                         |  |                               | (2)     |                 |   | 24     
|Income taxes payable                                                                     |  |                               | 403     |                 |   | -      
|Other accrued liabilities                                                                |  |                               | 1,537   |                 |   | (212)  
|                                                                                         |  |                               |         |                 |   |        
|Net cash provided by operating activities                                                |  |                               | 8,077   |                 |   | 2,389  
|                                                                                         |  |                               |         |                 |   |        
|                                                                                         |  |                              
|CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:                                   |  |                               |         |                 |   |        
|Purchases of property, plant and equipment                                               |  |                               | (5,948) |                 |   | (1,479)
|Proceeds from the sale of property, plant and equipment                                  |  |                               | 8       |                 |   | -      
|Investments:                                                                             |  |                               |         |                 |   |        
|Purchases                                                                                |  |                               | (2,550) |                 |   | (6,800)
|Sales and maturities                                                                     |  |                               | 7,075   |                 |   | 30,780 
|                                                                                         |  |                               |         |                 |   |        
|Net cash provided by (used in) investing activities                                      |  |                               | (1,415) |                 |   | 22,501 
|                                                                                         |  |                               |         |                 |   |        
|                                                                                         |  |                              
|CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:                                   |  |                               |         |                 |   |        
|Principal payments on long-term borrowings                                               |  |                               | (1,625) |                 |   | -      
|Payments on lease obligations                                                            |  |                               | (273)   |                 |   | -      
|Exercise of stock options                                                                |  |                               | 1,172   |                 |   | -      
|Reacquisition of common stock                                                            |  |                               | (48)    |                 |   | (6)    
|Due from affiliate, net                                                                  |  |                               | 1,948   |                 |   | -      
|                                                                                         |  |                               |         |                 |   |        
|Net cash provided by (used in) financing activities                                      |  |                               | 1,174   |                 |   | (6)    
|                                                                                         |  |                               |         |                 |   |        
|Foreign currency translation adjustment                                                  |  |                               | (9)     |                 |   | -      
|                                                                                         |  |                              
|Net increase in cash and cash equivalents                                                |  |                               | 7,827   |                 |   | 24,884 
|Cash and cash equivalents at beginning of period                                         |  |                               | 12,616  |                 |   | 9,130  
|                                                                                         |  |                               |         |                 |   |        
|Cash and cash equivalents at end of period                                               |  | $                             | 20,443  |                 | $ | 34,014 
|                                                                                         |  |                               |         |                 |   |        
|                                                                                         |  |                              
|Supplemental non-cash activity:                                                          |  |                               |         |                 |   |        
|Issuance of stock to employees                                                           |  | $                             | -       |                 | $ | 374    
|Increase to the asset retirement obligations (Note 10)                                   |  | $                             | 18      |                 | $ | 16     
|Reclassification of fixed assets to assets held for sale (Note 6)                        |  | $                             | 189     |                 | $ | -      





The accompanying notes are an integral part of the Consolidated Financial Statements.



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MERIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except share and per share amounts, unaudited)

Note 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Merix Corporation (the Company), an Oregon corporation, was formed in March 1994. The Company is a leading global manufacturer of technologically advanced
electronic interconnect solutions for use in electronic equipment. The Companys principal products comprise of complex multilayer printed circuit boards, which are the platforms used to interconnect microprocessors, integrated circuits and
other components that are essential to the operation of electronic products and systems. The Company provides its products to original equipment manufacturers (OEM) and their electronic manufacturing service (EMS) providers
that use the Companys products primarily in high-end commercial equipment in the communications, automotive, high-end computing and storage, test and measurement, and aerospace and defense markets. The Company provides its customers with a
broad range of products and services, including design and engineering assistance, quick-turn services and premium revenues, volume production, RF/Microwave application products, thermal management solutions and backplanes.

Subsidiaries

On December 9, 2004, Merix Corporation
purchased all of the outstanding capital stock of Data Circuit Holdings, Inc., the parent company of Data Circuit Systems, Inc. Data Circuit Systems, Inc. was renamed Merix San Jose, Inc. (referred to as Merix San Jose) and became a
wholly-owned subsidiary of Merix Corporation. Located in San Jose, California, Merix San Jose is a quick-turn services manufacturer of complex, multilayer printed circuit boards. The results of Merix San Jose have been included in the consolidated
financial statements since the date of acquisition.

On September 29, 2005, Merix Corporation acquired the business operations of Eastern Pacific
Circuits Holding Limited (EPCH) and certain of its subsidiaries, which were collectively renamed Merix Asia, Inc. (referred to as Merix Asia). Merix Asia became a majority-owned subsidiary of Merix Corporation. Located in
Hong Kong and the Peoples Republic of China, Merix Asia is a highvolume manufacturer of complex printed circuit boards. Two of the facilities in the Peoples Republic of China as well as the Hong Kong facility produce multi-layer
printed circuit boards. Two smaller facilities in the Peoples Republic of China produce single-sided printed circuit boards (see Note 23). The results of Merix Asia have been included in the consolidated financial statements since the date of
acquisition.

Merix Corporation has a direct sales force in the United States, Canada, the United Kingdom, the Netherlands, the Peoples Republic of
China, Hong Kong and Singapore.

Merix Corporation and its wholly-owned and majority-owned subsidiaries are collectively referred to as the
Company or Merix.

Basis of Presentation

The accompanying consolidated financial statements of the Company 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, reflect all normal recurring adjustments and non-recurring adjustments that are, in the opinion of management, necessary for a fair presentation. The interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included in the Companys 2006 Annual Report on Form 10-K. Results of operations for the interim period presented are not necessarily indicative of the results to be expected for
the full year.

Basis of Consolidation

The
consolidated financial statements include the accounts of Merix Corporation and its wholly-owned and majority-owned subsidiaries. To facilitate in the consolidation and public reporting process, the Companys recently acquired subsidiary, Merix
Asia, is included in the consolidated results on a 5-week lag. As such, the consolidated financial statements and related notes thereto for the 13-week period ended August 26, 2006 include results from Merix Asia for the period from April



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22, 2006 through July 22, 2006. Inter-company balances resulting from transactions with Merix Asia during the 5-week
lag period have been netted and presented as a current liability on the consolidated balance sheet. All other inter-company accounts, transactions and profits have been eliminated in consolidation. As of August 26, 2006, the net inter-company
liability of $3.2 million included in accounts payable was the result of inter-company transactions between Merix Asia and the Companys U.S. operations from July 23, 2006 through August 26, 2006.

Fiscal Year

The Companys fiscal year comprises a 52-or
53-week period that ends on the last Saturday in May. Fiscal year 2007 comprises 52-weeks and will end on May 26, 2007. Fiscal years 2006 and 2005 each comprised 52-weeks and ended on May 27, 2006 and May 28, 2005, respectively.

Reclassifications

Certain prior period
amounts have been reclassified to conform to current period presentation. These changes had no impact on shareholders equity, previously reported net income (loss), or the net change in cash or cash equivalents.

Segment Reporting

The Company has three reportable business
segments defined by geographic locations in accordance with Statement of Financial Accounting Standard (SFAS) No. 131 Disclosures about Segments of an Enterprise and Related Information (SFAS 131): (1) Merix Oregon,
(2) Merix San Jose and (3) Merix Asia. The Companys operating segments are evidence of the internal structure of the Companys 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 (CODM) is the
Companys Chief Executive Officer.

Refer to Note 18 of the consolidated financial statements for disaggregated financial information relating to our
operating segments.

Inventories, Net

On
May 28, 2006, the Company adopted SFAS No. 151, Inventory Costs  An Amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 amends the guidance in Accounting Research Bulletin
(ARB) No. 43, Chapter 4, Inventory Pricing (ARB 43) to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and requires that
those items be recognized as current-period charges. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of SFAS
151 did not result in additional expense being recorded by the Company during the 13-week period ended August 26, 2006, as the Company did not incur abnormal amounts of idle facility expense, freight, handling costs, or wasted material
(spoilage) during the 13-week period ended August 26, 2006.

Share-Based Compensation

On May 28, 2006, the Company adopted SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123(R)), which replaced SFAS No. 123
Accounting for Stock-Based Compensation (SFAS 123) and superseded Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The Company elected to use the
modified prospective transition method provided by SFAS 123(R). Under the modified prospective transition method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. The modified prospective transition
method requires the recognition of compensation expense for all share-based payments granted on or subsequent to the date of adoption over the service period for all awards expected to vest. This method also requires the recognition of compensation
expense for all share-based payments granted prior to, but not yet vested, as of the date of adoption, May 28, 2006. Compensation expense is measured based on the fair value of the award at the grant date. The fair value of non-vested
share-based grants is based on the number of shares granted and the quoted market price of the Companys common stock. In accordance with the modified prospective transition method, results for prior periods have not been restated. See Note 13.

On May 28, 2006, the Company adopted Staff Accounting Bulletin No. 107 (SAB 107), which provides the Staffs views on a variety
of matters relating to stock-based payments upon adoption of SFAS 123(R). SAB 107 requires that stock-based compensation be classified in the same expense line items as cash compensation. See Note 13.



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Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an enterprises consolidated financial statements in accordance with FASB No. 109, Accounting for Income Taxes (SFAS 109). This interpretation
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for annual periods beginning after
December 15, 2006. The Company will adopt FIN 48 during the first quarter of the fiscal year 2008 and will continue to evaluate the impact of FIN 48 on its consolidated operating results and financial condition.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This statement defines fair value, establishes a
framework for measuring fair value, and expands disclosure about fair value measurements. Where applicable, this statement simplifies and codifies related guidance within generally accepted accounting principles. SFAS 157 does not apply under SFAS
123(R), does not eliminate the practicability exceptions to fair value measurements in accounting pronouncements within the scope of the statement, and does not apply under accounting pronouncements that require or permit measurements that are
similar to fair value but that are not intended to measure fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will
adopt SFAS 157 during the first quarter of the fiscal year 2009. The Company does not believe SFAS 157 will have a material effect on its consolidated financial position, results of operations or cash flows.

Note 2.    BUSINESS ACQUISITIONS

a) Data
Circuit Holdings, Inc.

On December 9, 2004, Merix Corporation purchased all of the outstanding capital stock of Data Circuit Holdings, Inc.,
the parent company of Data Circuit Systems, Inc., renamed Merix San Jose, Inc. (collectively referred to as Merix San Jose). Located in San Jose, California, Merix San Jose is a quick-turn services manufacturer of complex, multilayer
printed circuit boards. The results of Merix San Jose have been included in the consolidated financial statements since the date of acquisition. The aggregate purchase price of $44.0 million was settled with available cash of $41.6 million
(including cash acquired of $339 thousand), a $2 million promissory note, and $366 thousand of direct acquisition costs.

The acquisition of Merix San Jose
enhanced the Companys presence in the marketplace by adding scale to its quick-turn services manufacturing capacity, diversifying its end markets, and enabling the Company to gain incremental quick-turn services processing capabilities. These
factors contributed to establishing the purchase price, which resulted in the recognition of a significant amount of goodwill.

b) Eastern Pacific
Circuits Holdings Limited

On September 29, 2005, Merix Corporation completed the acquisition of the business operations of Eastern Pacific
Circuits Limited and certain of its subsidiaries (collectively referred to as Merix Asia), a Hong Kong based supplier of printed circuit boards from Eastern Pacific Circuits Holdings Limited (EPCH). Located in Hong Kong and
the Peoples Republic of China, Merix Asia comprises of five manufacturing facilities. Two of the facilities in the Peoples Republic of China as well as the Hong Kong facility produce multi-layer printed circuit boards. Two smaller
facilities in the Peoples Republic of China produce single-sided printed circuit boards (see Note 23).

Subsequent to the completion of the
acquisition of Merix Asia, existing minority interest owners retained their ownership percentages in the four entities that hold facilities and conduct business operations in the Peoples Republic of China. The individual ownership percentages
of these minority interest owners range from 5% to 15%. Merix Asia is majority-owned by the Company.

The acquisition of the business operations of Merix
Asia was completed for an estimated purchase price of $120.3 million. The acquisition was financed with a combination of approximately $33.3 million of available cash; term loans, including the assumption of certain EPCH debt, and revolving credit
borrowings under two new credit facilities totaling approximately $71.2 million; and the issuance of an $11.0 million subordinated promissory note to EPCH. The purchase price included $5.3 million of direct acquisition costs, which were funded with
available cash. The term loans and revolving credit borrowings were refinanced during May 2006 (See Note 11). The estimated purchase price does not reflect potential additional consideration based on changes in working capital, cash and an
additional earnout payment of up to $13 million if the business meets certain adjusted EBITDA targets during the calendar year 2005. The Company is currently working with



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EPCH to determine the amount, if any, of this additional consideration. Any additional purchase consideration, if paid,
will increase recorded goodwill.

The acquisition of Merix Asia enabled the Company to better position itself to support its existing customer base,
introduce its technology to new customers in Asia, offer a diverse range of products and reduce its overall cost structure. The acquisition also provided the Company with a strategic combination of well-located manufacturing operations, a seasoned
management team and an expanded customer base that diversifies its end markets, resulting in the recognition of a significant amount of goodwill.

Accounting for Acquisitions

In accordance with SFAS No. 141 Business Combinations (SFAS 141), the
Company recorded these acquisitions using the purchase method of accounting. The purchase price has been allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values on the
respective acquisition dates. The excess purchase price over the fair value of tangible and intangible assets acquired and liabilities assumed was recorded as goodwill. For Merix San Jose and Merix Asia, the fair values were based upon a valuation
of tangible and identifiable intangible assets acquired, including useful lives, as estimated by management of the Company with the assistance of an independent appraiser. The fair values assigned to the assets acquired and liabilities assumed in
the Merix Asia acquisition are subject to change pending the outcome of contingent purchase price adjustments that are discussed in Note 21.

The following
summarizes the fair values of the assets acquired and liabilities assumed as of the respective acquisition dates:



|                                 |  |                       |         |               |   |         
|-------------------------------- |  | --------------------- | ------- | ------------- | - | --------
|                                 |  | (in thousands)       
|                                 |  |                       |         |               |   |         
|                                 |  | Merix        San Jose |         | Merix    Asia
|Current assets                   |  | $                     | 4,757   |               | $ | 47,911  
|Property and equipment           |  |                       | 4,397   |               |   | 46,270  
|Leasehold land use rights        |  |                       | -       |               |   | 6,547   
|Definite-lived intangible assets |  |                       | 11,140  |               |   | 7,268   
|Goodwill                         |  |                       | 25,551  |               |   | 64,755  
|Liabilities assumed              |  |                       | (1,833) |               |   | (52,490)
|                                 |  |                       |         |               |   |         
|                                 |  |                       |         |               |   |         
|Net assets acquired              |  | $                     | 44,012  |               | $ | 120,261 
|                                 |  |                       |         |               |   |         

The following is a reconciliation of the allocation of the purchase price of Merix Asia:



|                                 |  |                                                            |          |                                                      |   |         
|-------------------------------- |  | ---------------------------------------------------------- | -------- | ---------------------------------------------------- | - | --------
|                                 |  | (in thousands)                                            
|                                 |  | Allocation of Purchase Price as
of    November 26,    2005 |          | Allocation of    Purchase Price as
ofAugust 26, 2006
|Current assets                   |  | $                                                          | 49,375   |                                                      | $ | 47,911  
|Property and equipment           |  |                                                            | 48,849   |                                                      |   | 46,270  
|Leasehold land use rights        |  |                                                            | 6,547    |                                                      |   | 6,547   
|Definite-lived intangible assets |  |                                                            | 9,835    |                                                      |   | 7,268   
|Goodwill                         |  |                                                            | 56,779   |                                                      |   | 64,755  
|Liabilities assumed              |  |                                                            | (51,993) |                                                      |   | (52,490)
|                                 |  |                                                            |          |                                                      |   |         
|                                 |  |                                                            |          |                                                      |   |         
|Net assets acquired              |  | $                                                          | 119,392  |                                                      | $ | 120,261 
|                                 |  |                                                            |          |                                                      |   |         

The change in the allocation of the Merix Asia purchase price is primarily due to the following material
adjustments: (1) a $1.5 million adjustment to decrease current assets due to the uncollectibility of acquired receivables, (2) a $2.6 million adjustment to decrease property and equipment due to an error in the capital lease calculation in
the initial purchase price allocation, (3) a $2.6 million adjustment to decrease definite-lived intangible assets due to a change in the valuation of Merix Asia customer relationship intangible assets by the appraiser, (4) a $279 thousand
adjustment to increase liabilities assumed



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due to purchase deposits required to continue water treatment at the Merix Asia facilities, and (5) a $495 thousand
adjustment to increase liabilities assumed due to additional stamp duties assessed on the Companys Hong Kong facility by the Inland Revenue Department of Hong Kong,

Note 3.     SHORT-TERM INVESTMENTS

At August 26, 2006 and May 27, 2006, there was no
difference between the aggregate fair value and cost basis of short-term investments. The values of the Companys investments in auction rate securities are as follows:



|                        |  |                 |        |                   |   |                    |  |                       |   |  |   |       
|----------------------- |  | --------------- | ------ | ----------------- | - | ------------------ |  | --------------------- | - |  | - | ------
|                        |  | (in thousands) 
|                        |  | August 26, 2006
|                        |  | Cost            |        | Unrealized  Gains |   | Unrealized  Losses |  | Aggregate  Fair Value
|Auction rate securities |  | $               | 14,000 |                   | $ | -                  |  | $                     | - |  | $ | 14,000
|                        | 
|                        |  |                
|                        |  | May 27, 2006   
|                        |  | Cost            |        | Unrealized  Gains |   | Unrealized  Losses |  | Aggregate  Fair Value
|Auction rate securities |  | $               | 18,525 |                   | $ | -                  |  | $                     | - |  | $ | 18,525

All income generated from short-term investments is recorded in interest income. There were no realized gains or
losses on short-term investments during the 13-week periods ended August 26, 2006 and August 27, 2005. Although the underlying instruments have contractual maturities of up to 40 years, the Company believes that it has the ability to
readily liquidate these securities.

Note 4.     INVENTORIES, NET

Inventories, net by major classification are as follows:



|                |  |                    |        |                 |   |       
|--------------- |  | ------------------ | ------ | --------------- | - | ------
|                |  | (in thousands)    
|                |  |                    |        |                 |   |       
|                |  | August 26,    2006 |        | May 27,    2006
|                |  |                   
|Raw materials   |  | $                  | 6,609  |                 | $ | 5,002 
|Work in process |  |                    | 12,226 |                 |   | 10,447
|Finished goods  |  |                    | 9,547  |                 |   | 8,935 
|                |  |                    |        |                 |   |       
|Total           |  | $                  | 28,382 |                 | $ | 24,384
|                |  |                    |        |                 |   |       

At August 26, 2006 and May 27, 2006, the Companys inventory balance included consigned inventories
of $5.8 million and $4.3 million, respectively. Provisions for inventories are made to reduce excess inventories to their estimated net realizable values, as necessary. At August 26, 2006 and May 27, 2006, the Company had inventory
provisions of $3.2 million and $2.6 million, respectively.

Note 5.     PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net include the following:



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|                                          |  |                  |           |               |   |          
|----------------------------------------- |  | ---------------- | --------- | ------------- | - | ---------
|                                          |  | (in thousands)  
|                                          |  |                  |           |               |   |          
|                                          |  | August 26,  2006 |           | May 27,  2006
|                                          |  |                 
|Land                                      |  | $                | 1,065     |               | $ | 1,036    
|Buildings and grounds                     |  |                  | 59,832    |               |   | 61,158   
|Leasehold improvements                    |  |                  | 18,198    |               |   | 18,138   
|Machinery and equipment                   |  |                  | 144,190   |               |   | 142,628  
|Construction in progress                  |  |                  | 6,699     |               |   | 2,879    
|                                          |  |                  |           |               |   |          
|Total                                     |  | $                | 229,984   |               | $ | 225,839  
|                                          |  |                 
|Accumulated depreciation and amortization |  |                  | (106,317) |               |   | (102,977)
|                                          |  |                  |           |               |   |          
|Property, plant and equipment, net        |  | $                | 123,667   |               | $ | 122,862  
|                                          |  |                  |           |               |   |          

The Company recognized depreciation and amortization expense relating to property, plant and equipment of $4.9
million and $3.6 million during the 13-week periods ended August 26, 2006 and August 27, 2005, respectively. Accumulated depreciation and amortization, as presented above, includes accumulated amortization of assets under capital leases of
$909 thousand and $634 thousand at August 26, 2006 and May 27, 2006, respectively.

The Company reviews for impairment of long-lived assets to be
held and used in the business whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company deems long-lived assets to be impaired if a forecast of undiscounted future operating cash
flows directly related to the long-lived asset, including estimated disposal value, is less than the asset carrying amount. During the 13-week period ended August 26, 2006, the Company evaluated long-lived assets for impairment and determined
that no long-lived assets were impaired.

Note 6.     ASSETS HELD FOR SALE

In May 2006, management of the Company made a decision to sell certain long-lived assets of the Company. In accordance with SFAS 144, the Company has recorded such
long-lived assets as current assets held for sale. The Company is attempting to sell (1) a building located near its Forest Grove, Oregon campus bundled with a parcel of land on which the building is located and (2) two additional parcels
of land adjacent to the facility in Forest Grove, Oregon. In August 2005, the Company recorded an impairment charge of $146 thousand on the building held for sale near its Forest Grove, Oregon campus. Based on a firm commitment to sell, the building
and land for sale have net realizable values that approximate their carrying value at August 26, 2006. The carrying value of the building and parcels of land at August 26, 2006 is $1.9 million.

On August 10, 2006, the Company entered into an agreement with a third party to sell two condominiums in Ontario, Canada for $232 thousand Canadian Dollars ($209
thousand U.S. Dollars at August 26, 2006). The condominiums were formerly utilized as sales offices by certain sales representatives of the Company in Canada. As the sale of the condominiums has not yet been finalized, the Company has recorded
such long-lived assets as current assets held for sale. The carrying value of the condominiums at August 26, 2006 was $209 thousand Canadian Dollars ($189 thousand U.S. Dollars at August 26, 2006).

Note 7.     GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

Goodwill is accounted for in accordance with SFAS No. 142 Goodwill and Other Intangible Assets (SFAS 142). Accordingly, goodwill is not amortized. Instead, goodwill is reviewed and tested for impairment on an
annual basis, or more frequently, if impairment indicators arise. None of the goodwill is considered deductible for income tax purposes, except to the extent that it reduces the earnings and profits of foreign subsidiaries.

The following presents the details of definite-lived intangible assets acquired and the unamortized value as of August 26, 2006 and May 27, 2006 (July 22, 2006
and April 22, 2006 for Merix Asia):



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|                                            |  |                 |        |                          |   |                  |  |      |        |                          |   |                  |  |   |         |  |   |       
|------------------------------------------- |  | --------------- | ------ | ------------------------ | - | ---------------- |  | ---- | ------ | ------------------------ | - | ---------------- |  | - | ------- |  | - | ------
|                                            |  | (in thousands) 
|                                            |  | August 26, 2006 |        | May 27, 2006            
|                                            |  | Cost            |        | Accumulated Amortization |   | Intangibles, net |  | Cost |        | Accumulated Amortization |   | Intangibles, net
|Amortizable intangible assets:              |  |                 |        |                          |   |                  |  |      |        |                          |   |                  |  |   |         |  |   |       
|Merix San Jose:                             |  |                 |        |                          |   |                  |  |      |        |                          |   |                  |  |   |         |  |   |       
|Customer relationships                      |  | $               | 9,900  |                          | $ | (3,613)          |  | $    | 6,287  |                          | $ | 9,900            |  | $ | (3,185) |  | $ | 6,715 
|Non-compete agreement                       |  |                 | 1,200  |                          |   | (1,028)          |  |      | 172    |                          |   | 1,200            |  |   | (877)   |  |   | 323   
|Manufacturing sales representatives network |  |                 | 40     |                          |   | (12)             |  |      | 28     |                          |   | 40               |  |   | (11)    |  |   | 29    
|Merix Asia:                                 |  |                 |        |                          |   |                  |  |      |        |                          |   |                  |  |   |         |  |   |       
|Customer relationships(1)                   |  |                 | 7,268  |                          |   | (601)            |  |      | 6,667  |                          |   | 7,268            |  |   | (419)   |  |   | 6,849 
|                                            |  |                 |        |                          |   |                  |  |      |        |                          |   |                  |  |   |         |  |   |       
|                                            |  |                 |        |                          |   |                  |  |      |        |                          |   |                  |  |   |         |  |   |       
|Total intangibles purchased                 |  | $               | 18,408 |                          | $ | (5,254)          |  | $    | 13,154 |                          | $ | 18,408           |  | $ | (4,492) |  | $ | 13,916
|                                            |  |                 |        |                          |   |                  |  |      |        |                          |   |                  |  |   |         |  |   |       

(1) The Merix Asia customer relationships, net balances of $6.7 million and $6.8 million are reported as of
July 22, 2006 and April 22, 2006, respectively, due to the 5-week reporting lag for Merix Asia. See Note 1.

The Companys purchased
intangible assets have estimated useful lives ending through September 2015.

The Company performs reviews for impairment of all its purchased intangible
assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of August 26, 2006, management concluded that there were no events or changes in circumstances indicating that the
carrying amount of purchased intangible assets may not be recoverable. Amortization expense for intangible assets acquired was $762 thousand and $751 thousand for the 13-week periods ended August 26, 2006 and August 27, 2005, respectively,
and has been disclosed as a separate line item in the consolidated statements of operations. The estimated amortization expense of purchased intangible assets for fiscal years succeeding the 13-week period ended August 26, 2006 is as follows:



|                                |  |                      |       
|------------------------------- |  | -------------------- | ------
|                                |  | (in thousands)      
|For the Fiscal Year Ending:     |  | Amortization Expense
|2007 (remaining three
quarters) |  | $                    | 1,983 
|2008                            |  |                      | 2,277 
|2009                            |  |                      | 1,982 
|2010                            |  |                      | 1,766 
|2011                            |  |                      | 1,552 
|2012                            |  |                      | 1,106 
|Thereafter                      |  |                      | 2,488 
|                                |  |                      |       
|                                |  | $                    | 13,154
|                                |  |                      |       

Note 8.     ACCRUED WARRANTY

The Company generally warrants its products for a period of up to twelve months from the point at which the rights and rewards of ownership of the product are
transferred to the customer. However, Merix Asia generally honors warranty claims for a period of up to three years from the point at which the product is sold. The Company records a liability for the estimated cost of the warranty upon transfer of
ownership of the products to the customer. The warranty liability is calculated based on historical experience of expenses resulting from the warranty program for the twelve preceding months for Merix Oregon and Merix San Jose and for the preceding
three year period for Merix Asia.

Warranty activity for the 13-week periods ended August 26, 2006 and August 27, 2005 consisted of the
following:



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|                                                                    |  |                               |       |                 |   |      
|------------------------------------------------------------------- |  | ----------------------------- | ----- | --------------- | - | -----
|                                                                    |  | (in thousands)               
|                                                                    |  | For the 13-Week Period Ended:
|                                                                    |  | August 26, 2006               |       | August 27, 2005
|Accrued warranty, beginning of the period                           |  | $                             | 2,319 |                 | $ | 1,519
|Accruals for warranties issued during the period                    |  |                               | 537   |                 |   | 1,002
|Accruals or changes in estimates related to pre-existing warranties |  |                               | (8)   |                 |   | (416)
|Settlements made during the period                                  |  |                               | (531) |                 |   | (562)
|                                                                    |  |                               |       |                 |   |      
|Accrued warranty, end of the period                                 |  | $                             | 2,317 |                 | $ | 1,543
|                                                                    |  |                               |       |                 |   |      

Note 9.     OTHER ACCRUED LIABILITIES

Other accrued liabilities for the 13-week periods ended August 26, 2006 and May 27, 2006 consisted of the following:



|                                                                     |  |                 |        |              |   |       
|-------------------------------------------------------------------- |  | --------------- | ------ | ------------ | - | ------
|                                                                     |  | (in thousands) 
|                                                                     |  |                 |        |              |   |       
|                                                                     |  | August 26, 2006 |        | May 27, 2006
|Accrued professional and legal services                              |  | $               | 1,626  |              | $ | 1,596 
|Accrued sales commissions                                            |  |                 | 1,642  |              |   | 1,538 
|Accrued other taxes                                                  |  |                 | 2,338  |              |   | 1,559 
|Accrued interest                                                     |  |                 | 1,684  |              |   | 1,054 
|Accrued capital expenditures                                         |  |                 | 803    |              |   | 594   
|Accrued stamp duty assessment                                        |  |                 | 495    |              |   | 495   
|Accrued repair and maintenance                                       |  |                 | 298    |              |   | 340   
|Accrued rent                                                         |  |                 | 336    |              |   | 408   
|Accrued utilities                                                    |  |                 | 286    |              |   | 274   
|Accrued insurance                                                    |  |                 | 426    |              |   | 194   
|Environmental liability                                              |  |                 | 40     |              |   | 67    
|Payable to Eastern Pacific Circuits Holdings Limited (EPCH) (Note 2) |  |                 | 1,768  |              |   | 1,768 
|Other                                                                |  |                 | 815    |              |   | 1,133 
|                                                                     |  |                 |        |              |   |       
|                                                                     |  | $               | 12,557 |              | $ | 11,020
|                                                                     |  |                 |        |              |   |       

Note 10.     ASSET RETIREMENT OBLIGATIONS

In accordance with SFAS No. 143 Accounting for Asset Retirement Obligations (SFAS 143), the Company has recorded asset retirement
obligations related to the restoration of the Merix Wood Village and Merix San Jose facilities to shell condition upon termination of the leases in place at those facilities. Refer to Note 12 for a discussion of the related lease terms. Activity
related to asset retirement obligations for the 13-week periods ended August 26, 2006 and August 27, 2005 consisted of the following:



|                                                      |  |                               |       |                 |   |    
|----------------------------------------------------- |  | ----------------------------- | ----- | --------------- | - | ---
|                                                      |  | (in thousands)               
|                                                      |  | For the 13-Week Period Ended:
|                                                      |  | August 26, 2006               |       | August 27, 2005
|Asset retirement obligations, beginning of the period |  | $                             | 1,108 |                 | $ | 960
|Liabilities incurred during the period                |  |                               | -     |                 |   | -  
|Liabilities settled during the period                 |  |                               | -     |                 |   | -  
|Revisions in estimated cash flows                     |  |                               | -     |                 |   | -  
|Accretion expense                                     |  |                               | 18    |                 |   | 16 
|                                                      |  |                               |       |                 |   |    
|Asset retirement obligations, end of the period       |  | $                             | 1,126 |                 | $ | 976
|                                                      |  |                               |       |                 |   |    



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Note 11.    DEBT AND FINANCING ARRANGEMENTS

Debt and financing arrangements include the following:



|                                                    |  |                    |        |                 |   |       
|--------------------------------------------------- |  | ------------------ | ------ | --------------- | - | ------
|                                                    |  | (in thousands)    
|                                                    |  |                    |        |                 |   |       
|                                                    |  | August 26,    2006 |        | May 27,    2006
|                                                    |  |                   
|4% Convertible debenture                            |  | $                  | 70,000 |                 | $ | 70,000
|5% Note payable                                     |  |                    | 1,000  |                 |   | 1,000 
|Subordinated note payable                           |  |                    | 11,000 |                 |   | 11,000
|Domestic term loan                                  |  |                    | 13,500 |                 |   | 15,125
|Capital lease obligations                           |  |                    | 1,334  |                 |   | 1,607 
|                                                    |  |                    |        |                 |   |       
|Total                                               |  |                    | 96,834 |                 |   | 98,732
|                                                    |  |                   
|Less current maturities                             |  |                    | 7,579  |                 |   | 7,655 
|                                                    |  |                    |        |                 |   |       
|Total long-term obligations, net of current portion |  | $                  | 89,255 |                 | $ | 91,077
|                                                    |  |                    |        |                 |   |       

4% Convertible Debenture

On May 16, 2006, the Company completed the sale of $60 million 4% Convertible Senior Subordinated Notes due 2013 and on May 24, 2006, the initial purchaser of the notes exercised its option to purchase an
additional $10 million principal amount, bringing the total gross proceeds to $70 million (collectively referred to as the Notes due 2013). The Company used the net proceeds from the sale to prepay the Companys Asian Revolving
Loans in the amount of $5 million, Asian Term Loans in the amount of $25 million, to reduce approximately $10.4 million of outstanding borrowings under the Domestic Revolving Loans and to redeem the $25 million 6.5% Convertible Debenture due May
2007. The Asian Revolving Loans and Asian Term Loans were permitted to be prepaid without penalty. The Company incurred a $563 thousand prepayment penalty as a result of the redemption of the $25 million 6.5% Convertible Debenture due May 2007. Upon
payment of the outstanding obligations under the Companys Asian Revolving Loans, Asian Term Loans, and $25 million 6.5% Convertible Debenture due May 2007, the underlying agreements were terminated.

The Notes due 2013 mature on May 15, 2013 and bear interest at a rate of 4% per year. Interest is payable in arrears on May 15 and November 15 of
each year, beginning on November 15, 2006. The Notes due 2013 are convertible at the option of the holder into shares of the Companys common stock at any time prior to maturity, unless the notes are earlier redeemed or repurchased. The
Notes due 2013 are convertible at an initial conversion rate of 65.8328 shares per $1,000 principal amount, subject to certain adjustments. This is the equivalent to a conversion price of $15.19 per share. The Notes due 2013 are general unsecured
obligations of the Company and are subordinate in right of payment to all of the Companys existing and future senior debt, equal with any future unsecured debt that is not senior debt.

5% Note Payable

On December 9, 2004, Merix Corporation
issued a $2 million, 5% promissory note (the 5% Notes) in connection with the acquisition of Data Circuits Holdings, Inc. The 5% Notes bear interest at a rate of 5% per year and interest is payable quarterly. The remaining principal
balance of $1 million matures in the third quarter of the fiscal year 2007.

Subordinated Note Payable

On September 29, 2005, Merix Caymans Trading Company Limited (Merix Caymans), a wholly owned subsidiary of the Company, issued a subordinated Promissory
Note (the Note) to EPCH for a total of (a) $11 million, plus (b) the amount of the earn out consideration determined under the Master Sale and Purchase Agreement in connection with the acquisition of Merix Asia (see Note 2).
The principal is to be paid in four equal installments on March 1, 2007, December 1, 2007, December 1, 2008 and March 15, 2009. The outstanding principal balance earns interest at 7% through December 1, 2006, 8%
through December 1, 2007 and 9% thereafter, payable quarterly. Merix Caymans may offset its payment obligations under the Note by the amount of warranty claims arising under the Master Sale and Purchase Agreement. The holder of the Note has a
limited right to accelerate payment upon Merix Caymans failure to make payments due under the Note, Merix Caymans, Merix Caymans Holding Company Limited (Merix Holdings) or their subsidiaries raising debt and/or equity financing
proceeds in excess of $50 million or certain insolvency or bankruptcy events. The Note is unsecured and



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subordinated to the Companys obligations to its senior secured lender. The Note is subject to various restricted
covenants. Merix Caymans and Merix Holdings were in compliance with all applicable covenants at August 26, 2006.

The Company has not accrued
additional amounts relating to the earnout consideration component of the Note, as the Company is unable to estimate additional earnout amounts, if any, to which it may be subject under the Master Sale and Purchase Agreement. See Notes 2 and 21.

Domestic Term Loan

On September 28,
2005, Merix Corporation entered into a Loan and Security Agreement with a bank group (the Loan Agreement). Under the Loan Agreement, the lenders provided a term loan of $16.5 million and a revolving line of credit of up to $38.5 million
based on a borrowing base consisting primarily of the Companys accounts receivable. The maturity date of the Loan Agreement is September 28, 2010, with the principal of the term loan to be repaid in 19 equal quarterly payments of $687
thousand each and a final payment on the maturity date of $3.4 million. All revolving loans must be repaid in full on the maturity date. The obligations under the Loan Agreement are secured by substantially all of the U.S. assets of the Company. The
loans bear interest at (a) either the prime rate or LIBOR, plus (b) an additional margin, which is 50 basis points higher for the term loan than for the revolving loan, based on certain performance criteria. The Loan Agreement contains a
number of restrictive covenants, all of which the Company was in compliance with as of August 26, 2006. Specifically, the Companys ability to down stream funds to Merix Asia is limited, subject to certain conditions, to $10 million in the
aggregate at any time. The Loan Agreement is guaranteed by the following wholly-owned subsidiaries of the Company: Merix Nevada, Inc., Merix Asia, Inc., a United States holding company, and Data Circuit Holdings, Inc. The Company has no amounts
outstanding under the revolving line of credit at August 26, 2006. The interest rate on the term loan at August 26, 2006 was 7.9%.

6.5 % Convertible Debenture

During the first quarter of the fiscal year 2003, the Company privately sold a $25 million 6.5%
convertible debenture due in May 2007. In May 2006, the Company used the proceeds from the sale of the 4% Convertible Senior Subordinated Notes due 2013 to redeem the $25 million 6.5% convertible debenture. The debenture was unsecured, convertible
into shares of common stock at a fixed conversion price of $19.41, and became callable in August 2004. Under the terms of the agreement, interest was payable quarterly, and the debenture contained a put option that entitled the holder to require the
Company to redeem the debenture at a price equal to 110% of the principal balance upon a change in control of the Company. The put option was marked-to-market quarterly and the change in fair value was recorded in the consolidated statements of
operations. The debenture contained a debt ratio incurrence restrictive covenant.

Asian Revolving Loans and Asian Term Loan

On September 29, 2005, Merix Caymans, a wholly-owned subsidiary of the Company, entered into a Credit Agreement (Credit Agreement) with a bank group.
Under the Credit Agreement, the lenders provided an initial term loan of $21.3 million, a second term loan of $3.7 million and a revolving line of credit of $5.0 million, all of which the Company prepaid on May 26, 2006 using the net proceeds
from the 4% Convertible Senior Subordinated Notes due 2013. The original maturity date of the Credit Agreement was March 15, 2009, with the principal of the term loans to be repaid in equal payments of $7.5 million on each of December 1,
2006, 2007 and 2008 and the balance payable, along with the outstanding balance of the revolving loan, on March 15, 2009. The initial loan proceeds were used to fund the acquisition of Merix Asia. The obligations under the Credit Agreement were
collateralized by substantially all the assets of Merix Asia. The loans bore interest at (a) LIBOR, plus (b) an additional margin i) of 250 basis points for the first year, and ii) an amount to be determined based on certain performance
criteria each year thereafter.

The Credit Agreement contained a number of restrictive covenants. For the period from January 12, 2006 through
January 20, 2006 and again for the period from February 11, 2006 through February 24, 2006, the Company was in technical default with the lender related to the perfection of a security pledge on collateral located in the Peoples
Republic of China. The Company obtained a waiver of each technical default from the lenders.

Capital Lease Obligations

Capital lease obligations represent financing obligations for machinery and equipment at the Companys Asian facilities. The capital lease obligations are payable
in monthly installments of principal and interest and are collateralized by the related assets financed (See Note 12).



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Deferred Financing Costs, Net

Deferred financing costs, net at August 26, 2006 include $4.1 million of financing costs relating to the Notes due 2013 and $1.3 million of financing costs relating to the Domestic Term Loan. Deferred financing
costs, net at May 27, 2006 include $4.3 million of financing costs relating to the Notes due 2013 and $1.4 million of financing costs relating to the Domestic Term Loan. The financing costs are deferred and amortized over the life of the
related outstanding debt through the contractual maturity date, as defined in the debt agreement.

Principal Payments of Long-Term Debt

Principal payments of long-term debt, including capital lease obligations, as of August 26, 2006 are as
follows:



|                                  |  |                                         |       
|--------------------------------- |  | --------------------------------------- | ------
|                                  |  | (in thousands)                         
|For the Fiscal Year Ending:       |  | Principal Payments of    Long-Term Debt
|May 26, 2007 (remaining 39 weeks) |  | $                                       | 6,626 
|May 31, 2008                      |  |                                         | 6,007 
|May 30, 2009                      |  |                                         | 8,263 
|May 29, 2010                      |  |                                         | 2,750 
|May 28, 2011                      |  |                                         | 3,188 
|May 26, 2012                      |  |                                         | -     
|Thereafter                        |  |                                         | 70,000
|                                  |  |                                         |       
|Total principal payments          |  | $                                       | 96,834
|                                  |  |                                         |       

Note 12.    LEASE AGREEMENTS

Capital Leases

In connection with the acquisition of Merix
Asia (see Note 2), the Company assumed obligations for existing leases classified as capital leases under the requirements of SFAS No. 13, Accounting for Leases (SFAS 13). All of the acquired leases are for machinery and
equipment for use in the manufacturing facilities located in Asia, with original lease terms ranging from 8 to 48 months.

The following is an analysis of the leased property under capital leases:



|                               |  |                                              |       |                                           |   |      
|------------------------------ |  | -------------------------------------------- | ----- | ----------------------------------------- | - | -----
|                               |  | (in thousands)                              
|                               |  |                                              |       |                                           |   |      
|Class of Property              |  | Included in Assets        at August 26, 2006 |       | Included in Assets        at May 27,
2006
|Machinery & equipment          |  | $                                            | 2,090 |                                           | $ | 2,090
|Less: Accumulated amortization |  |                                              | (909) |                                           |   | (634)
|                               |  |                                              |       |                                           |   |      
|                               |  | $                                            | 1,181 |                                           | $ | 1,456
|                               |  |                                              |       |                                           |   |      

Consolidated future minimum lease payments under noncancelable capital leases as
of August 26, 2006 are as follows:



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|                                            |  |                                                   |      
|------------------------------------------- |  | ------------------------------------------------- | -----
|                                            |  | (in thousands)                                   
|For the Fiscal Year Ending:                 |  | Minimum Payments Under  Capital Lease Obligations
|May 26, 2007 (remaining 39 weeks)           |  | $                                                 | 970  
|May 31, 2008                                |  |                                                   | 515  
|May 30, 2009                                |  |                                                   | 13   
|May 29, 2010                                |  |                                                   | -    
|May 28, 2011                                |  |                                                   | -    
|May 26, 2012                                |  |                                                   | -    
|Thereafter                                  |  |                                                   | -    
|                                            |  |                                                   |      
|Total minimum lease payments                |  | $                                                 | 1,498
|                                            | 
|Less: Amount representing interest          |  |                                                   | (164)
|                                            |  |                                                   |      
|Present value of net minimum lease payments |  | $                                                 | 1,334
|                                            |  |                                                   |      

Operating Leases

In August 2000, the Company entered into a noncancelable operating lease agreement to lease a manufacturing facility located in Wood Village, Oregon. Under the terms of the lease agreement, lease payments began in
July 2001 and lease payments escalate at specific points over the minimum ten year term of the lease. Rent expense is recognized on the straight line basis. The Company has the option to extend the term of the lease for three consecutive five-year
periods beyond the initial lease term.

Merix San Jose leases office space and production facilities under noncancelable operating lease agreements with
various initial terms ending through the fiscal year 2010 and options to extend the lease terms beyond the initial lease terms through the fiscal year 2019. Lease payments escalate at specific points over the minimum five year lease terms. Rent
expense is recognized on the straight line basis.

Merix Asia leases office, apartment space and production facilities under noncancelable operating lease
agreements with various initial terms ending through the fiscal year 2008. Rent expense is recognized on the straight line basis. These lease agreements do not contain options to extend the lease terms and the lease payments do not escalate.

Rental expense under significant operating leases was $711 thousand and $826 thousand during the 13-week periods ended August 26, 2006 and
August 27, 2005, respectively.

Consolidated future minimum lease payments under noncancelable operating leases that have lease terms in excess of 12
months as of August 26, 2006 are as follows:



|                                  |  |                                                           |      
|--------------------------------- |  | --------------------------------------------------------- | -----
|                                  |  | (in thousands)                                           
|For the Fiscal Year Ending:       |  | Minimum Payments Under        Operating Lease Obligations
|May 26, 2007 (remaining 39 weeks) |  | $                                                         | 1,291
|May 31, 2008                      |  |                                                           | 1,259
|May 30, 2009                      |  |                                                           | 807  
|May 29, 2010                      |  |                                                           | 751  
|May 28, 2011                      |  |                                                           | 632  
|May 26, 2012                      |  |                                                           | 53   
|Thereafter                        |  |                                                           | -    
|                                  |  |                                                           |      
|                                  |  | $                                                         | 4,793
|                                  |  |                                                           |      

Note 13.    STOCK-BASED COMPENSATION PLANS

Adoption of SFAS 123(R) and SAB 107



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On May 28, 2006, the Company adopted SFAS 123(R), which replaced SFAS 123 and superseded APB 25. The Company elected
to use the modified prospective transition method provided by SFAS 123(R). Under the modified prospective transition method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. The modified prospective
transition method requires the recognition of compensation expense for all share-based payments granted on or subsequent to the date of adoption over the service period for all awards expected to vest. This method also requires the recognition of
compensation expense for all share-based payments granted prior to, but not yet vested, as of the date of adoption. Compensation expense is measured based on the fair value of the award at the grant date. The fair value of non-vested share-based
grants is based on the number of shares granted and the quoted market price of the Companys common stock. In accordance with the modified prospective transition method, results for prior periods have not been restated.

On May 28, 2006, the Company adopted SAB 107, which provides the Staffs views on a variety of matters relating to stock-based payments upon adoption of SFAS
123(R). SAB 107 requires that stock-based compensation be classified in the same expense line items as cash compensation. Accordingly, stock-based compensation for the thirteen-week period ended August 27, 2005 has been reclassified in the
statement of operations to correspond to current year presentation within the same operating expense line items as cash compensation paid to employees.

The Company recorded $559 thousand of share-based compensation expense for the 13-week period ended August 26, 2006 as a result of the Companys adoption of SFAS 123(R). This expense reduced basic and diluted income per share by
$0.03 for the 13-week period ended August 26, 2006. The Companys deferred compensation balance of $1.1 million as of May 27, 2006, which was accounted for under the provisions of APB 25, was reclassified to common stock upon the
adoption of SFAS 123(R). A one-time, non-cash benefit of approximately $82 thousand for estimated future forfeitures of restricted stock previously expensed was recorded as of May 28, 2006, the Companys SFAS 123(R) implementation date.
Pursuant to APB 25, stock compensation expense was not reduced for estimated future forfeitures; rather, stock compensation expense was reversed upon actual forfeiture. At August 26, 2006, $3.1 million of compensation costs related to stock
options and $1.2 million of compensation costs related to restricted stock awards were deferred. The stock options and restricted stock awards are expected to be recognized over a weighted average period of 1.95 years and 2.05 years, respectively.
The unrecognized expense of awards not yet vested at the date of adoption will be recognized in the periods after the date of adoption using the Black-Scholes valuation method over the remaining requisite service period of each grant.

The Company accrues compensation expense for performance stock option awards over the requisite service period if it is probable that the performance condition will be
achieved. The Company does not accrue compensation expense over the requisite service period if it is not probable that the performance condition will be achieved. In accordance with SFAS 123(R), the Company does not reverse previously recognized
compensation expense if an employee performance stock option award for which the requisite service has been rendered expires unexercised.

The Company did
not recognize a tax benefit from the stock compensation expense, because the Company believes that it is more likely than not that the related deferred tax assets, which have been reduced by a valuation allowance, will not be realized.

On May 25, 2005, the Companys Board of Directors accelerated vesting of outstanding underwater employee stock options with exercise prices
greater than $8.00 per share. Approximately 1.3 million options, or approximately 39% of the Companys total outstanding options as of May 25, 2005, with varying remaining vesting schedules, were subject to this acceleration and
became immediately exercisable. As a result of this acceleration, the Company reduced the amount of compensation expense recorded due to the effects of SFAS 123(R) by approximately $329 thousand for the fiscal year 2007 and $300 thousand for fiscal
years subsequent to 2007.

Prior to the adoption of SFAS 123(R), the Company presented any tax benefits of deductions resulting from the exercise of stock
options within operating cash flows in the consolidated statement of cash flows. SFAS 123(R) requires tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be
classified and reported as both an operating cash outflow and a financing cash inflow upon adoption of SFAS 123(R). The excess tax benefits that would otherwise be available to reduce income taxes payable have the effect of increasing the
Companys net operating loss carryforwards. Accordingly, because the Company is not able to realize these excess tax benefits, such benefits have not been recognized in the consolidated statement of cash flows for the 13-week period ended
August 26, 2006.

For purposes of the pro forma disclosures below, the Company applied the intrinsic value method of accounting for stock options
issued on and prior to May 27, 2006, as prescribed by APB 25. As each option issued and outstanding during the 13-



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week period ended August 27, 2005 had an exercise price equal to the closing market price of the underlying common
stock on the grant date, no compensation expense relating to stock options was recognized for the 13-week period ended August 27, 2005. If compensation expense had been recognized based on the estimated fair value of each option granted in
accordance with the provisions of SFAS 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure (SFAS 148), net loss and net loss per share would have been as follows:



|                                                                                                               |  |                                         |       
|-------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------
|                                                                                                               |  | (in thousands, except pershare amounts)
|                                                                                                               |  | For the 13-Week Period    Ended:       
|                                                                                                               |  | August 27, 2005                        
|                                                                                                               | 
|Net loss, as reported                                                                                          |  | $                                       | (545) 
|Add: stock-based compensation expense included in reported net loss, net of tax                                |  |                                         | 5     
|Deduct: stock-based employee compensation expense under the fair value based method for all awards, net of tax |  |                                         | (131) 
|                                                                                                               |  |                                         |       
|Pro forma net loss                                                                                             |  | $                                       | (671) 
|                                                                                                               |  |                                         |       
|                                                                                                               | 
|Net loss per share:                                                                                            |  |                                         |       
|                                                                                                               | 
|Basic - as reported                                                                                            |  | $                                       | (0.03)
|Basic - pro forma                                                                                              |  | $                                       | (0.03)
|                                                                                                               | 
|Diluted - as reported                                                                                          |  | $                                       | (0.03)
|Diluted - pro forma                                                                                            |  | $                                       | (0.03)

Pro forma compensation expense under SFAS 123, among other computational differences, does not consider potential
pre-vesting forfeitures. Because of these differences, the pro forma stock compensation expense presented above for the 13-week period ended August 27, 2005 under SFAS 123 and the stock compensation expense recognized during the current 13-week
period ended August 26, 2006 under SFAS 123(R) are not directly comparable.

The effects of applying SFAS 123(R) in calculating pro forma income
(loss) attributable to common stockholders and pro forma income (loss) per share may not necessarily be indicative of the effects of applying SFAS 123(R) to net income (loss) in future periods.

The following schedule indicates what certain operating results would have been without the effects of applying SFAS 123(R) during the 13-week period ended
August 26, 2006:



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|                                                  |  |                                               |       |                                                      |   |      
|------------------------------------------------- |  | --------------------------------------------- | ----- | ---------------------------------------------------- | - | -----
|                                                  |  | (in thousands, except per share amounts)     
|                                                  |  | For the 13-Week Period Ended: August 26, 2006
|                                                  |  | As Reported                                   |       | Pro Forma Withoutthe Effects
of Applying SFAS 123(R)
|Operating income                                  |  | $                                             | 6,209 |                                                      | $ | 6,686
|Income before income taxes and minority interests |  | $                                             | 4,154 |                                                      | $ | 4,631
|Income before minority interests                  |  | $                                             | 3,654 |                                                      | $ | 4,131
|Net income                                        |  | $                                             | 3,643 |                                                      | $ | 4,120
|Cash flows provided by operating activitites      |  | $                                             | 8,077 |                                                      | $ | 8,077
|Cash flows provided by financing activitites      |  | $                                             | 1,165 |                                                      | $ | 1,165
|Basic net income (loss) per share                 |  | $                                             | 0.18  |                                                      | $ | 0.21 
|Diluted net income (loss) per share               |  | $                                             | 0.17  |                                                      | $ | 0.19 

Total stock compensation expense is included in the consolidated statement of operations for the 13-week periods
ended August 26, 2006 and August 27, 2005 in the following expense categories:



|                                    |  |                               |     |                 |   |  
|----------------------------------- |  | ----------------------------- | --- | --------------- | - | -
|                                    |  | (in thousands)               
|                                    |  | For the 13-Week Period Ended:
|                                    |  | August 26, 2006               |     | August 27, 2005
|Cost of sales                       |  | $                             | 93  |                 | $ | 1
|Engineering                         |  | $                             | 7   |                 | $ | -
|Selling, general and administrative |  | $                             | 459 |                 | $ | 4

An $82 thousand one-time, non-cash benefit for estimated future forfeitures of restricted stock previously
expensed is included in the consolidated statement of operations for the 13-week period ended August 26, 2006 in the following expense categories:



|                                    |  |                                  |     
|----------------------------------- |  | -------------------------------- | ----
|                                    |  | (in thousands)                  
|                                    |  | For the 13-Week    Period Ended:
|                                    |  | August 26, 2006                 
|Cost of sales                       |  | $                                | (10)
|Engineering                         |  | $                                | (2) 
|Selling, general and administrative |  | $                                | (70)

Stock Incentive Plans

The Company has a 1994 Stock Incentive Plan (the 1994 Plan) for employees, consultants and directors of the Company that was approved by the Companys shareholders. The 1994 Plan, as amended, permits
the grant of up to 1,500,000 shares of authorized common stock in the form of incentive stock options, non-qualified stock options, restricted stock awards and performance based awards and 2,075,000 additional shares of authorized common stock in
the form of incentive or non-qualified stock options granted at not less than fair market value of the Companys stock on the date of grant to employees, directors, advisors, independent contractors and consultants. The 1994 Plan provides for
automatic option grants of 20,000 shares to directors that are not affiliated with Merix at the time the director is first elected to the board and 5,000 shares annually thereafter.

The Company also has a Merix Corporation 2000 Nonqualified Stock Option Plan (the 2000 Plan) that was adopted by the Company and did not require approval by the Companys shareholders. The 2000 Plan,
as amended, permits the grant of up to 4,000,000 shares of authorized common stock in the form of nonqualified stock options and stock awards to employees,



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directors and to non-employee consultants, agents and independent contractors and advisors who provide services to the
Company. The number of shares subject to stock options and stock awards granted to officers and directors in any given year cannot exceed 25% of the total number of shares subject to awards granted in that year.

In both plans, a committee of the Board of Directors has the authority to determine option prices. To date, all options have been granted at or above the fair market
value of the stock at the date of grant. The options vest as determined by the Human Resources Compensation Committee (HRCC) of the Board of Directors and generally become exercisable ratably over a four-year period, beginning one year after the
date of grant.The options may in no event have a term exceeding ten years from the date of grant.

The Company uses the Black-Scholes
option-pricing model to estimate the fair values of stock options. The option-pricing model requires a number of assumptions, including those assumptions noted in the table below. Expected volatility is calculated based on applying historical
volatility over the expected life of the stock options granted. The expected stock option term is calculated using the simplified method permitted by SAB 107 and is based on historical stock option exercise patterns. The risk-free
interest rate used is based on the implied yield on Treasury Constant Maturities with a remaining term equal to the expected term of the stock option. The expected dividend yield is representative of no cash dividends being paid by the Company in
the past and the Company having no intention of paying dividends in the foreseeable future. Additionally, the Companys Domestic Term Loan Agreement contains covenants that restrict the Companys ability to pay dividends.

The following weighted average assumptions were used in the Black-Scholes option pricing model for valuing all stock options granted during the 13-week periods ended
August 26, 2006 and August 27, 2005:

|                           |                               |            |                |           
|-------------------------- | ----------------------------- | ---------- | -------------- | ----------
|                           |                               |           
|                           | For the 13-Week Period Ended:
|                           | August 26,2006                |            | August 27,2005
|Expected volatility        |                               | 68%        |                | 55%       
|Expected stock option term |                               | 4.07 years |                | 1.90 years
|Risk-free interest rate    |                               | 5.09%      |                | 3.93%     
|Expected dividend yield    |                               | 0%         |                | 0%        

Using the Black-Scholes methodology, the total fair value of stock options granted during the 13-week periods
ended August 26, 2006 and August 27, 2005 was $2.1 million and $915 thousand, respectively. The weighted average grant date fair value per share of options granted during the 13-week periods ended August 26, 2006 and August 27,
2005 was $10.76 and $6.31, respectively. The total intrinsic value of stock options exercised during the 13-week period ended August 26, 2006 was $987 thousand. There was no intrinsic value in the stock options exercised during the 13-week
period ended August 27, 2005.

Total cash received from stock options exercised and shares purchased under all share-based arrangements was $1.8
million for the 13-week period ended August 26, 2006. No stock options were exercised during the 13-week period ended August 27, 2005, and accordingly, no cash was received from stock options during the 13-week period ended August 27,
2005.

The Black-Scholes valuation model does not take into account vesting requirements or restrictions on transferability. In addition, the valuation
model requires the input of highly subjective assumptions, including the expected stock price volatility. Employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input
assumptions can materially affect the fair value estimate. The estimation of stock awards that will ultimately vest requires significant estimates, and to the extent that actual results or updated estimates differ from current estimates, such
amounts will be recorded as a cumulative adjustment in the period that the estimates are revised. Actual results and future changes in estimates may differ substantially from the current estimates.

The Company amortizes stock-based compensation on a straight-line basis over the vesting period of the individual award with the estimated forfeitures considered.
Expected pre-vesting forfeitures are estimated based on actual historical pre-vesting forfeiture rates.

The following
table summarizes the Companys stock options outstanding at August 26, 2006:



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|                         |  |                                     |  |                                                                 |  |                                    |       |                                     |           |                                  |   |      
|------------------------ |  | ----------------------------------- |  | --------------------------------------------------------------- |  | ---------------------------------- | ----- | ----------------------------------- | --------- | -------------------------------- | - | -----
|                         |  |                                    
|Options
Outstanding      |  | Options Vested and Exercisable     
|Range of Exercise Prices |  | Number
of    Options    Outstanding |  | Weighted Average    Remaining    Contractual Life    (in years) |  | Weighted Average    Exercise Price |       | Number
of    Options    Outstanding |           | Weighted Average  Exercise Price
|$2.04 - $5.45            |  | 271,844                             |  | 5.45                                                            |  | $                                  | 4.78  |                                     | 54,094    |                                  | $ | 2.87 
|$5.53 - $6.60            |  | 323,325                             |  | 3.39                                                            |  | $                                  | 6.14  |                                     | 176,087   |                                  | $ | 6.14 
|$6.63 - $8.15            |  | 290,697                             |  | 4.67                                                            |  | $                                  | 7.57  |                                     | 151,446   |                                  | $ | 7.18 
|$8.19 - $8.34            |  | 356,075                             |  | 3.22                                                            |  | $                                  | 8.33  |                                     | 332,009   |                                  | $ | 8.34 
|$8.40 - $8.57            |  | 358,036                             |  | 2.82                                                            |  | $                                  | 8.57  |                                     | 358,036   |                                  | $ | 8.57 
|$8.58 - $9.22            |  | 327,073                             |  | 5.01                                                            |  | $                                  | 9.19  |                                     | 320,823   |                                  | $ | 9.19 
|$9.25 - $10.51           |  | 445,675                             |  | 6.53                                                            |  | $                                  | 9.88  |                                     | 83,875    |                                  | $ | 9.96 
|$10.54 - $11.30          |  | 430,650                             |  | 6.11                                                            |  | $                                  | 11.07 |                                     | 244,650   |                                  | $ | 11.06
|$11.34 - $16.50          |  | 353,990                             |  | 2.54                                                            |  | $                                  | 13.48 |                                     | 320,240   |                                  | $ | 13.55
|$16.63 - $67.06          |  | 370,612                             |  | 3.65                                                            |  | $                                  | 22.59 |                                     | 363,112   |                                  | $ | 22.64
|                         |  |                                     |  |                                                                 |  |                                    |       |                                     |           |                                  |   |      
|$2.04 - $67.06           |  | 3,527,977                           |  | 4.40                                                            |  | $                                  | 10.44 |                                     | 2,404,372 |                                  | $ | 11.32
|                         |  |                                     |  |                                                                 |  |                                    |       |                                     |           |                                  |   |      

At August 26, 2006, total estimated unrecognized compensation expense related to unvested stock options and
restricted stock awards was $3.1 million and $1.2 million, respectively. The unrecognized compensation expense related to unvested stock options and restricted stock awards is expected to be recognized over a weighted average period of 1.95 years
and 2.05 years, respectively.



|                                                                                                      |  |                     |  |                               |       |                                                    |      |                           |   |           
|----------------------------------------------------------------------------------------------------- |  | ------------------- |  | ----------------------------- | ----- | -------------------------------------------------- | ---- | ------------------------- | - | ----------
|The following table summarizes stock option activity during the 13-week period ended August 26, 2006:
|                                                                                                      |  |                    
|                                                                                                      |  | Outstanding Options
|                                                                                                      |  | Number of Shares    |  | WeightedAverage ExercisePrice |       | WeightedAverageRemainingContractual Term(in years) |      | Aggregate Intrinsic Value
|Options outstanding at May 27, 2006                                                                   |  | 3,502,839           |  | $                             | 10.37 |                                                    | 4.06 |                           | $ | 10,885,662
|                                                                                                      |  |                     |  |                               |       |                                                    |      |                           |   |           
|Granted                                                                                               |  | 355,200             |  | $                             | 10.76 |                                                    | 4.07 |                           |   |           
|Exercised                                                                                             |  | (254,389)           |  | $                             | 7.21  |                                                    | N/A  |                           |   |           
|Cancelled, forfeited or expired                                                                       |  | (75,673)            |  | $                             | 19.34 |                                                    | N/A  |                           |   |           
|                                                                                                      |  |                     |  |                               |       |                                                    |      |                           |   |           
|Options outstanding at August 26, 2006                                                                |  | 3,527,977           |  | $                             | 10.44 |                                                    | 4.40 |                           | $ | 10,092,128
|                                                                                                      |  |                     |  |                               |       |                                                    |      |                           |   |           
|                                                                                                      |  |                     |  |                              
|Options exercisable at August 26, 2006                                                                |  | 2,404,372           |  | $                             | 11.32 |                                                    | 3.26 |                           | $ | 6,090,859 
|                                                                                                      |  |                     |  |                               |       |                                                    |      |                           |   |           

The aggregate intrinsic value of outstanding options at August 26, 2006 in the preceding table represents the
total pretax intrinsic value of in-the-money options based on the Companys closing stock price of $12.05 as of August 26, 2006, which would have been received by the option holders had all option holders exercised their stock options as
of that date. The total number of in-the-money options exercisable as of August 26, 2006 1,729,059 and the weighted average exercise price was $8.53 at August 26, 2006

Performance Stock Option Awards

The Company issues performance stock option awards to certain employees
under the 1994 and 2000 Plans. Performance stock option awards are a form of award in which the number of stock options that ultimately vest depends upon performance against targets specified at the time of issuance by the HRCC Committee of the
Board of Directors. At the end of the requisite service period (the period of time over which the performance criteria must be satisfied), if the performance targets are met, the awards will vest in accordance with the terms of the underlying
performance stock option award agreement.

Accruals of compensation cost for performance stock option awards with a performance condition are based on the
probable outcome of the performance condition. The Company accrues compensation cost if it is probable that the performance



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condition will be achieved and the Company does not accrue compensation if it is not probable that the performance
condition will be achieved. Compensation cost is recognized on a straight-line over the requisite service period of the award.

Non-vested performance
stock option award activity under the 1994 and 2000 Plans for the 13-week period ended August 26, 2006 is as follows:



|                                                                          |                                                    |         |                                      |   |      
|------------------------------------------------------------------------- | -------------------------------------------------- | ------- | ------------------------------------ | - | -----
|                                                                          |                                                    |         |                                      |  
|                                                                          | NonvestedPerformance StockOption AwardsOutstanding |         | WeightedAverage GrantDate Fair Value
|Non-vested performance stock option awards outstanding at May 27, 2006    |                                                    | 61,000  |                                      | $ | 8.56 
|                                                                          |                                                    |         |                                      |   |      
|Granted                                                                   |                                                    | 170,000 |                                      | $ | 11.13
|Exercised                                                                 |                                                    | (1,375) |                                      | $ | 9.30 
|Forfeited                                                                 |                                                    | -       |                                      | $ | -    
|                                                                          |                                                    |         |                                      |   |      
|Non-vested performance stock option awards outstanding at August 26, 2006 |                                                    | 229,625 |                                      | $ | 10.46
|                                                                          |                                                    |         |                                      |   |      
|                                                                          |                                                    |         |                                      |   |      
|                                                                          |                                                    |         |                                      |   |      
|Performance stock option awards exercisable at August 26, 2006            |                                                    | 13,875  |                                      | $ | 8.49 
|                                                                          |                                                    |         |                                      |   |      

At August 26, 2006, the unrecognized cost related to non-vested performance stock option awards totaled
approximately $821 thousand. These costs are expected to be recognized over a weighted average period of 2.26 years. There were no performance stock option awards granted during the 13-week period ended August 27, 2005 or outstanding at
August 27, 2005.

Performance stock option award compensation expense computed under the fair value method for the 13-week period ended
August 26, 2006 was $63 thousand. As there were no performance stock option awards outstanding during the 13-week period ended August 27, 2005, the Company did not recognize any performance stock option award compensation expense during
the 13-week period ended August 27, 2005.

Restricted Stock Awards

The Company issues restricted stock awards to certain employees under the 1994 and 2000 Plans. Restricted stock awards are subject to vesting and other terms, as specified at the time of issuance by the HRCC Committee
of the Board of Directors. Generally, restricted stock awards vest ratably over a four-year period, beginning on the first anniversary of their issuance, and may contain accelerated vesting provisions.

The Company accrues compensation expense for restricted stock awards on a straight-line basis over the requisite service period of the restricted stock award, which is
defined as the period of time from the grant date of the restricted stock award to the end of the vesting period, as defined in the restricted stock award agreement.

Non-vested restricted stock award activity under the 1994 and 2000 Plans for the 13-week period ended August 26, 2006 is as follows:



|                                                                  |  |                                 |  |                                      |      
|----------------------------------------------------------------- |  | ------------------------------- |  | ------------------------------------ | -----
|                                                                  |  |                                 |  |                                      |      
|                                                                  |  | NonvestedRestricted StockAwards |  | WeightedAverage GrantDate Fair Value
|Non-vested restricted stock awards outstanding at May 27, 2006    |  | 134,621                         |  | $                                    | 8.07 
|                                                                  |  |                                 |  |                                      |      
|Granted                                                           |  | 79,066                          |  |                                      | 10.92
|Vested                                                            |  | (28,423)                        |  |                                      | 8.17 
|Forfeited                                                         |  | (500)                           |  |                                      | 9.22 
|                                                                  |  |                                 |  |                                      |      
|Non-vested restricted stock awards outstanding at August 26, 2006 |  | 184,764                         |  | $                                    | 9.27 
|                                                                  |  |                                 |  |                                      |      

At August 26, 2006, the unrecognized compensation cost related to non-vested restricted stock awards totaled
$1.2 million. These costs are expected to be recognized over a weighted average period of 2.05 years.



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Restricted stock compensation expense computed under the fair value method for the 13-week periods ended August 26,
2006 and August 27, 2005 was $161 thousand and $34 thousand, respectively.

Stock Grants

The Company from time to time grants stock to certain of its employees. Stock grants vest immediately and compensation expense is recorded immediately. During the
13-week periods ended August 26, 2006 and August 27, 2005, there were no stock grants. Accordingly, the Company did not recognize any stock compensation expense relating to stock grants during the 13-week periods ended August 26, 2006
and August 27, 2005.

Note 14.     EQUITY

On March 25, 1997, the Board of Directors adopted a Shareholder Rights Plan (the Shareholder Rights Plan) designed to preserve and enhance shareholder value and the Companys ability to carry out
its long-term business strategy. Under the Shareholder Rights Plan, the Company reserved 500,000 shares of Series A Preferred Stock. In connection with the adoption of the Plan, the Board of Directors declared a dividend distribution of one Right
for each outstanding share of common stock, payable to the shareholders of record on April 25, 1997. One Right entitles the registered holder, under certain circumstances, to purchase from the Company one one-hundredth of a share of Series A
Preferred Stock at a purchase price of $90.00, subject to adjustment. The Company may redeem the Rights for $0.001 per Right under certain circumstances. The Rights expire on March 25, 2007.

Note 15.     SEVERANCE AND IMPAIRMENT CHARGES

During the first quarter of the fiscal year 2006, the Company executed cost reduction actions that included a reduction in approximately 130 employee positions across the Companys manufacturing and support organizations, predominantly
in Oregon. The Company recorded a charge of $658 thousand related to severance costs and $477 thousand for the impairment of certain fixed assets. As of August 26, 2006 and May 27, 2006, the Company had no accrued liability remaining.

Note 16.     NET INCOME (LOSS) PER SHARE

Basic income (loss) per share is computed using the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per share is computed using the weighted average number of shares of common stock
and potentially dilutive common shares related to stock options and the convertible debenture outstanding during the period.

Net income (loss) per share
for the 13-week periods ended August 26, 2006 and August 27, 2005 is as follows:

|                                                                    |  |                                          |        |                 |   |       
|------------------------------------------------------------------- |  | ---------------------------------------- | ------ | --------------- | - | ------
|                                                                    |  |                                         
|                                                                    |  | (in thousands, except per share amounts)
|                                                                    |  | For the 13-Week Period Ended:           
|                                                                    |  | August 26, 2006                          |        | August 27, 2005
|                                                                    |  |                                         
|Determination of Net Income (Loss) Per Share - Basic:               |  |                                          |        |                 |   |       
|Net income (loss)                                                   |  | $                                        | 3,643  |                 | $ | (545) 
|Divided by: weighted average number of basic shares                 |  |                                          | 19,944 |                 |   | 19,376
|                                                                    |  |                                          |        |                 |   |       
|Net income (loss) per share - basic                                 |  | $                                        | 0.18   |                 | $ | (0.03)
|                                                                    |  |                                          |        |                 |   |       
|                                                                    |  |                                         
|Determination of Net Income (Loss) Per Share - Diluted:             |  |                                          |        |                 |   |       
|Net income (loss)                                                   |  | $                                        | 3,643  |                 | $ | (545) 
|Add: Interest expense on dilutive convertible notes, net of tax     |  | $                                        | 612    |                 |   |       
|Add: Amortization of fees on dilutive convertible notes, net of tax |  | $                                        | 135    |                 |   |       
|Subtract: Profit sharing expense, net of tax                        |  | $                                        | (63)   |                 | $ | -     
|                                                                    |  |                                          |        |                 |   |       
|Dilutive net income (loss)                                          |  | $                                        | 4,327  |                 | $ | (545) 
|Divided by: weighted average number of diluted shares               |  |                                          | 25,012 |                 |   | 19,376
|                                                                    |  |                                          |        |                 |   |       
|Net income (loss) per share - diluted                               |  | $                                        | 0.17   |                 | $ | (0.03)
|                                                                    |  |                                          |        |                 |   |       



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The following incremental shares were excluded from the calculation of diluted net income (loss), because including these
shares would have been anti-dilutive:



|                                                |  |                               |  |                
|----------------------------------------------- |  | ----------------------------- |  | ---------------
|                                                |  |                              
|                                                |  | For the 13-Week Period Ended:
|                                                |  | August 26, 2006               |  | August 27, 2005
|Incremental weighted average shares related to: |  |                               |  |                
|Outstanding stock options                       |  | 1,705,436                     |  | 3,177,955      
|Convertible debenture                           |  | -                             |  | 1,287,996      
|                                                |  |                               |  |                
|Total                                           |  | 1,705,436                     |  | 4,465,951      
|                                                |  |                               |  |                

Note 17.    COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) for the 13-week periods ended August 26, 2006 and August 27, 2005 is as follows:



|                                            |  |                               |       |                 |   |      
|------------------------------------------- |  | ----------------------------- | ----- | --------------- | - | -----
|                                            |  | (in thousands)               
|                                            |  | For the 13-Week Period Ended:
|                                            |  | August 26, 2006               |       | August 27, 2005
|                                            |  |                              
|Net income (loss)                           |  | $                             | 3,643 |                 | $ | (545)
|                                            |  |                               |       |                 |   |      
|Other comprehensive income (loss)           |  |                               |       |                 |   |      
|Change in cumulative translation adjustment |  |                               | (9)   |                 |   | -    
|                                            |  |                               |       |                 |   |      
|Total other comprehensive income (loss)     |  |                               | (9)   |                 |   | -    
|                                            |  |                               |       |                 |   |      
|Total comprehensive income (loss)           |  | $                             | 3,634 |                 | $ | (545)
|                                            |  |                               |       |                 |   |      

Accumulated other comprehensive income (loss) for the 13-week periods ended August 26, 2006 and
August 27, 2005 consists of the following:



|                                        |  |                               |   |                    |   |  
|--------------------------------------- |  | ----------------------------- | - | ------------------ | - | -
|                                        |  | (in thousands)               
|                                        |  | For the 13-Week Period Ended:
|                                        |  | August 26,    2006            |   | August 27,    2005
|                                        |  |                              
|Foreign currency translation adjustment |  | $                             | 4 |                    | $ | -
|                                        |  |                               |   |                    |   |  

Note 18.    OPERATING SEGMENTS

The Company has three reportable business segments defined by geographic location in accordance with SFAS 131: (1) Merix Oregon, (2) Merix San Jose and
(3) Merix Asia. Operating segments are defined as components of an enterprise for which separate financial information is available and regularly reviewed by senior management. The Companys operating segments are evidence of the internal
structure of the Companys 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 (CODM) is the Companys Chief Executive Officer.

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in Note 1. Net sales by geographic operating segment are defined as net sales consummated within the region
where the sale originated. The Company defines the sales origination to be the region where the product is manufactured. Prior to the acquisition of Merix Asia on September 29, 2005, the Company reported geographic net sales based on the
domicile of the OEM customer. Subsequent to the acquisition of Merix Asia, the Company changed its reporting definition of geographic net sales origination from the domicile of the OEM customer to net sales by manufacturing location.



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All corporate-type expenses have been included in the Merix Oregon segment.

Net sales, depreciation expense, amortization expense of identifiable intangible assets, operating income (loss), a reconciliation of operating income (loss) to net
income (loss), capital expenditures, accounts receivable, net, inventories, net, assets held for sale, property, plant and equipment, net, goodwill and total assets for each operating segment are regularly reviewed by management and are, therefore,
provided below:



|                                                                          |  |                           |         |                   |   |               |  |              |         |  |   |        
|------------------------------------------------------------------------- |  | ------------------------- | ------- | ----------------- | - | ------------- |  | ------------ | ------- |  | - | -------
|                                                                          |  | (in thousands, unaudited)
|                                                                          |  | Merix    Oregon           |         | Merix    San Jose |   | Merix    Asia |  | Consolidated
|For the 13-Week Period Ended August 26, 2006:                             |  |                           |         |                   |   |               |  |              |         |  |   |        
|                                                                          |  |                           |         |                  
|Net sales                                                                 |  | $                         | 54,219  |                   | $ | 8,641         |  | $            | 43,056  |  | $ | 105,916
|Depreciation expense                                                      |  |                           | (2,839) |                   |   | (316)         |  |              | (1,784) |  |   | (4,939)
|Amortization expense - identifiable intangible assets                     |  |                           | -       |                   |   | (580)         |  |              | (182)   |  |   | (762)  
|                                                                          |  |                           |         |                  
|Operating income (loss)                                                   |  |                           | 6,345   |                   |   | 327           |  |              | (463)   |  |   | 6,209  
|Interest income                                                           |  |                           | 309     |                   |   | 10            |  |              | 16      |  |   | 335    
|Interest expense                                                          |  |                           | (1,284) |                   |   | -             |  |              | (479)   |  |   | (1,763)
|Other income (expense), net                                               |  |                           | (30)    |                   |   | 34            |  |              | (631)   |  |   | (627)  
|                                                                          |  |                           |         |                   |   |               |  |              |         |  |   |        
|Income (loss) before taxes and minority interests                         |  |                           | 5,340   |                   |   | 371           |  |              | (1,557) |  |   | 4,154  
|                                                                          |  |                           |         |                  
|Income tax expense                                                        |  |                           | 275     |                   |   | -             |  |              | 225     |  |   | 500    
|                                                                          |  |                           |         |                   |   |               |  |              |         |  |   |        
|Income (loss) before minority interests                                   |  |                           | 5,065   |                   |   | 371           |  |              | (1,782) |  |   | 3,654  
|                                                                          |  |                           |         |                  
|Minority interests in net income of consolidated subsidiaries, net of tax |  |                           | -       |                   |   | -             |  |              | 11      |  |   | 11     
|                                                                          |  |                           |         |                   |   |               |  |              |         |  |   |        
|Net income (loss)                                                         |  | $                         | 5,065   |                   | $ | 371           |  | $            | (1,793) |  | $ | 3,643  
|                                                                          |  |                           |         |                   |   |               |  |              |         |  |   |        
|                                                                          | 
|                                                                          |  | (in thousands, unaudited)
|                                                                          |  | MerixOregon               |         | Merix San Jose    |   | MerixAsia     |  | Consolidated
|For the 13-Week Period Ended August 27, 2005:                             |  |                           |         |                   |   |               |  |              |         |  |   |        
|                                                                          |  |                           |         |                  
|Net sales                                                                 |  | $                         | 44,327  |                   | $ | 7,460         |  | $            | -       |  | $ | 51,787 
|Depreciation expense                                                      |  |                           | (3,286) |                   |   | (343)         |  |              | -       |  |   | (3,629)
|Amortization expense - identifiable intangible assets                     |  |                           | -       |                   |   | (751)         |  |              | -       |  |   | (751)  
|                                                                          |  |                           |         |                  
|Operating loss                                                            |  |                           | (427)   |                   |   | (211)         |  |              | -       |  |   | (638)  
|Interest income                                                           |  |                           | 633     |                   |   | -             |  |              | -       |  |   | 633    
|Interest expense                                                          |  |                           | (437)   |                   |   | -             |  |              | -       |  |   | (437)  
|Other income (expense), net                                               |  |                           | (105)   |                   |   | 6             |  |              | -       |  |   | (99)   
|                                                                          |  |                           |         |                   |   |               |  |              |         |  |   |        
|Loss before taxes and minority interests                                  |  |                           | (336)   |                   |   | (205)         |  |              | -       |  |   | (541)  
|                                                                          |  |                           |         |                  
|Income tax expense                                                        |  |                           | 4       |                   |   | -             |  |              | -       |  |   | 4      
|                                                                          |  |                           |         |                   |   |               |  |              |         |  |   |        
|Loss before minority interests                                            |  |                           | (340)   |                   |   | (205)         |  |              | -       |  |   | (545)  
|                                                                          |  |                           |         |                  
|Minority interests in net income of consolidated subsidiaries, net of tax |  |                           | -       |                   |   | -             |  |              | -       |  |   | -      
|                                                                          |  |                           |         |                   |   |               |  |              |         |  |   |        
|Net loss                                                                  |  | $                         | (340)   |                   | $ | (205)         |  | $            | -       |  | $ | (545)  
|                                                                          |  |                           |         |                   |   |               |  |              |         |  |   |        



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|                                    |  |                               |         |                    |   |        
|----------------------------------- |  | ----------------------------- | ------- | ------------------ | - | -------
|                                    |  | (in thousands, unaudited)    
|                                    |  | For the 13-Week Period Ended:
|                                    |  | August 26,    2006            |         | August 27,    2005
|Capital Expenditures:               |  |                               |         |                    |   |        
|Merix Oregon                        |  | $                             | 2,555   |                    | $ | 1,256  
|Merix San Jose                      |  |                               | 194     |                    |   | 223    
|Merix Asia                          |  |                               | 3,199   |                    |   | -      
|                                    |  |                               |         |                    |   |        
|Total                               |  | $                             | 5,948   |                    | $ | 1,479  
|                                    |  |                               |         |                    |   |        
|                                    | 
|                                    |  | (in thousands, unaudited)    
|                                    |  | August 26,2006                |         | May 27, 2006      
|Accounts Receivable, Net:           |  |                               |         |                    |   |        
|Merix Oregon                        |  | $                             | 52,024  |                    | $ | 49,005 
|Merix San Jose                      |  |                               | 5,400   |                    |   | 5,231  
|Merix Asia                          |  |                               | 21,894  |                    |   | 21,143 
|                                    |  |                               |         |                    |   |        
|Total                               |  | $                             | 79,318  |                    | $ | 75,379 
|                                    |  |                               |         |                    |   |        
|                                    | 
|                                    |  | (in thousands, unaudited)    
|                                    |  | August 26,2006                |         | May 27, 2006      
|Inventories, Net                    |  |                               |         |                    |   |        
|Merix Oregon                        |  | $                             | 14,463  |                    | $ | 13,079 
|Merix San Jose                      |  |                               | 1,330   |                    |   | 1,125  
|Merix Asia                          |  |                               | 12,589  |                    |   | 10,180 
|                                    |  |                               |         |                    |   |        
|Total                               |  | $                             | 28,382  |                    | $ | 24,384 
|                                    |  |                               |         |                    |   |        
|                                    | 
|                                    |  | (in thousands, unaudited)    
|                                    |  | August 26,2006                |         | May 27, 2006      
|Assets Held for Sale:               |  |                               |         |                    |   |        
|Merix Oregon                        |  | $                             | 1,987   |                    | $ | 1,987  
|Merix San Jose                      |  |                               | -       |                    |   | -      
|Merix Asia                          |  |                               | 189     |                    |   | -      
|                                    |  |                               |         |                    |   |        
|Total                               |  | $                             | 2,176   |                    | $ | 1,987  
|                                    |  |                               |         |                    |   |        
|                                    | 
|                                    |  | (in thousands, unaudited)    
|                                    |  | August 26,2006                |         | May 27, 2006      
|Property, Plant and Equipment, Net: |  |                               |         |                    |   |        
|Merix Oregon                        |  | $                             | 69,006  |                    | $ | 69,640 
|Merix San Jose                      |  |                               | 4,893   |                    |   | 4,680  
|Merix Asia                          |  |                               | 49,768  |                    |   | 48,542 
|                                    |  |                               |         |                    |   |        
|Total                               |  | $                             | 123,667 |                    | $ | 122,862
|                                    |  |                               |         |                    |   |        



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|               |  |                           |         |              |   |        
|-------------- |  | ------------------------- | ------- | ------------ | - | -------
|               |  | (in thousands, unaudited)
|               |  | August 26,2006            |         | May 27, 2006
|Goodwill:      |  |                           |         |              |   |        
|Merix Oregon   |  | $                         | -       |              | $ | -      
|Merix San Jose |  |                           | 25,551  |              |   | 25,551 
|Merix Asia     |  |                           | 64,755  |              |   | 64,338 
|               |  |                           |         |              |   |        
|Total          |  | $                         | 90,306  |              | $ | 89,889 
|               |  |                           |         |              |   |        
|               | 
|               |  | (in thousands, unaudited)
|               |  | August 26,2006            |         | May 27, 2006
|Total Assets:  |  |                           |         |              |   |        
|Merix Oregon   |  | $                         | 175,431 |              | $ | 168,300
|Merix San Jose |  |                           | 44,675  |              |   | 45,303 
|Merix Asia     |  |                           | 172,028 |              |   | 165,327
|               |  |                           |         |              |   |        
|Total          |  | $                         | 392,134 |              | $ | 378,930
|               |  |                           |         |              |   |        

MAJOR CUSTOMERS BY OPERATING SEGMENT:

Major Customers: The Companys five largest OEM customers, which vary from year to year, comprised 39% and 55% of the Companys consolidated net sales during the 13-week periods ended
August 26, 2006 and August 27, 2005, respectively. Net sales to two customers individually represented 15% and 10% of consolidated net sales during the 13-week period ended August 26, 2006. Net sales to two customers individually
represented 27% and 12% of consolidated net sales during the 13-week period ended August 27, 2005. Net sales to these customers primarily related to the Merix Oregon operating segment.

The following are the Companys significant end customers by operating segment for the 13-week period ended August 26, 2006:

Merix Oregon  Merix Oregons five largest customers during the 13-week period ended August 26, 2006, in alphabetic order,
were Cisco Systems Inc., Harris RF Communication, Inc., Juniper Networks, Inc., Motorola, Inc., and Thales Communication, Inc. During the 13-week period ended August 26, 2006, Merix Oregons net sales to Cisco Systems and Motorola
represented 29% and 19%, respectively, of Merix Oregons net sales.

Merix Asia  Merix Asias five largest
customers during the 13-week period ended August 26, 2006, in alphabetic order, were IBM Corporation, Lear Corporation, Robert Bosch Corporation, TRW Automotive, Inc. and Visteon Corporation. During the 13-week period ended August 26,
2006, Merix Asias net sales to TRW Automotive, Inc. represented 15% of Merix Asias net sales.

Merix San Jose
 Merix San Joses five largest customers during the 13-week period ended August 26, 2006, in alphabetic order, were Aeroflex Corporation, Ario Data Networks, Inc., Intel Corporation, Paramit Corporation, and Solectron USA, Inc.
During the 13-week period ended August 26, 2006, none of Merix San Joses customers represented 10% or more of Merix San Joses net sales.

Note 19.    BENEFIT PLANS

The Company has two defined contribution plans, one in Oregon and one in California,
which meet the requirements of Section 401(k) of the Internal Revenue Code for all regular employees and executive officers.

Under the 401(k) plan
for employees that reside in Oregon, the Company matches employee contributions of 100% of the first 3% of an employees base pay and Company contributions vest at a rate of 25% a year. The Companys contributions



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may be made in cash or in the Companys stock. During the 13-week periods ended August 26, 2006 and
August 27, 2005, contribution expense related to this plan was $413 thousand and $300 thousand, respectively.

Under the 401(k) plan for employees
that reside in California, the Company matches employee contributions of 20% of the first 5% of an employees base pay and Company contributions vest at a rate of 20% a year after the first year. The Companys contributions may be made in
cash or in the Companys stock. During the 13-week periods ended August 26, 2006 and August 27, 2005, contribution expense related to this plan was $22 thousand and $26 thousand, respectively.

During the calendar year 2005, the Company was not in compliance with certain 401(k) regulations relating to highly compensated employees within its 401(k) plan.
Contributions for highly compensated employees exceeded allowed limits by $43 thousand during the calendar year 2005.

Certain Merix Asia employees are
entitled to receive a long service payment if they have been employed under a continuous contract for a period of not less than five years (Long Service Payment Plan). Under certain circumstances upon termination of employment, the
employee is eligible to receive the long service payment or severance payment, which are individually calculated as the lesser of (1) the employees last full months wages multiplied by two-thirds multiplied by the employees
total number of service years, or (2) 22,500 Hong Kong Dollars (approximately US$3 thousand at July 22, 2006 and August 26, 2006) multiplied by two-thirds multiplied by the employees total number of service years. The total
cumulative severance and long service plan payment are subject to a maximum payment not to exceed 390,000 Hong Kong Dollars (approximately US$50 thousand at July 22, 2006 and August 26, 2006). The Companys Long Service Payment Plan
accrual at July 22, 2006 was $2.7 million. During the 13-week period ended July 22, 2006, contribution expense related to this plan was $327 thousand.

Note 20.    CONCENTRATIONS OF RISK

The Company is subject to concentrations of credit risk, primarily associated
with cash and cash equivalents, short-term investments and accounts receivable. To mitigate risk associated with cash, cash equivalents, and investments, the Company places cash, cash equivalents, and investments with financial institutions with
investment grade credit ratings and limits the amount of credit exposure to any one financial institution. To mitigate risk associated with short-term investments, the Company further selects investments with creditworthy investees and diversifies
the portfolio. The Companys more significant credit risk is attributable to accounts receivable. The Companys credit risk surrounding accounts receivable are mitigated through (a) ongoing credit evaluations of customers,
(b) monitoring of current changes in the customers businesses, and (c) responding to circumstances promptly. The accounts receivable can either be due from an OEM customer or its electronic manufacturing service provider, depending
upon the billing arrangement.

In total, five entities represented approximately 44% of the net trade accounts receivable balance at August 26, 2006,
individually ranging from 4% to 17%. Comparatively, five entities represented approximately 39% of the net trade accounts receivable balance at May 27, 2006, individually ranging from 5% to 15%. The risk in net trade accounts receivable is
limited due to the creditworthiness of entities to which we sell products and the relatively stable geopolitical environment of the countries in which these entities reside. The Company has not had significant losses related to its accounts
receivable in the past.

Certain of the Companys products use types of laminate materials that are only available from a single supplier that holds a
patent on the material. Although other manufacturers of advanced printed circuit boards must also use the single supplier, and the Companys OEM customers generally determine the type of laminate materials used, a failure to obtain the material
from the single supplier, for any reason, may cause disruption, and possible cancellation, of orders for printed circuit boards using that type of laminate, which in turn would cause a decrease in the Companys consolidated net sales.

Note 21.    COMMITMENTS AND CONTINGENCIES

Litigation

In the normal course of business, the Company is party to
various legal claims, actions and complaints.

On June 17, 2004, the Company and certain of its executive officers and directors were named as
defendants in the first of four purported class action lawsuits alleging violations of federal securities laws. These four cases, which were filed in the United States District Court for the District of Oregon, have now been consolidated in a single
action entitled In re Merix



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Securities Litigation, Lead Case No. CV 04-826-MO. A lead plaintiff was appointed, who filed a
consolidated and amended class action complaint on November 15, 2004. On March 3, 2005, the Company filed a motion to dismiss the amended and consolidated complaint for failure to identify with sufficient specificity the statements that
plaintiffs allege to have been false and why the statements were either false when made or material. On September 15, 2005, the court dismissed the complaint, without prejudice, and gave plaintiffs leave to amend their complaint. On
November 18, 2005, the lead plaintiff filed an amended complaint. The complaint, as amended, alleges that the defendants violated the federal securities laws by making certain alleged inaccurate and misleading statements in the Prospectus used
in connection with the January 2004 public offering. On January 26, 2006, the defendants filed a motion to dismiss the amended complaint. On September 28, 2006, the United States District Court of Oregon dismissed the amended complaint
with prejudice. See Note 23.

On July 2, 2004, two derivative lawsuits were filed in the Circuit Court for the State of Oregon, County of Multnomah,
against certain of the Companys officers and directors based on the same allegations made in the class action lawsuit. The Company is named as a nominal defendant in these derivative lawsuits, which have now been consolidated under a single
action entitled In re Merix Corporation Derivative Litigation, Lead Case No. 0407-06807. On April 29, 2005, plaintiffs filed a consolidated shareholder derivative complaint in which they allege breaches of fiduciary
duties and mismanagement by the defendants. Plaintiffs seek unspecified damages from the defendants, purportedly on behalf of the Company, as well as the derivative plaintiffs attorneys fees and costs. On August 31, 2005, the
federal court hearing the class action lawsuit described above granted a motion to stay discovery in this state-court derivative action. On September 13, 2005, the state court stayed all proceedings in the derivative lawsuit pending further
developments in the federal class action lawsuit, including all proceedings on a motion that the defendants filed on July 7, 2005 to dismiss the consolidated shareholder derivative complaint.

In each complaint, the plaintiffs seek unspecified damages from the defendants. A potential loss or range of loss that could arise from these complaints is not estimable
or probable at this time. The Company has recorded charges for estimated probable costs associated with defending these claims, as it is the Companys policy to accrue legal fees when it is probable that the Company will have to defend itself
against known claims or allegations and it can reasonably estimate the amount of anticipated expense.

The Company is from time to time made subject to
employment-related claims and other commercial claims in the ordinary course of business. The Company has recorded charges for the estimated probable costs associated with defending these claims. Management of the Company believes that the
Companys reserves are adequate and that the outcome should not have a material adverse effect on the Companys consolidated results of operations, financial condition or liquidity.

Environmental Matters

The process to manufacture printed
circuit boards requires adherence to environmental regulations regarding the storage, use, handling and disposal of chemicals, solid wastes and other hazardous materials as well as air quality standards applicable in each of the jurisdictions in
which the Company operates. The Companys Huiyang and Huizhou facilities in the Peoples Republic of China currently are not compliant with all applicable environmental permits and requirements. The Company has worked cooperatively with
regulators in the Peoples Republic of China and has agreed upon a remediation plan. The Company anticipates that this plan, if executed, would not result in any unplanned fines, penalties or costs. The Company incurred $90 thousand and $193
thousand of environmental remediation costs relating to the Huiyang facility and Huizhou facility, respectively, in the Peoples Republic of China during the 13-week period ended July 22, 2006. As the Company purchased the operations of
EPCH on September 29, 2005, the Company did not incur environmental remediation costs relating to the Huiyang facility and Huizhou facility in the Peoples Republic of China during the 13-week period ended August 27, 2005. Management
believes that its other facilities comply in all material respects with applicable environmental laws and regulations. The Company has in the past received certain notices of violations and has been required to engage in certain minor corrective
activities. There can be no assurance that violations will not occur in the future.

Commitments

As of August 26, 2006, the Company had capital commitments of approximately $6.5 million, primarily relating to the purchase of manufacturing equipment.

On April 14, 2005, the Company entered into a Master Sale and Purchase Agreement (the Agreement) with EPCH. Pursuant to the Agreement, the Company
acquired from EPCH the operations of Eastern Pacific Circuits, Ltd and certain of its subsidiaries, a Hong Kong based supplier of printed circuit boards, for a total purchase price of $120.3 million, subject to (1) adjustment based on changes
in working capital, (2) an additional earn out payment of up to $13 million if the business



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meets certain adjusted EBITDA targets in calendar 2005, and (3) revised purchase price negotiations based on a
revised Merix Asia business valuation. The Company is continuing to work with EPCH to finalize the purchase price; however, the Company is currently unable to estimate the date on which the purchase price will be finalized. The Company has not
recorded or accrued for any potential additional consideration relating to the earn out clause, as the Company is unable to determine the amounts, if any, of additional consideration that will be paid.

The Company has consignment agreements with certain suppliers for raw material inventory, some of which obligate the Company to purchase inventory on hand upon
termination of the agreement. As of August 26, 2006, potential commitments under these agreements were insignificant.

Note 22.    RELATED PARTY TRANSACTIONS

On September 29, 2005, Merix Caymans entered into an inter-company
loan agreement (the Loan) with Merix Corporation. Under the terms of the agreement, Merix Corporation loaned $41.2 million to Merix Caymans with interest payable at a rate equal to 110% of the Federal mid-term rate for each quarter. The
loan proceeds were used to fund the acquisition of Merix Asia. Interest payments are due on September 1, December 1 and March 1 of each year, as well as on the last Friday in May of each year. The unpaid principal and accrued
unpaid interest on the Loan are payable in full on the last Friday of May of each year, or, on September 1, December 1, March 1 and on the last Friday in May of each year, the unpaid principal amount of the Loan is rolled
over into a new loan. In the event that the parties are no longer affiliated entities, the unpaid principal and accrued unpaid interest on the Loan will be due immediately and payable in full and the agreement will automatically terminate. No
interest on the Loan was paid during the 13-week period ended August 26, 2006. All accrued principal and interest amounts relating to the Loan were eliminated in consolidation in accordance with the Companys consolidation policies
described in Note 1.

On May 24, 2006, Merix Caymans added an addendum to the inter-company loan agreement with Merix Corporation discussed above,
whereby Merix Corporation loaned an additional $30 million to Merix Caymans (the $30 Million Loan) for the purpose of paying off the Merix Asia $30 million Standard Charter Bank (SCB) debt. Interest is payable at a rate equal to 110% of
the Federal mid-term rate for each quarter. Interest payments are due on September 1, December 1 and March 1 of each year, as well as on the last Friday in May of each year, beginning on May 28, 2006. The unpaid principal
and accrued unpaid interest on the $30 Million Loan are payable in full on the last Friday of May of each year, or, on September 1, December 1, March 1 and on the last Friday in May of each year, the unpaid principal amount
of the $30 Million Loan is rolled over into a new loan. In the event that the parties are no longer affiliated entities, the unpaid principal and accrued unpaid interest on the $30 Million Loan will be due immediately and payable in full and the
agreement will automatically terminate. No interest on the $30 Million Loan was paid during the 13-week period ended August 26, 2006. All accrued principal amounts relating to the Loan were eliminated in consolidation in accordance with the
Companys consolidation policies described in Note 1.

During the 13-week period ended August 26, 2006, the Company paid the following amounts to
Huizhou Desay Holdings Co. Ltd, a minority shareholder: $43 thousand for consulting fees, $67 thousand for rental fees, $7 thousand for management fees, and $83 thousand for other fees.

During the 13-week period ended August 26, 2006, there were no distributions to minority shareholders in the Peoples Republic of China. The Company is obligated to make distributions to its minority
shareholders based on the profits generated from the following four Merix Asia facilities prior to the Companys acquisition of Merix Asia: Huizhou facility, Huiyang facility, Dongguan facility and Lomber facility (each located in the
Peoples Republic of China).

Note 23.    SUBSEQUENT EVENTS

Sale of Dongguan and Lomber Facilities

On September 29,
2006, Merix Hong Kong entered into an agreement with Citi-Power Investment Limited (Citi-Power) to sell Merix Hong Kongs 90% shareholding interest in the Lomber single-sided manufacturing facility located in Huizhou City in the
Peoples Republic of China (Lomber Facility) for a nominal amount, subject to (1) the minority shareholder issuing a letter consenting to the proposed transfer of Merix Hong Kongs interest in the Lomber Facility to
Citi-Power, (2) the Board of Directors approval of the transfer of Merix Hong Kongs interest in the Lomber Facility to Citi-Power, and (3) the issue of an amended approval certificate of the joint venture entity stating that
Citi-Power and the minority shareholder own 90% and 10%, respectively, of the registered capital of the Lomber Facility pursuant to the Ministry of Commerce approval of the proposed equity transfer. Under the terms of the sales agreement, all
receivables due to or payables due from the joint venture entity by Company affiliates will be offset and cancelled as of the completion date of the sale.



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On September 29, 2006, Merix Hong Kong entered into an agreement with Excel Hero (China) Limited (EXCEL)
to sell Merix Hong Kongs 85.29% shareholding interest in its single-sided manufacturing facility located in Dongguan City in the Peoples Republic of China (Dongguan Facility) for a nominal amount, subject to (1) the
minority shareholder issuing a letter consenting to the proposed transfer of Merix Hong Kongs interest in the Dongguan Facility to EXCEL, (2) the Board of Directors approval of the transfer of Merix Hong Kongs interest in the
Dongguan Facility to EXCEL, and (3) the issue of an amended approval certificate of the Company stating that EXCEL and the minority shareholder own 85.29% and 14.71%, respectively, of the registered capital of the Lomber Facility pursuant to
the Ministry of Commerce approval of the proposed equity transfer. Under the terms of the sales agreement, the joint venture entity will further write-off all receivables due from any company affiliate as of the completion date of the sale in
exchange for a cash settlement payment.

The net carrying value of the Dongguan and Lomber facilities was $2.4 million at July 22, 2006. As these
assets did not meet the assets held for sale criteria defined by SFAS 144 at August 26, 2006, such long-lived assets are not recorded as assets held for sale in the Companys consolidated balance sheet as of August 26, 2006 and are
not included as discontinued operations in the Companys consolidated statement of operations for the 13-week period ended August 26, 2006.

Dismissal of In re Merix Corporation Securities Litigation

As previously reported in the Companys periodic reports filed with
the Securities and Exchange Commission, four proposed class action complaints were filed against the Company and certain of the Companys executive officers and directors in the first quarter of the fiscal year 2005 by plaintiffs who purchased
securities in the Companys January 2004 public offering. The complaints were consolidated in the second quarter of the fiscal year 2005 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. On March 3, 2005, the Company filed a motion to dismiss the amended and consolidated complaint for failure to identify with sufficient specificity the statements that plaintiffs
allege to have been false and why the statements were either false when made or material. On September 15, 2005, the court granted that motion without prejudice and gave plaintiffs leave to amend their complaint. On November 18, 2005, the
lead plaintiff filed an amended complaint. The complaint, as amended, alleged that the defendants violated the federal securities laws by making certain alleged inaccurate and misleading statements in the prospectus used in connection with the
Companys January 2004 public offering. The initial purchaser was one of the underwriters of the Companys January 2004 public offering and is one of the defendants in this case. On September 28, 2006, the United States District Court
of Oregon dismissed the amended complaint with prejudice to the plaintiffs right to amend.



ITEM 2.     MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

A Warning About Forward-Looking Statements

This Quarterly Report contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in
this Quarterly Report are forward-looking. 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 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 From 10-K for the fiscal year ended May 27, 2006.



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Business

Merix Corporation is an Oregon corporation formed in March 1994. In this report, the terms Merix, Company, we, us, and our refer to Merix Corporation and its wholly and
majority-owned subsidiaries. We are a leading global manufacturer of technologically advanced printed circuit boards for use in electronic equipment. Our principal products are complex multi-layer rigid printed circuit boards, which are the
platforms used to interconnect microprocessors, integrated circuits and other components that are essential to the operation of electronic products and systems. We provide our products to original equipment manufacturer (OEM) customers,
and their electronic manufacturing service (EMS) providers, that use them primarily in commercial equipment in the communications, automotive, high-end computing and storage, and test and measurement markets. Our markets are generally
characterized by rapid technological change, high levels of complexity and short product life-cycles, as new and technologically superior electronic equipment is continually being developed. We have focused our efforts on shortened lead time
delivery, technology and volume production. We believe we are well positioned to serve our customer base as a result of our quick-turn service capabilities, our technology leadership, high-technology production capacity and our lower-cost, volume
production capabilities in Asia.

In December 2004, we acquired Data Circuit Systems, now referred to as Merix San Jose. Located in San Jose,
California, Merix San Jose is a quick-turn services manufacturer of complex, multilayer printed circuit boards and provider of related engineering assistance. Merix San Joses experienced management team and strong technical capabilities have
provided us additional capabilities to manufacture complex printed circuit boards in very compressed time frames. The majority of its sales are for prototypes. Merix San Jose has approximately 40,000 square feet of manufacturing space and 10,000
square feet of administration facilities.

In September 2005, we acquired the business operations of Eastern Pacific Circuits Holdings Limited, and certain
of its subsidiaries, a Hong Kong-based lower-cost, high-volume supplier of printed circuit boards, now referred to as Merix Asia. Merix Asia supplies a global customer base of OEMs and contract manufacturers in the automotive, high-end
computing, communications, consumer and industrial markets. Merix Asia provides us with a strategic combination of well located manufacturing operations, a strong new customer base and significant market diversification.

Merix Asia has approximately 869,000 square feet of manufacturing space, consisting of four facilities in Southern China and one facility in Hong Kong. Two of the
facilities in the Peoples Republic of China as well as the Hong Kong facility produce multi-layer printed circuit board products. Two smaller facilities in the Peoples Republic of China produce single-sided printed circuit board
products. See Note 23 to the consolidated financial statements.

With our platform in Asia, we believe that we are better positioned to provide a full
range of products and services to our existing customers, as well as to establish Merix as a viable supplier to Asian-based OEMs and contract manufacturers. Combined with our facilities in Oregon and San Jose, we can offer a combination of
quick-turn service, advanced technology and lower-cost, high volume production capabilities that we believe should enable us to have significant cross-selling opportunities as we leverage our combined global sales forces.

Operating Segments

We define our business by three operating
segments that are evidence of the internal structure of our organization. Our three operating segments, as defined by SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information (SFAS 131) include:
(1) Merix Oregon, (2) Merix San Jose and (3) Merix Asia. Operating segments are defined as components of an enterprise for which separate financial information is available and regularly reviewed by senior management. Each operating
segment operates predominately in the same industry with production facilities that produce similar customized products for our global customers. The production facilities, sales management and chief decision-makers for all of our operating segments
are managed by the same executive team. The Companys chief operating decision maker (CODM) is the Companys Chief Executive Officer.

Markets and Customers

We have a broad customer base and our customers include leading OEMs in the electronics and automotive
industries. Our five largest OEM customers, which vary from year to year, comprised 39%, and 55% of our consolidated net sales during the 13-week periods ended August 26, 2006 and August 27, 2005, respectively. Net sales to two customers
individually represented 15% and 10% of consolidated net sales during the 13-week period ended August 26, 2006. Net sales to two customers individually represented 27% and 12% of consolidated net sales during the 13-week period ended
August 27,



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2005. Net sales to these customers primarily related to the Merix Oregon operating segment. The reduced concentration of
and shift in our major customers is largely the result of a more diverse customer base resulting from the acquisition of Merix Asia on September 29, 2005. However, 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 following are our significant end
customers by operating segment for the 13-week period ended August 26, 2006:

Merix Oregon  Merix Oregons
five largest customers during the 13-week period ended August 26, 2006, in alphabetic order, were Cisco Systems Inc., Harris RF Communication, Inc., Juniper Networks, Inc., Motorola, Inc., and Thales Communication, Inc. During the 13-week
period ended August 26, 2006, Merix Oregons net sales to Cisco Systems and Motorola represented 29% and 19%, respectively, of Merix Oregons net sales.

Merix Asia  Merix Asias five largest customers during the 13-week period ended August 26, 2006, in alphabetic order, were IBM Corporation, Lear Corporation, Robert Bosch Corporation, TRW
Automotive, Inc. and Visteon Corporation. During the 13-week period ended August 26, 2006, Merix Asias net sales to TRW Automotive, Inc. represented 15% of Merix Asias net sales.

Merix San Jose  Merix San Joses five largest customers during the 13-week period ended August 26, 2006, in alphabetic
order, were Aeroflex Corporation, Ario Data Networks, Inc., Intel Corporation, Paramit Corporation, and Solectron USA, Inc. During the 13-week period ended August 26, 2006, none of Merix San Joses customers represented 10% or more of
Merix San Joses net sales.

Sales attributed to OEMs include sales made through their electronic manufacturing service providers. Approximately 47%
and 61% of our consolidated net sales were through electronic manufacturing service providers during the 13-week periods ended August 26, 2006 and August 27, 2005, respectively. Although our contractual relationship is with the electronic
manufacturing service provider, most of our shipments to electronic manufacturing service providers are directed by OEMs that negotiate product pricing and volumes directly with us. In addition, we are on the approved vendor list of several
electronic manufacturing service providers and are awarded incremental discretionary orders directly from some of them. We expect these discretionary orders to increase in the future as we strengthen our direct relationships with these electronic
manufacturing service providers.

Refer to Note 18 of the consolidated financial statements for disaggregated financial information relating to our
operating segments.

Backlog

Backlog comprises
purchase orders received and, in some instances, forecast requirements released for production under customer contracts.

Oregon: Our 90-day backlog for our Oregon facilities was approximately $29.8 million and $17.0 million at August 26, 2006 and August 27, 2005, respectively.

San Jose: Our backlog for our San Jose facility was approximately $2.7 million and $2.6 million at August 26, 2006 and August 27,
2005, respectively.

Asia: Our backlog for our Asian facilities acquired in September 2005 was approximately $30.3 million at
July 22, 2006.

A substantial portion of our backlog is typically scheduled for delivery within 90 days and customers may cancel or postpone all
scheduled orders, and in most cases, without penalty. Therefore, backlog may not be a meaningful indicator of future financial results.

CHANGES IN
CRITICAL ACCOUNTING POLICIES

Inventories, Net



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On May 28, 2006, the Company adopted SFAS No. 151, Inventory Costs  An Amendment of ARB
No. 43, Chapter 4 (SFAS 151). SFAS 151 amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, Inventory Pricing (ARB 43) to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and requires that those items be recognized as current-period charges. Additionally, SFAS 151 requires that the allocation of
fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of SFAS 151 did not result in additional expense being recorded by the Company during the 13-week period ended
August 26, 2006, as the Company did not expense abnormal amounts of idle facility expense, freight, handling costs, or wasted material (spoilage) during the 13-week period ended August 26, 2006.

Stock-Based Compensation

On May 28, 2006, the Company
adopted Statement of Financial Accounting Standard No. 123 (Revised 2004), Share-Based Payment (SFAS 123(R)), which replaced SFAS 123 Accounting for Stock-Based Compensation and superseded Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company elected to use the modified prospective transition method provided by SFAS 123(R). Under the modified prospective transition method, the
provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. The modified prospective transition method requires the recognition of compensation expense for all share-based payments granted on or subsequent to the
date of adoption over the service period for all awards expected to vest. This method also requires the recognition of compensation expense for all share-based payments granted prior to, but not yet vested, as of the date of adoption, May 28,
2006. Compensation expense is measured based on the fair value of the award at the grant date. The fair value of non-vested share-based grants is based on the number of shares granted and the quoted market price of our common stock. In accordance
with the modified prospective transition method, results for prior periods have not been restated. See Note 13 to the consolidated financial statements.

The Company uses the Black-Scholes option-pricing model to estimate the fair values of stock options. The option-pricing model requires a number of assumptions, including: (1) expected stock price volatility, (2) the expected
pre-vesting forfeiture rate and (3) the expected option term (the amount of time from the grant date until the options are exercised or expire). Expected volatility is calculated based upon actual historical stock price movements over the most
recent periods ending August 26, 2006 equal to the expected option term. The expected option term is calculated using the simplified method permitted by SAB 107.

The Black-Scholes valuation model does not take into account vesting requirements or restrictions on transferability. In addition, the valuation model requires the input of highly subjective assumptions, including the
expected stock price volatility. Employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. The estimation of stock
awards that will ultimately vest requires significant estimates, and to the extent that actual results or updated estimates differ from current estimates, such amounts will be recorded as a cumulative adjustment in the period that the estimates are
revised. Actual results and future changes in estimates may differ substantially from the current estimates.

Prior to the adoption of SFAS 123(R), the
Company presented any tax benefits of deductions resulting from the exercise of stock options within operating cash flows in the consolidated statement of cash flows. SFAS 123(R) requires tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options (excess tax benefits) to be classified and reported as both an operating cash outflow and a financing cash inflow upon adoption of SFAS 123(R). The excess tax benefits that would otherwise
be available to reduce income taxes payable have the effect of increasing the Companys net operating loss carry forwards. Accordingly, because the Company is not able to realize these excess tax benefits, such benefits have not been recognized
in the statement of cash flows for the 13-week period ended August 26, 2006.

On May 28, 2006, the Company adopted Staff Accounting Bulletin
No. 107 (SAB 107), which provides the Staffs views on a variety of matters relating to stock-based payments upon adoption of SFAS 123(R). SAB 107 requires that stock-based compensation be classified in the same expense line
items as cash compensation. Accordingly, stock-based compensation for the thirteen week period ended August 26, 2006 has been reclassified in the statement of operations to correspond to current year presentation within the same operating
expense line items as cash compensation paid to employees.

For a complete description of our critical accounting policies and estimates, refer to our 2006
Annual Report on Form 10-K filed with the Securities and Exchange Commission on August 24, 2006.



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RESULTS OF OPERATIONS

Net Sales

Consolidated net sales were $105.9 million during the 13-week period ended August 26, 2006, an increase of 105% over
consolidated net sales of $51.8 million during the 13-week period ended August 27, 2005. The increase in consolidated net sales during the 13-week period ended August 26, 2006 as compared to the 13-week period ended August 27, 2005 is
primarily due to the addition of net sales generated by Merix Asia and increased sales of quick-turn and premium revenues.

On a consolidated basis, unit
shipments were higher during the 13-week period ended August 26, 2006 as compared to the 13-week period ended August 27, 2005. The increase was primarily related to the addition of Merix Asia as well as increased demand and production
from Merix U.S. operations. First quarter 2007 average pricing for the U.S. operations increased by 9% over the first quarter of the fiscal year 2006 due to strong demand across all of our major customer segments. In addition,
average pricing also benefited from managements efforts to increase its share of the higher priced quick-turn business and the Companys product sales mix contains a higher percentage of more technologically advanced boards. In
general, average pricing is higher for boards that utilize high-speed laminate materials, thermal management solutions and smaller and more compact holes.

Consolidated net sales of quick-turn and premium services (products that sell at a premium over our standard base price as a result of rapid prototype manufacturing or compressed lead-time volume orders), comprised roughly 26% of our
consolidated net sales for the 13-week period ended August 26, 2006, as compared to 33% of our consolidated net sales for the 13-week period ended August 27, 2005. The lower percentage of quick turn and premium business during the
13-week period ended August 26, 2006 was caused by the addition of Merix Asia that does not currently produce any of this type of business (Merix Asia currently only produces full lead time business).

Sales attributed to our five largest original equipment manufacturers (OEM) customers comprised 39% and 55% of our consolidated net sales during the 13-week
periods ended August 26, 2006 and August 27, 2005, respectively. Net sales to two customers individually represented 15% and 10% of consolidated net sales during the 13-week period ended August 26, 2006. Net sales to two
customers individually represented 27% and 12% of consolidated net sales during the 13-week period ended August 27, 2005. The loss of or decrease in orders from one or more major customers could materially reduce our consolidated net sales and
have a material adverse impact on our consolidated results of operations and financial condition.

Sales attributed to OEMs include sales made through the
OEMs electronic manufacturing service providers (EMS). We expect sales to OEMs through their EMSs to continue to represent a significant portion of our consolidated net sales. The percentage of our consolidated net
sales made through electronic manufacturing service providers was approximately 47% and 61% during the 13-week periods ended August 26, 2006 and August 27, 2005, respectively. Although our contractual relationship is with the
electronic manufacturing service provider, most of our shipments to electronic manufacturing service providers are directed by OEMs who negotiate product pricing and volumes direction with us. In addition, we are on the approved vendor list of
EMSs and are awarded discretionary orders directly from some of them.

The following table shows, for the periods indicated, the percentage of our
consolidated net sales to the principal end markets we serve (amounts in thousands):



|                             |  |                               |  |                 |         |  |      |  |   |       
|---------------------------- |  | ----------------------------- |  | --------------- | ------- |  | ---- |  | - | ------
|                             |  | For the 13-Week Period Ended:
|                             |  | August
26, 2006               |  | August
27, 2005
|End Markets                  |  |                               |  |                 |         |  |      |  |   |       
|Communications               |  | 40%                           |  | $               | 42,682  |  | 73%  |  | $ | 37,731
|Automotive                   |  | 19%                           |  |                 | 20,168  |  |     |  |   |      
|High-end Computing & Storage |  | 11%                           |  |                 | 11,337  |  | 6%   |  |   | 3,290 
|Test and Measurement         |  | 7%                            |  |                 | 7,219   |  | 7%   |  |   | 3,572 
|Aerospace and Defense        |  | 5%                            |  |                 | 5,122   |  | 4%   |  |   | 2,139 
|Other*                       |  | 18%                           |  |                 | 19,388  |  | 10%  |  |   | 5,055 
|                             |  |                               |  |                 |         |  |      |  |   |       
|Total                        |  | 100%                          |  | $               | 105,916 |  | 100% |  | $ | 51,787
|                             |  |                               |  |                 |         |  |      |  |   |       

      Other includes medical, industrial and other.

The decrease in communications end market results principally from the Merix Asia acquisition and also reflects our continued focus to reduce our market risk with
increased diversification. The increase in other end markets is primarily the result of the addition of Merix Asias sales, which include additional sales to EMSs and other consumer markets.



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Future demand and product pricing depend on many factors, including capacity utilization in the industry, product mix,
competitive pressure in the printed circuit board industry, levels of advanced technology, economic conditions affecting the markets we serve, and the electronics industry in general.

Gross Margin

Gross margin as a percentage of consolidated net sales was 19.1% and 14.7% during the 13-week
periods ended August 26, 2006 and August 27, 2005, respectively. The increase in gross margin during 13-week period ended August 26, 2006 compared to the 13-week period ended August 27, 2005 is primarily attributable to improved
market demand, increasing average selling prices, and increased volume of more profitable sales, primarily in North America. Partially offsetting the higher gross margins in North America were lower gross margins in Asia, which are impacted by
generally lower average prices due to the lower technology products it currently produces. In addition, during the 13-week periods ended August 26, 2006 and August 27, 2005, Merix Asia was abnormally impacted by higher cost raw
materials, principally copper laminate, that were affected by the sharp rise in copper prices. Merix Asias results also incurred higher outsourcing costs in order to meet its growing revenue base.

Engineering

Engineering expenses were $1.6 million during the
13-week period ended August 26, 2006 as compared to $1.5 million during the 13-week period ended August 27, 2005. Engineering expenses during the 13-week periods ended August 26, 2006 and August 27, 2005 represented 1% and 3% of
consolidated net sales, respectively. Engineering expenses decreased as a percentage of consolidated net sales during the 13-week period ended August 26, 2006 as compared to the 13-week period ended August 27, 2005 due to the addition of
sales at Merix Asia.

Selling, General and Administrative

Selling, general and administrative expenses were $11.7 million during the 13-week period ended August 26, 2006 as compared to $4.9 million during the 13-week period ended August 27, 2005. These increases
are largely attributed to the inclusion of Merix Asia in the results of the 13-week period ended August 26, 2006 as well as significantly higher professional fees included in the results of the 13-week period ended August 26, 2006
primarily related to the annual audit, commissions, and legal fees related to securities litigation. See Note 21. We also added incremental labor expenses to corporate administrative functions.

Interest Income

Interest income was $335 thousand during the
13-week period ended August 26, 2006 as compared to $633 thousand during the 13-week period ended August 27, 2005. The lower interest income reported during the 13-week period ended August 26, 2006 was primarily the result of lower
average cash and investment balances held during the 13-week period ended August 26, 2006 as compared to the 13-week period ended August 27, 2005. The primary contributor to the reduced liquidity was the utilization of cash and
investsments to purchase Merix Asia in September 2005.

Interest Expense

Interest expense was $1.8 million during the 13-week period ended August 26, 2006 as compared to $437 thousand during the 13-week period ended August 27, 2005. The increase in interest expense is the result
of new debt incurred during the fiscal year 2006 due to the acquisition of Merix Asia.

Other Expense, net

Other expense, net was $627 thousand during the 13-week period ended August 26, 2006 as compared to $99 thousand during the 13-week period ended August 27,
2005. The increase in other expense, net during the 13-week period ended August 26, 2006 as compared to the 13-week period ended August 27, 2005 was primarily related to accrued outsourcing penalties incurred to meet the increased revenue
demand for Merix Asia. The Peoples Republic of China has unique outsourcing laws that limit the type of outsourcing activity, without incurring a penalty.

Income Taxes

The provision for income taxes was $500 thousand and $4 thousand for the 13-week periods ended
August 26, 2006 and August 27, 2005. The provision for income taxes is the result of the mix of profits (losses) earned by the Company and its subsidiaries in various tax jurisdictions with a broad range of income tax rates. On a quarterly
basis, we evaluate our



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provision for income taxes based on our projected consolidated results of operations for the full year and we record an
adjustment during the current quarter accordingly. We have applied the estimated 8% annual effect rate to the pre-tax income without discrete items for the 13-week period ended August 26, 2006. The actual tax rate of the resulting tax expense
for the first 13-weeks of the fiscal year 2007 was 12% due to the impact of discrete items during the quarter. The projected provision for income taxes for the fiscal year 2007 at an 8% effective rate differs from tax computed at the federal
statutory rate primarily due to (1) U.S. taxable income for which the valuation allowance has been released due to the utilization of net operating loss carryforwards, (ii) tax losses incurred by some foreign entities for which no benefit
has been realized due to the valuation allowance, and (iii) lower tax rates on earning and permanent taxable items of some foreign entities.

LIQUIDITY

On August 26, 2006, we had $20.4 million in cash and cash equivalents and $14.0 million in short-term investments.
The principal sources of liquidity during the 13-week period ended August 26, 2006 were the sales and maturities of short-term investments and cash provided by operating activities. During the 13-week period ended August 27, 2005, we used
cash principally for capital expenditures and to fund working capital requirements.

Cash provided by operating activities during the 13-week period ended
August 26, 2006 was $8.1 million as compared to cash provided by operating activities of $2.4 million during the 13-week period ended August 27, 2005. Our operating cash flow of $8.1 million during the 13-week period ended August 26,
2006 primarily reflects consolidated net income of $3.6 million, adjusted for $6.0 million of depreciation and amortization, offset in part by a $291 thousand increase in working capital, excluding cash and cash equivalents and short-term
investments, due to increased levels of business activity.

Cash used in investing activities during the 13-week period ended August 26, 2006 was $1.4
million as compared to cash provided by investing activities of $22.5 million during the 13-week period ended August 27, 2005. Net cash flows used in investing activities during the 13-week period ended August 26, 2006 comprised of $6.0
million of capital expenditures and $2.6 million of purchases of short-term investments, offset by $7.1 million of sales and maturities of short-term investments. The $6.0 million of capital expenditures primarily related to ongoing implementation
of a new ERP system and new equipment purchased to mitigate some of the outsourcing costs.

Cash provided by financing activities during the 13-week period
ended August 26, 2006 was $1.2 million as compared to cash used in financing activities of $6 thousand during the 13-week period ended August 27, 2005. Net cash flows from financing activities during the 13-week period ended
August 26, 2006 comprised of $1.9 million of amounts due from affiliates and $1.2 million of stock option exercises, offset by $1.6 million of principal payments on long-term borrowings.

CAPITAL RESOURCES

On April 14, 2005, we entered into a
Master Sale and Purchase Agreement (the Agreement) with Eastern Pacific Circuits Holdings Limited (EPCH). Pursuant to the Agreement, we acquired the operations of Eastern Pacific Circuits, Ltd. and certain of its subsidiaries
(now referred to as Merix Asia), a Hong Kong based supplier of printed circuit boards, for a total purchase price of $120.3 million, (1) subject to adjustment based on changes in working capital, (2) subject to an additional
earn out payment of up to $13 million if the business meets certain adjusted EBITDA targets in calendar 2005, and (3) subject to revised purchase price negotiations based on a revised Merix Asia business valuation. We are continuing to work
with EPCH to finalize the purchase price; however, we are currently unable to estimate the date on which the purchase price will be finalized. The acquisition was financed with a combination of approximately $33.3 million of available cash, term
loans, including the assumption of certain EPCH debt, and revolving credit borrowings under two new credit facilities totaling approximately $71.2 million, and the issuance of an $11.0 million subordinated promissory note to EPCH. The purchase price
included $5.3 million of direct acquisition costs, which were funded with available cash. The term loans and revolving credit borrowings were refinanced in May 2006 (See Note 11 to the consolidated financial statements). Refer to Note 2 to the
consolidated financial statements for further discussion of the acquisition.

SIGNIFICANT CONTRACTUAL OBLIGATIONS

The following summarizes our significant contractual obligations at August 26, 2006 and the effect of such on its liquidity and cash flows in future periods.



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|                                                                                 |  |                        |         |                  |   |             |  |             |        |                   |   |        |  |   |       
|-------------------------------------------------------------------------------- |  | ---------------------- | ------- | ---------------- | - | ----------- |  | ----------- | ------ | ----------------- | - | ------ |  | - | ------
|                                                                                 |  | (in thousands)        
|                                                                                 |  | Payments due by period
|                                                                                 |  | Total                  |         | Less than 1 year |   | 1 - 3 years |  | 3 - 5 years |        | More than 5 years
|Contractual Obligations                                                          |  |                        |         |                  |   |             |  |             |        |                   |   |        |  |   |       
|                                                                                 |  |                        |         |                  |  
|Asset retirement obligations - expected cash payments, adjusted for inflation(1) |  | $                      | 3,689   |                  | $ |            |  | $           |       |                   | $ |       |  | $ | 3,689 
|                                                                                 |  |                        |         |                  |  
|Long-Term Debt:(2)                                                               |  |                        |         |                  |   |             |  |             |        |                   |   |        |  |   |       
|Convertible debenture                                                            |  |                        | 70,000  |                  |   |            |  |             |       |                   |   |       |  |   | 70,000
|Domestic term loan                                                               |  |                        | 13,500  |                  |   | 2,750       |  |             | 5,500  |                   |   | 5,250  |  |   |      
|Notes payable                                                                    |  |                        | 12,000  |                  |   | 3,750       |  |             | 8,250  |                   |   |       |  |   |      
|Expected interest on debt                                                        |  |                        | 21,189  |                  |   | 3,512       |  |             | 6,458  |                   |   | 5,611  |  |   | 5,608 
|                                                                                 |  |                        |         |                  |  
|Capital lease obligations(3)                                                     |  |                        | 1,498   |                  |   | 970         |  |             | 528    |                   |   |       |  |   |      
|Operating lease obligations(3)                                                   |  |                        | 4,793   |                  |   | 1,690       |  |             | 1,876  |                   |   | 1,227  |  |   |      
|Capital purchase obligations(4)                                                  |  |                        | 6,507   |                  |   | 6,507       |  |             |       |                   |   |       |  |   |      
|                                                                                 |  |                        |         |                  |   |             |  |             |        |                   |   |        |  |   |       
|Total                                                                            |  | $                      | 133,176 |                  | $ | 19,179      |  | $           | 22,612 |                   | $ | 12,088 |  | $ | 79,297
|                                                                                 |  |                        |         |                  |   |             |  |             |        |                   |   |        |  |   |       



| | (1) | For further discussion surrounding asset retirement obligations, refer to Note 10 to the consolidated financial statements.
| | --- | ---------------------------------------------------------------------------------------------------------------------------

| | (2) | For further discussion surrounding long-term debt obligations, refer to Note 11 to the consolidated financial statements.
| | --- | -------------------------------------------------------------------------------------------------------------------------

| | (3) | For further discussion surrounding lease obligations, refer to Note 12 to the consolidated financial statements.
| | --- | ----------------------------------------------------------------------------------------------------------------

| | (4) | For further discussion surrounding commitments, refer to Note 21 to the consolidated financial statements.
| | --- | ----------------------------------------------------------------------------------------------------------

On April 14, 2005, we entered an Agreement with EPCH whereby we acquired the operations of Eastern Pacific Circuits, Ltd. and certain of its subsidiaries, a Hong
Kong based supplier of printed circuit boards, for a total purchase price of $120.3 million, (1) subject to adjustment based on changes in working capital, (2) subject to an additional earn out payment of up to $13 million if the business
meets certain adjusted EBITDA targets in calendar 2005, and (3) subject to revised purchase price negotiations based on a revised Merix Asia business valuation. We are continuing to work with EPCH to finalize the purchase price; however, we are
currently unable to estimate the date on which the purchase price will be finalized.

During the 13-week period ended August 26, 2006, there were no
distributions to minority shareholders in the Peoples Republic of China relating to earnings generated from the following four Merix Asia facilities: Huizhou facility, Huiyang facility, Dongguan facility and Lomber facility (each located in
the Peoples Republic of China). We will continue to be obligated to pay its minority shareholders based on the profits of each of these facilities.

OFF-BALANCE SHEET ARRANGEMENTS

In August 2000, we entered into a noncancelable operating lease agreement to lease a manufacturing
facility located in Wood Village, Oregon. Under the terms of the lease agreement, lease payments began in July 2001 and lease payments escalate at specific points over the minimum ten year term of the lease. Rent expense is recognized on the
straight line basis. We have the option to extend the term of the lease for three consecutive five-year periods beyond the initial lease term.

Merix San
Jose leases office space and production facilities under noncancelable operating lease agreements with various initial terms ending through the fiscal year 2010 and options to extend the lease terms beyond the initial lease terms through the fiscal
year 2019. Lease payments escalate at specific points over the minimum five year lease terms. Rent expense is recognized on the straight line basis.

Merix
Asia leases office space, apartment space and production facilities under noncancelable operating lease agreements with various initial terms ending through the fiscal year 2008. Rent expense is recognized on the straight line basis. These lease
agreements do not contain options to extend the lease terms and the lease payments do not escalate.

Consolidated future minimum lease payments under
noncancelable operating leases that have lease terms in excess of 12 months as of August 26, 2006 are as follows:



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|                                  |  |                                                       |      
|--------------------------------- |  | ----------------------------------------------------- | -----
|                                  |  | (in thousands)                                       
|For the Fiscal Year Ending:       |  | Minimum Payments Under    Operating Lease Obligations
|May 26, 2007 (remaining 9 months) |  | $                                                     | 1,291
|May 31, 2008                      |  |                                                       | 1,259
|May 30, 2009                      |  |                                                       | 807  
|May 29, 2010                      |  |                                                       | 751  
|May 28, 2011                      |  |                                                       | 632  
|May 26, 2012                      |  |                                                       | 53   
|Thereafter                        |  |                                                       | -    
|                                  |  |                                                       |      
|                                  |  | $                                                     | 4,793
|                                  |  |                                                       |      

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our exposure to market risk for
changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our funds available for investment and interest expense on our debt obligations. We seek to mitigate our default risk, market
risk and reinvestment risk on our investment portfolio. We mitigate default risk by investing in high-credit quality securities.

We are exposed to
interest rate risk relating to our Domestic Term Loan, which bears interest at (a) either the prime rate or LIBOR, plus (b) an additional margin, which is 50 basis points higher for the term loan than for the revolving loan, based on
certain performance criteria. A 1.0% fluctuation in the interest rate would result in a $135 thousand increase in interest expense per annum.

We are
exposed to foreign currency fluctuation as a result of our international operations. Our primary foreign currency exposure stems from operating costs relating to manufacturing operations in Hong Kong and the Peoples Republic of China.
Substantially all of our consolidated net sales are denominated in U.S. Dollars. We do not currently engage in derivative activities to hedge against foreign currency risk. However, we are evaluating our risk management options. Net foreign currency
transaction losses were $144 thousand during the 13-week period ended August 26, 2006. Net foreign currency transaction gains and losses were insignificant for the 13-week period ended August 27, 2005

ITEM 4.     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the
Exchange Act) refer to the controls and other procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to management, including the CEO and CFO, to allow
timely decisions regarding required disclosures. Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of August 26, 2006. There has been no change in our internal controls 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, except as follows:

In our assessment of the effectiveness of our internal control over financial
reporting as of May 27, 2006, two material weaknesses were identified as summarized below:

1. The Company did not maintain a
sufficient complement of personnel to maintain an appropriate accounting and financial reporting organizational structure to support the activities of the Company. Specifically, the Company did not maintain personnel with an appropriate level of
accounting knowledge, experience and training in the selection, application and implementation of generally accepted accounting principles with respect to: (i) stock-based compensation, (ii) external financial reporting, including income
tax disclosures (iii) accrued liabilities, and (iv) classification of assets held-for-sale. This material weakness resulted in audit adjustments to the Companys 2006 annual consolidated financial statements and contributed to the
material weakness discussed in 2 below.



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Additionally, this control deficiency could result in a misstatement of the above mentioned accounts and
disclosures that would result in a material misstatement to the interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material
weakness. Over the past 12 months, the Company has strengthened its personnel within its Finance and Accounting organization. Further, it has implemented new controls and procedures to substantially mitigate the risks that were highlighted in the
material weakness; although, no formal testing of controls has yet occurred.

2. The Company did not maintain effective controls over the
completeness, accuracy and disclosure of segment information. Specifically, controls over segment reporting were not effective to ensure that disclosures were determined in accordance with generally accepted accounting principles. This control
deficiency resulted in an audit adjustment to the required disclosure included in the notes to the Companys 2006 annual consolidated financial statements. Additionally, this control deficiency could result in a misstatement of segment
information that would result in a material misstatement to the interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material
weakness. At this time, management believes it is compliant with segment reporting requirements, as defined in SFAS 131.

3. We are in the
process of documenting and remediating our financial reporting and information technology general controls in Merix Asia. We expect to complete initial testing in our second fiscal quarter of 2007.

Our CEO and CFO do not expect that our disclosure controls and procedures will prevent all error and all fraud. Although our disclosure controls were designed to provide
reasonable assurance of achieving their objectives, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within Merix have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based partly on certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART II.    OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS

As previously reported in our periodic reports filed with
the Securities and Exchange Commission, four proposed class action complaints were filed against us and certain of our executive officers and directors in the first quarter of fiscal 2005 by plaintiffs who purchased securities in our January 2004
public offering. The complaints were consolidated in the second quarter of fiscal 2005 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. On March 3, 2005, we filed a motion to dismiss the amended and consolidated complaint for failure to identify with sufficient specificity the statements that plaintiffs allege to have been false and why the statements were either false
when made or material. On September 15, 2005, the court granted that motion without prejudice and gave plaintiffs leave to amend their complaint. On November 18, 2005, the lead plaintiff filed an amended complaint. The complaint, as
amended, alleges that the defendants violated the federal securities laws by making certain alleged inaccurate and misleading statements in the prospectus used in connection with our January 2004 public offering. The initial purchaser was one of the
underwriters of our January 2004 public offering and is one of the defendants in this case. On January 26, 2006, the defendants filed a motion to dismiss the second amended complaint. On September 28, 2006, the United States District Court
of Oregon dismissed the amended complaint with prejudice.

In the first quarter of fiscal 2005, two derivative lawsuits were filed by plaintiffs who
purchased securities in our January 2004 public offering against certain of our directors and officers based on the same allegations made in the class action lawsuit. Merix is named as a nominal defendant in these derivative lawsuits, which have now
been consolidated under the common caption In re Merix Corporation Derivative Litigation, Lead Case No. 0407-06807, in the Circuit Court for the State of Oregon, Multnomah County. On August 31, 2005, the federal court hearing the
class action lawsuit described above granted a motion to stay discovery in this state-court derivative action. On September 13, 2005, the state court stayed all



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proceedings in the derivative lawsuit pending further developments in the federal class action lawsuit, including all
proceedings on a motion that defendants filed on July 7, 2005 to dismiss the consolidated shareholder derivative complaint.

The plaintiffs seek
unspecified damages from the defendants. A potential loss or range of loss that could arise from these complaints is not estimable or probable at this time. We have recorded charges for estimated probable costs associated with defending these
claims, as it is our policy to accrue legal fees when it is probable that we will have to defend the company against known claims or allegations and it can reasonably estimate the amount of anticipated expense.

We are from time to time made subject to various legal claims, actions and complaints in the ordinary course of our business. We have recorded charges for the estimated
probable costs associated with defending these claims. We believe that our legal accruals are adequate and that the outcomes should not have a material adverse effect on our consolidated results of operations, financial condition or liquidity.

ITEM 1A. RISK FACTORS

The risk factors described under the subheading Risk Factors Affecting Our Business,
Financial Condition and Results of Operations in Part I, Item 7 of this quarterly report on Form 10-Q are incorporated herein by reference.

RISK FACTORS AFFECTING BUSINESS AND RESULTS OF OPERATIONS

Investing in our securities involves a high degree of risk. If any of the
following risks occur, 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.

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.

The electronics industry is characterized by intense competition,
rapid technological change, relatively short product life-cycles and pricing and margin pressures. These factors adversely affect our customers and we suffer similar effects. Our customers are primarily high-technology equipment manufacturers in the
communications, automotive, high-end computing and storage, test and measurement, and aerospace and defense end 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 services and premium revenues versus standard lead time production, any of which could have a material adverse effect on our results of operations.

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

To manufacture
our printed circuit boards, 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 gross margins and our ability to deliver our products on a timely basis. We have recently experienced, and expect that we will
continue to experience, significant increases in the cost of laminate materials, copper products and oil-based or oil-derivative raw materials. These cost increases have had an adverse impact on our gross margins and the impact has been particularly
significant on our Asian operations which maintain fixed prices 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



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the material. Although other manufacturers of advanced printed circuit boards 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 printed circuit boards using that type of
laminate, which in turn would cause a decrease in our consolidated net sales.

Our recent acquisitions may be costly and difficult to integrate, may
divert 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 connection
with our San Jose and Asian acquisitions or any future acquisitions or investments, we could experience:



| |  |  | problems integrating the purchased operations, technologies or products;
| | - |  | ------------------------------------------------------------------------



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



| |  |  | unanticipated expenses and working capital requirements;
| | - |  | --------------------------------------------------------



| |  |  | difficulty achieving sufficient revenues to offset increased expenses associated with acquisitions;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | diversion of managements attention;
| | - |  | ------------------------------------



| |  |  | adverse effects on business relationships with our or the acquired companys suppliers and customers;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | difficulty in entering markets in which we have limited or no prior experience;
| | - |  | -------------------------------------------------------------------------------



| |  |  | losses of key employees, particularly those of the acquired organization; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | problems completing anticipated technology transfers to our Asian operations.
| | - |  | -----------------------------------------------------------------------------

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



| |  |  | issue stock that would dilute our current shareholders percentage ownership;
| | - |  | -----------------------------------------------------------------------------



| |  |  | incur debt and assume liabilities that could impair our liquidity;
| | - |  | ------------------------------------------------------------------



| |  |  | incur amortization expenses related to intangible assets; or
| | - |  | ------------------------------------------------------------



| |  |  | incur large and immediate write-offs that would reduce net income.
| | - |  | ------------------------------------------------------------------

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.

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.

We recently acquired Merix Asia and believe that additional capital investment will be required to fully realize the value of the assets we acquired. Any future capacity
expansion with respect to our facilities will expose us to significant start-up risks including:



| |  |  | delays in receiving and installing required manufacturing equipment;
| | - |  | --------------------------------------------------------------------



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



| |  |  | difficulties scaling up production at our expanded facilities;
| | - |  | --------------------------------------------------------------



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| |  |  | 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The success of our integration and anticipated expansion efforts will depend upon our ability to expand, train, retain and manage our
employee base. In connection with our expansion efforts in Asia, we expect to require additional employees throughout the company. If we are unable to attract and train and retain new workers, or manage our employee base effectively, our ability to
fully utilize our Asian assets will likely be impaired. If we are unable to effectively expand, train and manage our employee base, our business and results of operations could be adversely affected.

In addition, if our consolidated net sales do not increase sufficiently to offset the additional fixed operating expenses associated with our Asian operations, our
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.

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 future
success of our business will depend 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 printed circuit board 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.

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 are denominated in foreign currencies, including the Hong Kong Dollar and the Chinese Renminbi
(RMB). 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 fixed 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.

If we are unable to successfully integrate Merix Asia, our business may be materially adversely affected.

We recently acquired
Eastern Pacific Circuits Limited and certain of its subsidiaries, now Merix Asia, and are attempting to integrate Merix Asias operations with our domestic operations. We have never acquired foreign operations before and have never had
facilities in Asia. Our operations in Asia will increase our exposure to certain risks, including the risks that we may not be able to successfully attract and retain qualified personnel in Asia, realign our resources for cost savings, realize any
anticipated cost savings, adapt to business practices which may be different from our other business locations, integrate our accounting software systems and implement adequate internal controls and procedures. Under prior ownership, Merix Asia
experienced difficulty in reaching and maintaining profitability. To date, we have not realized expected growth in sales opportunities in Asia from our domestic operations, nor have we realized expected materials cost savings by operating as a



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multinational business. If we are unable to successfully integrate Merix Asia or if Merix Asia is unable to reach and
maintain profitability, our business and results of operations will likely be materially adversely affected.

We have minority investors in our China
manufacturing facilities.

We have four printed circuit board manufacturing plants in the Peoples Republic of China that are each owned by a
separate Chinese company. While we are the majority interest holder in all of these companies, there are minority interest holders in each of them. The aggregate minority interest in these companies ranges from five percent to 15 percent. These
minority holders are local investors with close ties to local economic development and other government agencies. In some cases, the investors lease to the Chinese operating companies the land on which the plants 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 these
investors could materially adversely affect our ability to manage the operations of one or more of the plants and our ability to realize the anticipated benefits of the Asian acquisition.

We do not currently have options to renew our leased manufacturing facilities in the Peoples Republic of China and Hong Kong.

We have two printed circuit board manufacturing plants in the Peoples Republic of China that are leased from separate Chinese companies under operating leases that
do not contain lease renewal options. The facilities include one of our major multi-layer plants and one of our smaller single-layer facilities in the Peoples Republic of China. While we lease these facilities from companies that have minority
interests ranging from five percent to fifteen percent in our majority-owned subsidiaries in the Peoples Republic of China, we cannot be assured that these minority interest holders will renew our leases. Failure to maintain good relations
with these investors could materially adversely affect our ability to negotiate the renewal of our operating leases or continue to operate one or more of the plants. Further, failure to successfully renew such leases could materially adversely
affect our ability to realize the anticipated benefits of the Asian acquisition.

Lower sales may cause gross margins and operating results to
decrease because many of our operating costs are fixed.

A significant portion of our operating expenses are relatively fixed in nature, and
planned expenditures are based in part on anticipated orders. If we do not receive orders as anticipated or if revenue is reduced by reductions in the proportion of our quick-turn services and premium business, our operating results will be
adversely affected. Revenue shortfalls have historically resulted in an underutilization of our installed capacity and, together with adverse pricing, have decreased our gross margins. Future decreases in demand or pricing will likely decrease our
gross margins and have a material adverse impact 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 printed circuit boards is intensely competitive, highly fragmented and
rapidly changing. We expect competition to persist, which could result in continued reductions in pricing and gross margins and loss of market share. We believe our major competitors are United States, Asian and other international independent
manufacturers of multi-layer printed circuit boards, backplanes and other electronic assemblies, and companies that offer quick-turn services. Those competitors include Daeduck Electronics Co., DDi Corp., Kingboard Chemical Holdings Ltd., LG
Electronics, Multek Corporation (a division of Flextronics International Ltd.), Sanmina-SCI Corporation, Topsearch International, TTM Technologies, Inc., WUS Printed Circuits Company Ltd and ViaSystems, Inc.

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



| |  |  | significantly greater financial, technical, marketing and manufacturing resources;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | preferred vendor status with some of our existing and potential customer; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | larger customer bases.
| | - |  | ----------------------

In addition, these competitors may have the
ability to respond more quickly to new or emerging technologies, more successfully enter or adapt to existing or new end markets, may adapt more quickly to changes in customer requirements and may devote greater resources to the development,
promotion and sale of their products than we can. Consolidation in the printed circuit board industry, which we expect to continue, could result in an increasing number of larger printed circuit board 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



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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. 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 when they are in more favorable economic climates.

We may not be able to remediate material weaknesses in our internal control over financial reporting.

As
reported in Item 8. of our 2006 Annual Report on Form 10-K for the fiscal year ended May 27, 2006, we have identified material weaknesses in our internal control over financial reporting, as follows:

1. The Company did not maintain a sufficient complement of personnel to maintain an appropriate accounting and financial reporting organizational
structure to support the activities of the Company. Specifically, the Company did not maintain personnel with an appropriate level of accounting knowledge, experience and training in the selection, application and implementation of generally
accepted accounting principles with respect to: (i) stock-based compensation, (ii) external financial reporting, including income tax disclosures, (iii) accrued liabilities, and (iv) classification of assets held-for-sale. This
material weakness resulted in audit adjustments to the Companys 2006 annual consolidated financial statements and contributed to the material weakness discussed in 2 below. Additionally, this control deficiency could result in a misstatement
of the above mentioned accounts and disclosures that would result in a material misstatement to the interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control
deficiency constitutes a material weakness.

2. The Company did not maintain effective controls over the completeness, accuracy and
disclosure of segment information. Specifically, controls over segment reporting were not effective to ensure that disclosures were determined in accordance with generally accepted accounting principles. This control deficiency resulted in an audit
adjustment to the required disclosure included in the notes to the Companys 2006 annual consolidated financial statements. Additionally, this control deficiency could result in a misstatement of segment information that would result in a
material misstatement to the interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.

As a result of the aforementioned material weaknesses, the PricewaterhouseCoopers LLP opinion set forth in the Internal Control over Financial Reporting section
of the Report of Independent Registered Public Accounting Firm as of May 27, 2006 states that we have not maintained effective internal control over financial reporting as of May 27, 2006. Although the Company is implementing
remedial controls to address this matter, if we fail to remedy the material weaknesses in a timely manner, it could cause us to improperly record our financial position and results of operations and could result in us failing to meet our financial
reporting responsibilities in future reporting periods.

We were unable to implement adequate internal controls and procedures at Merix Asia.

Our management was unable to complete an evaluation and review of Merix Asias internal control over financial reporting for the fiscal year
ended May 27, 2006, and accordingly, our management excluded Merix Asia from its 2006 assessment of internal control over financial reporting. We are required to complete an evaluation and review of Merix Asias internal control over
financial reporting by the year ended May 26, 2007. We are in the process of upgrading the accounting systems and strengthening our internal staffing and technical expertise in financial and SEC accounting and reporting at our Asia operations
and our management intends to include Merix Asia in its 2007 assessment of internal control over financial reporting. However, if we are not able to attract and retain qualified accounting personnel or successfully upgrade our accounting systems,
our management may have to exclude Merix Asia in its 2007 assessment of internal control over financial reporting, which may subject us to adverse regulatory consequences and could result in a negative reaction in the financial markets due to a loss
of confidence in the reliability of our consolidated financial statements. If we fail to develop and maintain effective controls and procedures at Merix Asia, we may be unable to provide required financial information in a timely and reliable manner
or otherwise comply with the standards applicable to us as a public company. Any failure by us to timely provide required financial information could materially and adversely impact our financial condition and the market value of our securities.

If production capabilities increase in Asia, where production costs are lower, we may lose market share and our gross margins may be materially
adversely affected by increased pricing pressure.



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Price competition from printed circuit board manufacturers in Asia and other locations with lower production costs may
play an increasing role in the printed circuit board markets in which we compete. While printed circuit board 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 printed circuit boards.

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

To the extent Asian printed circuit board 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 U.S. operations may not remain viable.

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. As a result, Merix Asias results of operations may be
materially and adversely impacted by market conditions in the automotive industry. Automotive production and sales are highly cyclical and depend on general economic conditions and other factors, including consumer spending and preferences. In
addition, automotive production and sales can be affected by labor relations issues, regulatory requirements, trade agreements and other factors. Any significant economic decline that results in a reduction in automotive production and sales by
Merix Asias customers could have a material adverse effect on Merix business, results of operations and financial condition.

Automotive
customers have higher quality requirements and long qualification times.

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 impacted. 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.

A small number of customers accounts 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 year to year, comprised 39% and 55% of our consolidated net sales during the 13-week periods
ended August 26, 2006 and August 27, 2005, respectively. Net sales to two customers individually represented 15% and 10% of consolidated net sales during the 13-week period ended August 26, 2006. Net sales to two customers
individually represented 27% and 12% of consolidated net sales during the 13-week period ended August 27, 2005. 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 from one or more major customers could reduce our consolidated net sales and have a material adverse effect on our results of operations.

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.

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

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



| |  |  | fluctuation in demand for our customers products;
| | - |  | --------------------------------------------------



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| |  |  | changes in customers manufacturing strategies, such as a decision by a customer to either diversify or consolidate the number of printed circuit board manufacturers used;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | customers inventory management; 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 margins, decrease our consolidated net sales and
negatively affect our business and results of operations.

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

Under its current leadership, the Chinese government
has been pursuing economic reform policies, including the encouragement of foreign trade and investment and greater economic decentralization. No assurance can be given, however, that the government of the Peoples Republic of China will
continue to pursue such policies, that such policies will be successful if pursued, or that such policies will not be significantly altered from time to time. 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. Further, any litigation in the PRC may be protracted and
result in substantial costs and diversion of resources and management attention. In addition, some government policies and rules are not timely published or communicated in the local districts, 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.

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

A substantial portion of our current manufacturing operations is located in the Peoples Republic of China and Hong Kong. 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 Peoples Republic of China and Hong Kong, 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 Peoples Republic of China or Hong Kong, including:



| |  |  | lack of developed infrastructure;
| | - |  | ---------------------------------



| |  |  | currency fluctuations;
| | - |  | ----------------------



| |  |  | overlapping taxes and multiple taxation issues;
| | - |  | -----------------------------------------------



| |  |  | employment and severance taxes;
| | - |  | -------------------------------



| |  |  | the burdens of cost and compliance with 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 Peoples Republic of China, including inadequate power and water supplies, transportation or raw materials availability, 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 Peoples Republic of China.

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



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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. 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 printed circuit board, 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 limitations 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.

Merix 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.

As we commence our work to implement a new enterprise resource planning system, unexpected problems and delays could occur and could cause disruption to the management of our business and significantly increase costs.

In the fourth quarter of the fiscal year 2006, as part of a multi-phase process, the Company decided to implement a new enterprise resource
planning, or ERP, for our world-wide operations. As of the end of the fiscal year 2006, the Company selected an ERP vendor and it began the initial design and implementation during the first quarter of the fiscal year 2007. We expect the new ERP
system will become 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. Our work to plan, develop and
implement this new ERP system will continue into the fiscal year 2008 as an active project. These systems are new to us and we have not had extensive experience with them. The new ERP system could eventually become more costly, difficult and
time-consuming to purchase and implement than we currently anticipate. Implementation of the new ERP system may require us to change certain internal business practices. We may encounter unexpected difficulties, delays, costs or other challenges,
any of which may disrupt our business. Corrections and improvements may be required as we continue the implementation of our new system, procedures and controls, and could cause us to incur additional costs and require additional management
attention, placing burdens on our internal resources. Any delay in the implementation of, or disruption in the transition to our new or enhanced systems, procedures or controls, could harm our ability to accurately forecast sales demand, manage our
supply chain, achieve accuracy in the conversion of electronic data and records and to 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.

If we lose key management,
operations, engineering and 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, 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.



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

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

We 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 39% of the
consolidated net trade accounts receivable balance at May 27, 2006, individually ranging from 5% to 15%. Comparatively, five entities represented approximately 67% of the consolidated net trade accounts receivable balance at May 28, 2005,
individually ranging from 5% to 39%. 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 results of operations would be harmed.

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 Hong Kong and the Peoples Republic of China 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. We have evaluated our environmental and safety practices to determine where deficiencies exist
and are working to improve our compliance with these laws. For example, we are working cooperatively with the appropriate agencies in the Peoples Republic of China to improve our compliance with laws related to wastewater discharges at the
Huiyang and Huizhou facilities. 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 in the future as a
result of our failure to have necessary permits, human error, equipment failure or other causes. Moreover, in connection with our acquisitions in San Jose, California and in Asia, we may be liable for any violations of environmental and safety laws
at those facilities by prior owners. If we violate environmental laws, we may be held liable for damages and the costs of investigations and remedial actions and may be subject to fines and penalties, and revocation of permits necessary to conduct
our business. Any permit revocations could require us to cease or limit production at one or more of our facilities, and harm our business, results of operations and financial condition. Even if we ultimately prevail, environmental lawsuits against
us would be time consuming and costly to defend. Our failure to comply with applicable environmental laws and regulations could limit our ability to expand facilities or could require us to acquire costly equipment or to incur other significant
expenses to comply with these laws and regulations. In the future, environmental laws may become more stringent, imposing greater compliance costs and increasing risks and penalties associated with violations. We operate in environmentally sensitive
locations and we are subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes or restrictions on discharge limits, emissions levels, permitting requirements and material storage,
handling or disposal might require a high level of unplanned capital investment, operating expenses or, depending on the severity of the impact of the foregoing factors, costly plant relocation. It is possible that environmental compliance costs and
penalties from new or existing regulations may harm our business, results of operations and financial condition.



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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.

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.

With the acquisition of our 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 and economic instability, 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.
| | - |  | -----------------------------------------------

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

We are currently subject to legal proceedings
and claims, including a securities class action lawsuit and a shareholder derivative lawsuit. In each complaint, the plaintiffs seek unspecified damages. These lawsuits are described in Item 3. Legal Proceedings above. More lawsuits could
be filed against us.

Where we can make a reasonable estimate of any probable liability relating to pending litigation, we record a liability. Although we
have created a reserve for some of the potential legal fees associated with litigation currently pending against us, we have not created any reserve for potential liability for settlements or judgments because the potential liability is neither
probable nor estimable. Even when we record a liability, the amount of our estimates of costs or liabilities could be wrong. Accordingly, our operating results and financial condition could be adversely affected. 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. Accordingly, our operating results and financial condition could be adversely affected.

We did not have a Chief Financial Officer from January 13, 2006 through August 24, 2006, the filing date of our 2006 Annual Report on Form 10-K.

We did not have a Chief Financial Officer from January 13, 2006, the date on which our former Chief Financial Officer retired, through
August 24, 2006, the filing date of our 2006 Annual Report on Form 10-K. Subsequent to the filing of our 2006 Annual Report on Form 10-K on August 24, 2006, the appointment of our new Chief Financial Officer became effective. Although
our Chief Executive Officer acted as our principal accounting and financial officer, we did not have an officer dedicated to the tasks generally performed by a Chief Financial Officer, such as overseeing the financial management of the Company;
directing our financial goals, objectives and budgets; directing and overseeing the preparation of our consolidated financial statements; overseeing investment of funds and managing associated risks; supervising our cash management activities; and
overseeing our disclosure controls and procedures and our internal control over financial



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reporting. In addition, we integrated a significant foreign acquisition without a senior financial
officer. Moreover, the added responsibilities may have diverted our Chief Executive Officers focus from his other responsibilities during that period of time.

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
significantly and declined from an all-time high of $73.50 per share on August 25, 2000 to a low of $2.56 per share on October 8, 1998.

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 printed circuit board industry and the end markets which we serve;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | interest rates;
| | - |  | ---------------



| |  |  | geopolitical conditions throughout the world;
| | - |  | ---------------------------------------------



| |  |  | perceptions of the strengths and weaknesses of the printed circuit board 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 this volatility to continue in the future. In recent years, the stock market in general has experienced extreme price and volume fluctuations that have affected the printed circuit board 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 August 26, 2006, we had 3,527,977 outstanding
options, each to purchase one share of our common stock, issued to key employees, officers and directors under our equity incentive plans. The options have exercise prices ranging from $2.04 per share to $67.06 per share. These outstanding
options could have a significant adverse effect on the trading price of our common stock, especially if a significant volume of the options was exercised and the stock issued was immediately sold into the public market. Further, the exercise of
these options could have a dilutive impact on other shareholders by decreasing their ownership percentage of our outstanding common stock. If we attempt to raise additional capital through the issuance of equity or convertible debt securities, the
terms upon which we will be able to obtain additional equity capital, if at all, may be negatively affected since the holders of



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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.

Our shareholder rights plan and some
provisions contained in our articles of incorporation and bylaws, as well as provisions of Oregon law, could inhibit a takeover attempt.

Some of
the provisions of our articles of incorporation and bylaws, such as the authorization of blank check preferred stock, our shareholder rights plan 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 shareholders rights plan was adopted to discourage a
potential acquisition of us that our board of directors believes is undesirable to us and our shareholders. 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



|                                      |  |                                                  |  |                            |       |                                                                                 |   |                                                                               |  
|------------------------------------- |  | ------------------------------------------------ |  | -------------------------- | ----- | ------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------- | -
|ISSUER PURCHASES OF EQUITY SECURITIES
|Period                                |  | Total Number of Shares of Common Stock Purchased |  | AveragePrice PaidPer Share |       | Total Number of Shares Purchased as Part of
PubliclyAnnounced Plans or Programs |   | Maximum Numberof Shares that May Yet Be Purchased Under the
Plans or Programs
|May 28, 2006 - June 24, 2006          |  | -                                                |  | $                          | -     |                                                                                 | - |                                                                               | -
|                                      |  |                                                  |  |                           
|June 25, 2006 - July 22, 2006         |  | 2,002                                            |  | $                          | 11.29 |                                                                                 | - |                                                                               | -
|                                      |  |                                                  |  |                           
|July 23, 2006 - August 26, 2006       |  | 2,371                                            |  | $                          | 10.79 |                                                                                 | - |                                                                               | -
|                                      |  |                                                  |  |                            |       |                                                                                 |   |                                                                               |  
|Total                                 |  | 4,373                                            |  | $                          | 11.10 |                                                                                 | - |                                                                               | -
|                                      |  |                                                  |  |                            |       |                                                                                 |   |                                                                               |  

The issuer purchases during the period covered by this report represent shares purchased by the Company in
satisfaction of withholding taxes due upon the vesting of restricted shares granted to our employees under the Companys equity-based compensation plans. The shares are purchased from employees and the proceeds are remitted to pay the
employees withholding taxes due at the time the employees restricted stock awards vest.

ITEM 6.    EXHIBITS

See the Exhibit Index for the exhibits filed as
part of this report.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized on October 10, 2006.



MERIX CORPORATIONBy:

/s/ Mark R. HollingerMark R. HollingerChief Executive Officer and PresidentBy:

/s/ Kelly E. LangKelly E. LangChief Financial Officer




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EXHIBIT INDEX



|                  |  |                                                        
|----------------- |  | -------------------------------------------------------
|Exhibit    Number |  | Document Description                                   
|                  |  |                                                        
|                  | 
|31.1              |  | Rule 13a-14(a) Certification of Chief Executive Officer
|                  | 
|31.2              |  | Rule 13a-14(a) Certification of Chief Financial Officer
|                  | 
|32.1              |  | Section 1350 Certification of Chief Executive Officer  
|                  | 
|32.2              |  | Section 1350 Certification of Chief Financial Officer  



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