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

Overview

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

Critical Accounting Policies

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

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

Comparison of the Three Months Ended March 31, 2009 and 2008

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



                                                           Three
                                                       Months Ended
                                                         March 31,
                                                      2009      2008
               Net sales                              100.0 %   100.0 %
               Cost of sales                           85.8      82.4

               Gross profit                            14.2      17.6

               Operating expenses:
               Research and development                 0.7       0.3
               Sales and marketing                      3.5       2.8
               General and administrative               3.6       4.7
               Impairment and restructuring expense    (0.1 )     0.0

               Total operating expenses                 7.7       7.9

               Operating income                         6.5       9.8
               Interest income                          0.1       0.3
               Interest expense                        (0.1 )     0.0
               Other income / (expense), net            0.1      (1.3 )

               Income before income taxes               6.6       8.8
               Provision for income taxes               1.6       2.4

               Net income                               5.0 %     6.4 %

Net Sales. Net sales increased to $174.1 million for the three months ended March 31, 2009, from $163.9 million in the three months ended March 31, 2008. The increase of $10.2 million, or 6%, was primarily attributable to an increase in the average selling price as a result of added material content, offset by a decline in total unit volumes and some price reduction activity. Sales into the consumer products sector were $42.8 million for the three months ended March 31, 2009, up from $500,000 for the three months ended March 31, 2008, driven primarily by the ramp up in unit volume shipments to one of our key customers related to new programs that were started in fiscal 2008. This sector accounted for approximately 25% and 0% of total net sales for the three months ended March 31, 2009 and 2008, respectively, and is a result of our on-going efforts to diversify both our customers and the market sectors into which we sell.

Net sales into the wireless sector decreased to $124.3 million for the three months ended March 31, 2009, from $153.5 million in the three months ended March 31, 2008. The decrease of $29.2 million, or 19%, versus the comparable period of the prior year was primarily due to decreased unit volume shipments as a result of reduced demand from two of our major customers. Sales into the wireless sector comprised 71% and 94% of total net sales for the three months ended March 31, 2009 and 2008, respectively.

Sales to two customers each accounted for more than 25% of our net sales during the three months ended March 31, 2009, as compared to three customers who each accounted for 10% or more of our net sales for the comparable period in the prior year, with one of these customers accounting for more than 25% of our net sales.

Cost of Sales and Gross Profit. Cost of sales as a percentage of net sales increased to approximately 86% for the three months ended March 31, 2009, versus approximately 82% for the comparable period in the prior year. The increase in cost of sales as a percentage of net sales was driven by several factors, and was primarily attributable to the impact of increased material content in programs, an increase in fixed costs as we added satellite facilities and infrastructure to meet increased demand for the second half of fiscal 2008 as well as expected future demand and some price reduction activity, offset by improved manufacturing yields and labor efficiencies.

Research and Development. Research and development expense increased to $1.2 million for the three months ended March 31, 2009, from $588,000 in the comparable period in the prior year, an increase of 104%. The increase was primarily due to an increase in compensation and benefits expenses related to increased headcount and bonus accruals of $162,000, increased depreciation expense of $179,000 on research and development equipment purchases, $117,000 for increased information technology and human resource expense due to the expanded activities and increased purchases of test materials of $116,000. Our research and development activities focus on new technologies, primarily those which are expected to provide for additional miniaturization, cost reduction, and differentiation from our competition, as well as activities related to Pelikon Limited ("Pelikon"). We expect these expenses to continue to grow as we focus on expanding our product development activities.

Sales and Marketing Expense. Sales and marketing expense increased by $1.6 million to $6.1 million in the three months ended March 31, 2009, from $4.5 million in the comparable period in the prior year, an increase of 36%. As a percentage of net sales, sales and marketing expense increased to 3.5% versus 2.8% for the comparable period in the prior year. The increase is primarily attributable to a $1.0 million increase in compensation and benefit expense due to headcount to support expanded program management activities, stock-based compensation and bonus increases, and $280,000 increased information technology and human resource support expenses due to expanded infrastructure growth. As a percentage of net sales, we expect sales and marketing expenses to remain relatively unchanged in our next fiscal quarter.

General and Administrative Expense. General and administrative expense decreased to $6.3 million during the three months ended March 31, 2009, from $7.8 million for the comparable period in the prior year, a decrease of $1.5 million or 19%. As a percentage of net sales, general and administrative expense declined to 3.6% versus 4.7% for the comparable period of the prior year. This was primarily attributable to a decrease of $900,000 for information technology and human resource expenses as activities were shifted to support expanded manufacturing operations and infrastructure growth in other areas, reduced bad debt expenses of $430,000 and reduced depreciation of $317,000. As a percentage of net sales, we expect our general and administrative expense to remain relatively unchanged in our next fiscal quarter.

Restructuring Cost. During the three months ended March 31, 2009, we recorded a net gain from restructuring and impairment of $185,000 which consisted of $12,000 of additional expense related to the restructuring of our wholly owned subsidiary, Aurora Optical in Tucson, Arizona, offset by a gain of $197,000 related to the sale of equipment. No charges were recorded during the comparable period of the prior fiscal year.

Interest Income. Interest income decreased to $252,000 for the three months ended March 31, 2009, from $488,000 for the three months ended March 31, 2008. The decrease is primarily attributable to a significant decline in interest rates.

Interest Expense. Interest expense increased to $198,000 for the three months ended March 31, 2009, from $12,000 for the three months ended March 31, 2008. The increase in interest expense is primarily related to interest accrued against the notes payable issued as part of our acquisition of Pelikon and unused line fees on our new bank loan facilities.

Other Income (Expense), Net. Other income (expense), net changed to income of $169,000 for the three months ended March 31, 2009, from net expense of $2.1 million for the comparable period in the prior year. This change from expense to income is primarily attributable to $1.8 million recorded in the prior year period related to foreign exchange losses as a result of the accelerated weakening of the U.S. dollar against foreign currencies and a $450,000 write down related to an investment.

Income Taxes. The effective tax rate for the three months ended March 31, 2009, was 24% versus 28% for the comparable period in the prior year. The tax rate declined as a result of our international restructuring efforts and the migration of technology to further strengthen our Asian operations and enhance our operational efficiencies.

Comparison of the Six Months Ended March 31, 2009 and 2008

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



                                                            Six
                                                       Months Ended
                                                         March 31,
                                                      2009      2008
               Net sales                              100.0 %   100.0 %
               Cost of sales                           85.2      82.8

               Gross profit                            14.8      17.2

               Operating expenses:
               Research and development                 0.6       0.3
               Sales and marketing                      2.9       2.6
               General and administrative               3.4       4.2
               Impairment and restructuring expense     0.1       0.0

               Total operating expenses                 7.0       7.1

               Operating income                         7.8      10.1
               Interest income                          0.1       0.2
               Interest expense                        (0.1 )     0.0
               Other expense, net                      (0.3 )    (0.5 )

               Income before income taxes               7.5       9.8
               Provision for income taxes               1.7       2.9

               Net income                               5.8 %     6.9 %

Net Sales. Net sales increased to $390.7 million in the six months ended March 31, 2009, from $348.1 million in the six months ended March 31, 2008. The increase of $42.6 million, or 12%, was primarily attributable to an increase in overall average unit prices resulting from added material content, offset by a decline in total unit volumes. Sales into the consumer products sector were $100.6 million for the six months ended March 31, 2009, up from $2.7 million for the six months ended March 31, 2008. The increase was driven primarily by increases in unit volume shipments to one of our key customers related to several programs that were started in fiscal 2008. Shipments into the consumer products sector accounted for approximately 26% and 1% of total net sales for the six months ended March 31, 2009 and 2008, respectively.

Net sales into the wireless sector decreased to $273.7 million for the six months ended March 31, 2009, from $327.2 million in the six months ended March 31, 2008. The decrease of $53.5 million, or 16%, versus the comparable period of the prior year was primarily due to reduced unit volume shipments to two of our major customers as a result of reduced demand. Sales into the wireless sector comprised 70% and 94% of total net sales for the six months ended March 31, 2009 and 2008, respectively.

Sales to three customers each accounted for more than 10% of our net sales during the six months ended March 31, 2009, with sales to two of these customers each equal to or accounting for more than 25% of our net sales, as compared to three customers who accounted for more than 10% of our net sales each, with two of these customers each equaling or accounting for more than 25% of our net sales for the comparable period in the prior year.

Cost of Sales and Gross Profit. Cost of sales as a percentage of net sales increased to 85% for the six months ended March 31, 2009, versus 83% for the comparable period in the prior year. The increase in cost of sales as a percentage of net sales of 2% was driven by several factors, and was primarily attributable to the increase of average material content as a percent of new programs in the current fiscal year and the deleveraging of fixed overhead costs, resulting from higher current year infrastructure costs, and the negative impact of operating at less-than-optimum capacity levels. These increases were only partially offset by cost reductions from improved manufacturing yields resulting from operational improvement initiatives.

Gross profit decreased to $57.7 million for the six months ended March 31, 2009, versus $59.7 million in the comparable period in the prior year, a decrease of 3%. As a percentage of net sales, gross profit decreased to 15% for the six months ended March 31, 2009 from 17% in the comparable period in the prior year for the reasons identified above.

Sales and Marketing Expense. Sales and marketing expense increased by $2.3 million to $11.4 million in the six months ended March 31, 2009, from $9.1 million in the comparable period in the prior year, an increase of 25%. The increase is primarily attributable to compensation and benefit expense increase of $1.9 million as a result of headcount growth and compensation and benefit increases, $488,000 for information technology and human resource support expenses to support the expanded infrastructure, offset by reduced commissions expense of $494,000. As a percentage of net sales, sales and marketing expense increased to 2.9% versus 2.6% for the prior year.

General and Administrative Expense. General and administrative expense decreased by $1.2 million to $13.3 million in the six months ended March 31, 2009, from $14.5 million in the comparable period in the prior year, a decrease of 8%. The decrease was primarily attributable to a decrease of $1.7 million for information technology and human resource expenses as activities were shifted to support expanded manufacturing operations and infrastructure growth, reduced depreciation of $210,000, offset by an increase in compensation and benefits expense of $773,000 due to the increase in headcount at various locations to support business growth, increased telecommunications expenses of $232,000 and increased professional fees of $142,000. As a percentage of net sales, general and administrative expense decreased to 3.4% of net sales for the six months ended March 31, 2009, from 4.2% for the comparable period in the prior year, attributable to the favorable leveraging impact on our operating expenses from the increased net sales.

Restructuring Cost. During the six months ended March 31, 2009, we recorded a net restructuring charge $127,000 which consisted of $324,000 related to the restructuring of our wholly owned subsidiary, Aurora Optical, in Tucson, Arizona, offset by a gain of $197,000 related to the sale of equipment. No charges were recorded during the comparable period of the prior fiscal year. Going forward, we believe that we can achieve approximately $2 to $3 million dollars per year in cost savings resulting from reduced compensation and benefit cost, reduced overhead and other operating expenses.

Interest Income. Interest income decreased to $637,000 for the six months ended March 31, 2009, from $847,000 for the six months ended March 31, 2008. The decrease is primarily attributable to a significant decline in interest rates.

Interest Expense. Interest expense increased to $217,000 for the six months ended March 31, 2009, from $71,000 for the six months ended March 31, 2008. The increase in interest expense is primarily related to interest accrued against the notes payable issued as part of our acquisition of Pelikon and unused line fees on our new bank loan facilities.

Other Income (Expense), Net. Other income (expense), net decreased to net expense of $1.3 million for the six months ended March 31, 2009, from net expense of $1.8 million for the comparable period in the prior year. The reduced expense was primarily attributable to a reduction in foreign currency exchange losses of $889,000 experienced during the six months ended March 31, 2009, versus the comparable period in the prior year. The decrease in net losses from foreign exchange is due to the strengthening of the U.S. dollar versus the Chinese Renminbi ("RMB") and other foreign currencies. The decrease was partially offset by $419,000 of scrap material sales.

Income Taxes. The effective tax rate for the six months ended March 31, 2009, was 23% versus 29% for the comparable period of the prior year. The tax rate declined as a result of our international restructuring efforts and the migration of technology to further strengthen our Asian operations and enhance our operational efficiencies.

Liquidity and Capital Resources

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

During the six months ended March 31, 2009, net income of $22.8 million, adjusted for depreciation and amortization, gain on equipment disposal, stock-based compensation expense, deferred taxes, impairments and provision for doubtful accounts, generated $45.6 million of operating cash. This amount was increased by $17.4 million generated from working capital.

Changes in the principal components of working capital for the six months ended March 31, 2009, were as follows:

• Net accounts receivable decreased 29% to $114.5 million at March 31, 2009, from $162.4 million at September 30, 2008. The decrease in outstanding accounts receivable was primarily attributable to reduced sales compared to the first quarter of 2009 as a result of decreased unit volume shipments, partially offset by more aggressive collections activity during the three months ended March 31, 2009.

• Inventory decreased 50% to $29.9 million at March 31, 2009, from $59.8 million at September 30, 2008. The principal reason for the decrease relates to reduced inventory deliveries at the end of the quarter related to reduced second quarter 2009 compared to the preceding quarter's sales . . .