Multi Fineline Electronix (MFLX) 10-Q 2005 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2005

OR

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

For the transition period from                    to                    

Commission file number 000-50812

MULTI-FINELINE ELECTRONIX, INC.

(Exact name of registrant as specified in its charter)

Delaware	95-3947402
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3140 East Coronado Street

Anaheim, CA 92806

(Address of principal executive offices, Zip Code)

(714) 238-1488

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes  ¨    No  x

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, as of May 6, 2005 was 23,701,840.

Multi-Fineline Electronix, Inc.

Index

PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Income	2
	Condensed Consolidated Statements of Cash Flows	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II. OTHER INFORMATION
Item 6.	Exhibits	28
Signatures

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

MULTI-FINELINE ELECTRONIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

(unaudited)

	March 31, 2005		September 30, 2004
ASSETS
Cash and cash equivalents	$	26,349	$	16,631
Short term investments		17,465		21,565
Restricted cash		612		181
Accounts receivable, net of allowances of $341 and $250		51,530		44,382
Inventories		37,118		39,217
Due from affiliates		213		43
Deferred taxes		3,258		3,343
Other current assets		690		807
Total current assets		137,235		126,169
Property, plant and equipment, net		65,797		59,914
Restricted cash		124		122
Deferred taxes		1,205		1,790
Other assets		3,617		2,003
Total assets	$	207,978	$	189,998
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	26,098	$	26,079
Accrued liabilities		8,891		5,990
Due to affiliates		1,687		5,471
Line of credit		4,950		3,369
Income taxes payable		4,860		6,299
Total current liabilities		46,486		47,208
Other liabilities		371		361
Deferred taxes		1,345		1,345
Total liabilities		48,202		48,914
Commitments and contingencies (Note 2)
Stockholders’ equity
Preferred stock, $0.0001 par value, 5,000,000 shares authorized; none issued or outstanding		—		—
Common stock, $0.0001 par value; 100,000,000 shares authorized; 23,605,940 and 23,264,835 shares issued and outstanding		2		2
Additional paid-in capital		90,435		89,110
Retained earnings		69,336		51,971
Accumulated other comprehensive income		3		1
Total stockholders’ equity		159,776		141,084
Total liabilities and stockholders’ equity	$	207,978	$	189,998

The accompanying notes are an integral part of these consolidated financial statements.

1

MULTI-FINELINE ELECTRONIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Share and Per Share Data)

(unaudited)

	Three Months Ended March 31,						Six Months Ended March 31,
	2005			2004			2005			2004
Net sales	$	77,392		$	56,516		$	161,804		$	109,966
Cost of sales		58,873			42,933			123,442			88,695
Gross profit		18,519			13,583			38,362			21,271
Operating expenses
Sales and marketing		2,263			1,998			4,429			3,778
General and administrative (includes stock-based compensation expense of $99, $99, $0 and $14 for the three and six months ended March 31, 2005 and 2004, respectively)		4,185			3,152			8,016			5,673
Total operating expenses		6,448			5,150			12,445			9,451
Operating income		12,071			8,433			25,917			11,820
Other (income) expense, net
Interest expense		65			284			101			405
Interest income		(168	)		(24	)		(274	)		(27	)
Other (income) expense		(91	)		99			(62	)		259
Income before provision for income taxes		12,265			8,074			26,152			11,183
Provision for income taxes		(4,370	)		(2,317	)		(8,787	)		(3,281	)
Net income	$	7,895		$	5,757		$	17,365		$	7,902
Net income per share
Basic	$	0.34		$	0.32		$	0.74		$	0.45
Diluted	$	0.32		$	0.30		$	0.70		$	0.42
Shares used in computing net income per share
Basic		23,468,084			18,257,835			23,368,087			17,724,885
Diluted		24,894,249			19,336,815			24,698,791			18,659,958

The accompanying notes are an integral part of these consolidated financial statements.

2

MULTI-FINELINE ELECTRONIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(unaudited)

	Six Months Ended March 31,
	2005			2004
Cash flows from operating activities
Net income	$	17,365		$	7,902
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization		5,098			2,938
Loss from equity method investee		—			205
Provision for doubtful accounts		269			78
Deferred taxes		670			(69	)
Stock-based compensation expense		99			14
Loss on disposal of equipment		105			34
Changes in operating assets and liabilities
Accounts receivable		(7,417	)		(16,922	)
Inventories		2,099			(6,363	)
Due to/from affiliates, net		(3,954	)		2,730
Other current assets		117			5
Other assets		(1,715	)		(639	)
Accounts payable		19			(2,742	)
Accrued liabilities		2,900			2,088
Income tax payable		(1,439	)		1,657
Other liabilities		10			9
Net cash provided by (used in) operating activities		14,226			(9,075	)
Cash flows from investing activities
Sale of short term investments		4,100			—
Cash paid for property and equipment		(10,512	)		(10,971	)
Purchases of software and capitalized internal-use software		(84	)		(62	)
Deposits on property and equipment		(410	)		(280	)
Cash advances to equity method investee		—			(242	)
Proceeds from sale of equipment		22			509
Increase in restricted cash, net		(433	)		—
Net cash used in investing activities		(7,317	)		(11,046	)
Cash flows from financing activities
Borrowings on line of credit		4,950			14,326
Payments on line of credit		(3,369	)		(3,410	)
Proceeds from note payable		—			7,602
Principal payments on note payable		—			(4,611	)
Proceeds from exercise of stock options		1,226			—
Proceeds from issuance of common stock, net of issuance costs of $0 and $80		—			10,172
Net cash provided by financing activities		2,807			24,079
Effect of exchange rate changes on cash		2			(22	)
Net increase in cash		9,718			3,936
Cash and cash equivalents at beginning of period		16,631			5,211
Cash and cash equivalents at end of period	$	26,349		$	9,147
Non-cash financing activities
Issuance of common stock to Wearnes		—		$	15,000

The accompanying notes are an integral part of these consolidated financial statements.

3

MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share Data)

(unaudited)

1. DESCRIPTION OF BUSINESS

Multi-Fineline Electronix, Inc. (the “Company”) was incorporated in 1984 in the State of California. The Company is primarily engaged in the engineering, design and manufacture of flexible printed circuit boards along with related component assemblies.

In February 2004, the board of directors approved the reincorporation of the Company from California to Delaware. On June 4, 2004, the Company completed the reincorporation and effected a 15 for 1 forward stock split. The reincorporation and the stock split have been given retroactive effect in the accompanying consolidated financial statements. In connection with the reincorporation completed in June 2004, the authorized number of shares of common stock decreased to 100,000,000, and 5,000,000 shares of preferred stock, par value $0.0001, were authorized.

Affiliates and subsidiaries of WBL Corporation Limited (collectively “Wearnes”), a Singapore company, owned approximately 63% and 64% of the Company’s outstanding common stock as of March 31, 2005 and September 30, 2004, allowing Wearnes to exercise operating control over the Company.

On June 30, 2004, the Company closed an underwritten public offering of 5,000,000 shares at a price of $10 per share. Proceeds, net of commissions of $3,500 and offering expenses of $1,890, totaled $44,610.

2. BASIS OF PRESENTATION

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company has two wholly owned subsidiaries located in China: Multi-Fineline Electronix (Suzhou) Co., Ltd. (“MFC1”) and Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd. (“MFC2”). All significant intercompany transactions and balances have been eliminated.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s 2004 Annual Report on Form 10-K. The financial information presented in the accompanying statements reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of the periods indicated. All such adjustments are of a normal recurring nature.

Short-Term Investments

Short-term investments consist of certain marketable debt securities, which consist primarily of auction rate obligation securities of short to intermediate term fixed income securities issued by U.S. government agencies and municipalities. The Company only invests in marketable securities with active secondary or resale markets to ensure portfolio liquidity and the ability to readily convert investments to cash to fund current operations, or satisfy other cash requirements as needed. Short-term investments are classified as available for sale and are carried at fair value which approximates amortized cost.

Inventories

Inventories comprise the following:

	March 31, 2005		September 30, 2004
Raw materials and supplies	$	17,053	$	23,796
Work-in-progress		10,063		9,788
Finished goods		10,002		5,633
	$	37,118	$	39,217

4

MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(In Thousands, Except Share Data)

(unaudited)

Property, Plant and Equipment

Property, plant and equipment comprise the following:

	March 31, 2005			September 30, 2004
Land	$	3,730		$	3,730
Building		16,728			17,347
Machinery and equipment		63,060			52,189
Furniture and fixtures		2,666			2,342
Leasehold improvements		2,806			2,783
		88,990			78,391
Accumulated depreciation		(23,193	)		(18,477	)
	$	65,797		$	59,914

Depreciation expense for the six months ended March 31, 2005 and 2004, was $4,861 and $2,778, respectively.

Included in other assets as of March 31, 2005 and September 30, 2004 is capitalized purchased software and internally developed software costs. Amortization of software costs for the six months ended March 31, 2005 and 2004, was $237 and $160, respectively.

Warranty

The Company warrants its products for 60 days. The standard warranty requires the Company to replace defective products returned to the Company at no cost to the customer. The Company records an estimate for warranty related costs at the time revenue is recognized based on historical amounts incurred for warranty expense and historical return rates. The warranty accrual is included in accrued liabilities in the consolidated balance sheets.

Changes in product warranty accrual for the three months ended March 31, 2005 and 2004 were as follows:

	Warranty Accrual Balance at December 31		Warranty Expenditures			Provision for Estimated Warranty Cost		Warranty Accrual Balance at March 31
2005	$	1,538	$	(770	)	$	639	$	1,407
2004		1,248		(1,185	)		1,000		1,063

Changes in product warranty accrual for the six months ended March 31, 2005 and 2004 were as follows:

	Warranty Accrual Balance at September 30		Warranty Expenditures			Provision for Estimated Warranty Cost		Warranty Accrual Balance at March 31
2005	$	1,549	$	(1,692	)	$	1,550	$	1,407
2004		337		(1,704	)		2,430		1,063

Comprehensive Income

Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The difference between net income and comprehensive income for the three and six months ended March 31, 2005 and 2004 was comprised entirely of the Company’s foreign currency translation adjustment. For the three and six months ended March 31, 2005 and 2004, the comprehensive income was $7,895, $17,365, $5,743 and $7,880, respectively.

5

MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(In Thousands, Except Share Data)

(unaudited)

Foreign Currency

The functional currency of the Company’s foreign subsidiaries is the local currency. Balances are translated into U.S. Dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for statement of income amounts. Currency translation adjustments are recorded in other comprehensive income, a component of stockholders’ equity.

Foreign currency transactions occur when there is a receivable or payable denominated in other than the respective entity’s functional currency. The Company records the changes in the exchange rate for these transactions in the consolidated statements of income. For the three and six months ended March 31, 2005 and 2004, foreign exchange transaction gains and losses were included in other expenses and were a net gain of $37 and net losses of $8, $29 and $75, respectively.

Accounting for Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees and Related Interpretations, and complies with the disclosure requirements of Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), Accounting for Stock-Based Compensation. Under APB Opinion No. 25, compensation expense, if any, is recognized on a straight-line basis over the respective vesting period based on the difference between the estimated fair value of the Company’s common stock and the exercise price on the date of grant. Prior to the Company’s initial public offering on June 25, 2004, the Company’s common stock did not have a readily determinable fair market value; accordingly, the Company estimated the fair value of its common stock using the results of the Company’s projected discounted cash flows and values of comparable publicly traded companies.

In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB No. 123 (“SFAS No. 148”). As permitted under SFAS No. 148, the Company has elected to continue to account for stock-based employee compensation using the intrinsic value method under APB No. 25.

Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method promulgated by SFAS No. 123, the Company’s net income for the three and six months ended March 31, 2005 and 2004, would have decreased to the pro forma amounts below:

	Three Months Ended March 31,					Six Months Ended March 31,
	2005			2004		2005			2004
Net income, as reported	$	7,895		$	5,757	$	17,365		$	7,902
Stock-based compensation, intrinsic value method, net of tax		70			—		70			9
Total stock-based employee compensation expense determined under fair value-based method for all options		(74	)		—		(74	)		(50	)
Pro forma net income	$	7,891		$	5,757	$	17,361		$	7,861
Net income per share
Basic, as reported	$	0.34		$	0.32	$	0.74		$	0.45
Basic, pro forma	$	0.34		$	0.32	$	0.74		$	0.44
Diluted, as reported	$	0.32		$	0.30	$	0.70		$	0.42
Diluted, pro forma	$	0.32		$	0.30	$	0.70		$	0.42
Shares used in computing net income per share
Basic		23,468,084			18,257,835		23,368,087			17,724,885
Diluted		24,894,249			19,336,815		24,698,791			18,659,958

6

MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(In Thousands, Except Share Data)

(unaudited)

Net Income Per Share-Basic and Diluted

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. In computing diluted earnings per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities. The impact of potentially dilutive securities are determined using the treasury stock method.The following table presents a reconciliation of basic and diluted income per share:

	Three Months Ended March 31,		Six Months Ended March 31,
	2005	2004	2005	2004
Basic weighted-average number of common shares outstanding	23,468,084	18,257,835	23,368,087	17,724,885
Dilutive effect of outstanding stock options	1,426,165	1,078,980	1,330,704	935,073
Diluted weighted-average number of common and potential common shares outstanding	24,894,249	19,336,815	24,698,791	18,659,958
Potential common shares excluded from the per share calculation because the effect of their inclusion would be anti-dilutive	—	—	—	—

Commitments and Contingencies

As of March 31, 2005 and September 30, 2004, the Company had outstanding purchase commitments related to MFC2 capital projects which totaled $5,119 and $18,002, respectively.

Pursuant to the laws applicable to the Peoples’ Republic of China’s Foreign Investment Enterprises, the Company’s two wholly owned subsidiaries, MFC1 and MFC2, are restricted from paying cash dividends on 10% of net income, subject to certain cumulative limits. These restrictions on net income for the six months ended March 31, 2005 and for the year ended September 30, 2004 are equal to $1,632 and $111, respectively.

As of December 31, 2004, the Company recorded a $1,300 accrual for value added tax, duty and penalties as a result of an import and export review in China, which is still in progress. While it is difficult to predict the final outcome or the timing of resolution of this particular matter, management believes it is probable a loss contingency has been incurred. This accrual was recorded directly to cost of sales.

In January 2005, the Company received an extension of the tax holiday for the Company’s MFC1 facility from the Chinese government. This tax holiday allows the Company to operate for three calendar years, 2005, 2006 and 2007, at a reduced income tax rate of 12%. Although the extended tax holiday will have a net favorable impact on the Company’s future effective tax rate, the Company was required to revalue MFC1’s deferred tax assets and liabilities using the lower rate. As a result, during the three months ended March 31, 2005, MFC1 decreased its net deferred tax assets and increase its income tax expense by approximately $670.

The Company is currently under audit by the Internal Revenue Service and from time to time, audited by other taxing authorities. We do not believe the results of these audits will have a materially adverse effect to the balance sheet or results of operations.

The Company is involved in litigation from time to time in the ordinary course of business, the outcome of which the Company’s management believes will not have a material adverse affect on the Company’s financial position, results of operations or cash flows.

Recent Accounting Pronouncements

In December 2004, the FASB issued FASB No. 123R,Share-Based Payment (“FAS 123R”), that requires companies to expense the value of employee stock options and similar awards. FAS 123R is effective for public companies in annual periods beginning after June 15, 2005, and applies to all outstanding and unvested share-based payment awards at the

7

MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(In Thousands, Except Share Data)

(unaudited)

adoption date. The Company is in the process of evaluating the impact of FAS 123R to its financial position and results of operations and cash flows. FAS 123R will be effective for the Company in the first quarter of fiscal year 2006.

On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”). The Act provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the Act also provides for a two-year phase-out (except for certain pre-existing binding contracts) of the existing ETI exclusion tax benefit for foreign sales which the World Trade Organization (“WTO”) ruled was an illegal export subsidy. The European Union believes that the Act fails to adequately repeal the illegal export subsidies because of the transitional provisions and has asked the WTO to review whether these provisions are in compliance with their prior ruling. It is not possible to predict what impact this issue will have on future earnings pending the final resolution of this matter.

On December 21, 2004, the Financial Accounting Standards Board Staff Position (FSP) No. FAS 109-1,Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, was issued. FSP No. FAS 109-1 clarifies that this tax deduction should be accounted for as a special deduction in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the date of enactment. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on our tax return beginning in 2005. As regulations are still pending, the Company has been unable to quantify this impact.

On December 21, 2004, FSP No. FAS 109-2,Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, was issued. FSP No. FAS 109-2 provides companies additional time, beyond the financial reporting period during which the Act took effect, to evaluate the Act’s impact on a company’s plan for reinvestment or repatriation of certain foreign earnings for purposes of applying SFAS No. 109. FSP No. FAS 109-2 was effective upon issuance. As of March 31, 2005, the Company has not decided on whether and to what extent it might repatriate foreign earnings under the Act, and accordingly, the financial statements do not reflect any provisions for taxes on unremitted foreign earnings.

Significant Concentrations

For the three and six months ended March 31, 2005, 79% of the Company’s net sales were realized from one customer and its subcontractors.

Reclassification

The Company has reclassified certain auction rate securities from cash equivalents to short-term investments. Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the underlying security in excess of 90 days. Auction rate securities have interest rate resets through a modified Dutch auction at predetermined short-term intervals, typically every 7, 28 or 35 days. Interest paid during a given period is based upon the interest rate determined during the prior auction.

Although these securities are issued and rated as long-term bonds, they are priced and traded as short-term instruments because of the liquidity provided through the interest rate reset. The Company had historically classified these instruments as cash equivalents if the period between interest rate resets was 90 days or less, which was based on the Company’s ability to either liquidate its holdings or roll the investment over to the next reset period. The Company’s re-evaluation of the maturity dates and other provisions associated with the underlying bonds resulted in a reclassification from cash and equivalents to short-term investments of $21,565 on the September 30, 2004 balance sheet.

3. RELATED PARTY TRANSACTIONS

During the three and six months ended March 31, 2005 and 2004 and the year ended September 30, 2004, the Company has recognized revenue and recorded purchases from the following affiliated companies: (a) Wearnes Hollingsworth Corporation; (b) MFS Technology Ltd., a subsidiary of Wearnes, and its subsidiaries, Wearnes Greatwall Circuits and MFS Technologies (M) Sdn. Bhd.; and (c) Suzhou Wearnes-Xirlink Electric Co. Ltd., a subsidiary of Wearnes. As discussed in Note 1, Wearnes owned 63% and 64% of the Company’s outstanding common stock as of March 31, 2005 and September 30, 2004, respectively.

8

MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(In Thousands, Except Share Data)

(unaudited)

Net amounts due from/to affiliated companies comprise the following:

	March 31, 2005		September 30, 2004
Due from affiliates
MFS Technology Ltd.	$	102	$	—
Wearnes Greatwall Circuits		—		1
Suzhou Wearnes-Xirlink Electric Co. Ltd.		42		42
Wearnes		69		—
	$	213	$	43
	March 31, 2005		September 30, 2004
Due to affiliates
MFS Technology Ltd.	$	1,363	$	5,063
Wearnes Hollingsworth Corporation		324		324
Wearnes		—		84
	$	1,687	$	5,471

Sales to and purchases from affiliates comprise the following:

	Three Months Ended March 31,				Six Months Ended March 31,
	2005		2004		2005		2004
Sales to affiliates
MFS Technology Ltd.	$	—	$	9	$	2	$	518
Wearnes Greatwall Circuits		—		1		—		1
MFS Technologies (M) Sdn. Bhd.		—		2		—		2
	$	—	$	12	$	2	$	521
Purchases from affiliates
MFS Technology Ltd.	$	162	$	—	$	1,397	$	3,560
Wearnes Greatwall Circuits		—		—		—		85
	$	162	$	—	$	1,397	$	3,645

Management fees are charged to the Company by Wearnes and are based on the amount of time spent on Company-related matters. Historically, these fees were determined at the discretion of Wearnes and totaled $0 and $194 for the six months ended March 31, 2005 and 2004, respectively. In June 2004, the Company formalized an agreement with Wearnes whereby the Company is billed for corporate services on a time and materials basis. For the six months ended March 31, 2005, no services were provided under this services agreement.

The Company files a combined California income tax return with Wearnes Hollingsworth Corporation pursuant to a tax sharing agreement. The tax sharing agreement provides that the Company will pay Wearnes Hollingsworth Corporation for the California state income tax benefit realized by filing the combined California tax return. During the six months ended March 31, 2005 and 2004, the Company paid $0 and $15, respectively to Wearnes Hollingsworth Corporation.

In connection with the Company’s initial public offering in June 2004 (the “IPO”), the Company terminated a consulting relationship with an independent director on the Company’s board of directors, and entered into a consulting relationship with a former member of the Company’s board of directors. Under the new consulting agreement, the Company agreed to pay the former Board member $9 per month until June 2006.

4. EQUITY INVESTMENT

In June 2004, the Company entered into a definitive agreement with Cornerstone Equipment Management, Inc. (“Cornerstone”), in which the Company agreed to invest $450 in exchange for shares equal to approximately 14% of the ownership of Cornerstone. In addition, the Company agreed to provide certain services to Cornerstone at the Company’s standard terms and conditions. The investment balance as of March 31, 2005 is $450 and is included in other assets in the consolidated balance sheets. The Company accounts for its investment in Cornerstone using the cost method of accounting.

9

MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(In Thousands, Except Share Data)

(unaudited)

5. LINES OF CREDIT

In February 2003, the Company established a line of credit with Bank of China (“BC”) denominated in Chinese currency (“RMB”) of RMB 60,000 ($7,229 at September 30, 2004). The line of credit was increased by RMB 40,000 to RMB 100,000 in October 2004 ($12,082 at March 31, 2005). The line of credit will mature in October 2005, as amended, and bears interest at LIBOR (3.03% and 1.91% at March 31, 2005 and September 30, 2004, respectively) plus 0.4%, which is payable quarterly. Borrowings outstanding under this line of credit as of March 31, 2005 and September 30, 2004 were $3,000 and $0, respectively.

The Company also maintains a $20,000 line of credit with Shanghai Pudong Development Bank (“SPDB”). The line of credit will mature in July 2005 and bears interest at LIBOR (3.03% and 1.91% at March 31, 2005 and September 30, 2004, respectively) plus 0.75%, which is payable quarterly. As of March 31, 2005 and September 30, 2004, the Company had $1,950 and $3,369, respectively, outstanding under this line of credit. During the six months ended March 31, 2005, the Company borrowed $1,950 and made repayments of $3,369. The remaining $1,950 balance is due in full in June 2005.

In November 2003, the Company entered into a $25,000 credit facility with Norddeutsche Landesbank Girozentrale (“NLG”). In March 2005 the maturity date on the line of credit was extended to mature in June 2005. Borrowings bear interest at SIBOR plus 1.4% correlating to the time period of the borrowing. In connection with the IPO, the parties agreed to reduce the facility to $15,000 and to reduce WBL Corporation’s guarantee to an amount equal to the percentage of the Company’s outstanding stock owned by WBL Corporation, which is 63% as of March 31, 2005. However, at no time can WBL Corporation’s guarantee be reduced to below 40% of the outstanding balance of the credit facility, even if it owns less than 40% of the Company’s outstanding stock. As of March 31, 2005 and September 30, 2004, the Company had no borrowings outstanding under this line of credit. In addition to WBL Corporation’s guarantee of a portion of this line of credit, the Company is required to maintain stockholders’ equity of at least $40,000 and the facility must be equal as to priority with all other obligations, with certain limited exceptions.

In the event the Company defaults under its representations, warranties and covenants in the facility, including the covenants described above, NLG could require the Company to immediately repay all amounts outstanding under the facility and, if the Company were unable to make such payments, could seize the Company’s assets and property. In addition, if the Company defaults under its credit agreements with any other party, the Company will be considered in default under the agreement with NLG. As of March 31, 2005 and September 30, 2004, the Company was in compliance with these covenants.

A summary of the lines of credit follows:

	Amounts Available at				Amounts Outstanding at
	March 31, 2005		September 30, 2004		March 31, 2005		September 30, 2004
Line of credit (BC)	$	9,082	$	12,082	$	3,000	$	—
Line of credit (SPDB)		18,050		16,631		1,950		3,369
Line of credit (NLG)		15,000		15,000		—		—
	$	42,132	$	43,713	$	4,950	$	3,369

6. SEGMENT INFORMATION

Based on the evaluation of the Company’s internal financial information, management believes that the Company operates in one reportable segment which is primarily engaged in the engineering, design and manufacture of flexible circuit boards along with related component assemblies. The Company operates in two geographical areas: domestic (U.S.) and international (China). Net sales are presented based on the country in which the sales originate (i.e., where the legal entity is domiciled). The financial results of the Company’s geographic segments are presented on a basis consistent with the consolidated financial statements.

10

MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(In Thousands, Except Share Data)

(unaudited)

Financial information by geographic segment is as follows:

	Three Months Ended March 31,						Six Months Ended March 31,
	2005			2004			2005			2004
Net sales
United States	$	47,762		$	39,734		$	106,259		$	85,519
China		42,489			26,114			86,610			40,874
Eliminations		(12,859	)		(9,332	)		(31,065	)		(16,427	)
Total	$	77,392		$	56,516		$	161,804		$	109,966
Operating income
United States		5,340			4,248			16,584			6,688
China		6,731			4,185			9,333			5,132
Total	$	12,071		$	8,433		$	25,917		$	11,820
Depreciation and amortization
United States		625			614			1,286			1,229
China		1,991			913			3,812			1,709
Total	$	2,616		$	1,527		$	5,098		$	2,938

	March 31, 2005			September 30, 2004
Total assets
United States	$	165,337		$	161,797
China		116,445			69,766
Eliminations		(73,804	)		(41,565	)
Total	$	207,978		$	189,998
Long-lived assets
United States	$	16,411		$	17,879
China		54,332			45,950
Total	$	70,743		$	63,829

7. SUBSEQUENT EVENT

In April 2005, the Company finalized the transfer price audit with the Chinese Tax Authority for the calendar years 1999 through 2004. The net impact from the settlement was $400 accrued in the three months ended December 31, 2004.

11

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

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 operating expenses, sales and operations, anticipated cash needs, capital requirements and capital expenditures, expected tax rates, results of audits of us in China, needs for additional financing, use of working capital, the benefits of our China operations, anticipated growth strategies, ability to attract customers, sources of net sales, anticipated trends and challenges in our business and the markets in which we operate, the adequacy of our facilities, the impact of economic and industry conditions on our customers and our business, customer demand, our competitive position, critical accounting policies, Sarbanes-Oxley compliance 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 effectiveness in managing manufacturing processes and costs and expansion of our operations, the degree to which we are able to utilize available manufacturing capacity, our ability to successfully manage power shortages in China, the impact of competition and of technological advances, and the risks set forth below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Our Operating Results.” 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 circuit and value-added component assembly solutions to the electronics industry. We believe that we are one of a limited number of manufacturers that provides a seamless, integrated end-to-end flexible printed circuit solution for our customers, ranging from design and application engineering, prototyping and high-volume manufacturing to turnkey 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 and smart mobile devices, portable bar code scanners, personal digital assistants, power supplies and consumable medical sensors. We expect that the usage of flexible printed circuits and component assemblies will continue to increase in our target markets.

Comparison of the Three Months Ended March 31, 2005 and 2004

The following table sets forth the Statement of Operations data of the Company expressed as a percentage of net sales for the period indicated.

	Three Months Ended March 31,
	2005		2004
Net sales	100.0	%	100.0	%
Cost of sales	76.1		76.0
Gross profit	23.9		24.0
Operating expenses:
Sales and marketing	2.9		3.5
General and administrative	5.4		5.6
Total operating expenses	8.3		9.1
Operating income	15.6		14.9
Interest (income) / expense, net	(0.1	)	0.4
Other (income) / expense, net	(0.1	)	0.2
Income before provision for income taxes	15.8		14.3
Provision for income taxes	(5.7	)	(4.1	)
Net income	10.1	%	10.2	%

12

Net Sales

The increase of $20.9 million was primarily attributable to further growth in wireless telecommunications sector of $16.8 million, which accounted for approximately 83% of total net sales for the three months ended March 31, 2005 versus 85% for the comparable period in the prior year. The increase in wireless net sales is due to the added level of phone features, which utilize additional flex circuits per phone. Industrial customer net sales, our second largest sector, increased by $1.6 million or 32% over the comparable period in the prior year due to the growth of several new programs related to bar code scanners and industrial data storage devices. The personal digital assistant, network telecommunications and power transmission sectors all remained relatively unchanged from the comparable period in the prior year.

Cost of Sales and Gross Profit

As a percentage of net sales, cost of sales remained relatively unchanged at 76% for the three months ended March 31, 2005 and the comparable period in the prior year. Cost of sales increased to $58.9 million for the three months ended March 31, 2005 from $42.9 million in the comparable period in the prior year, an increase of 37%, primarily due to the increased revenue volumes.

As a percentage of net sales, gross profit remained constant at 24% for the three months ended March 31, 2005 and the comparable period in the prior year. Gross profit increased to $18.6 million for the three months ended March 31, 2005 from $13.6 million in the comparable period in the prior year, an increase of 36%, primarily due to the increased revenue volumes.

Sales and Marketing Expense

Sales representatives’ commissions and other sales related expense increased to $1.1 million for the three months ended March 31, 2005 from $1.0 million in the comparable period in the prior year, primarily due to higher revenue. As a percent of sales, commissions decreased from 2% for the three months ended March 31, 2004 to 1% for the three months ended March 31, 2005, primarily due to lower commission rates paid on high volume programs. Compensation and benefit expense increased to $1.2 million for the three months ended March 31, 2005 from $1.0 million in the comparable period in the prior year, an increase of 20%, primarily as the result of headcount additions to support the increased business volume and wage increases. As a percentage of net sales, compensation and benefit remained constant at 2% for the three months ended March 31, 2005 and 2004. We believe sales and marketing expense as a percentage of sales may be at the lower end of our sustainable range.

General and Administrative Expense

As a percentage of net sales, general and administrative expense remained relatively unchanged at 5%. The $1.0 million increase in general and administrative expense was primarily attributable to an increase in expenses experienced as a result of being a public company, including increases in directors and officers insurance and Sarbanes-Oxley expenses. These additional expenses were offset by a cessation of management fee charges by Wearnes, which also contributed to the change in general and administrative expense between the two periods. As stated above with the sales and marketing expenses, we believe general and administrative expense as a percentage of sales may be at the lower end of our sustainable range.

Interest Income /(Expense), Net

Net interest income increased to $103,000 for the three months ended March 31, 2005 from expense of $260,000 in the comparable period in the prior year. The decrease in net interest expense was primarily due to the interest expense incurred on the GE Capital loan attributable to the loan installments paid during the period from October 2003 through January 2004 and interest penalty of $181,000 resulting from the early repayment of the debt in February 2004.

Other Income/(Expense), Net including loss from equity method investee, net

Net other income / expense increased to income of $91,000 for the three months ended March 31, 2005 from expense of $99,000 for the comparable period in the prior year. The principal component of the change was the loss from our equity investment in Mind Wurx LLC, or Mind Wurx. The loss from the equity investment was zero, due to the full absorption of the investment’s basis in prior periods, and $86,000 for the three months ended March 31, 2005 and 2004, respectively.

13

Income Taxes

The effective tax rate for the three months ended March 31, 2005 was 35% versus 29% for the comparable period of the prior year. The higher effective tax rate was due primarily to the higher percentage of United States generated pre-tax income, which is taxed at a higher rate. The actual rate for the three months ended March 31, 2005 was incrementally increased by $670,000 due to the decrease in our deferred tax assets and liabilities from our revaluation of MFC1 deferred tax assets and liabilities required due to the extension of the tax holiday for our MFC1 facility from the Chinese government. This tax holiday allows us to operate MFC1 for three calendar years, 2005, 2006 and 2007, at a reduced income tax rate of 12%, and will have a net favorable impact on our future effective tax rate.

Comparison of the Six Months Ended March 31, 2005 and 2004

The following table sets forth the Statement of Operations data of the Company expressed as a percentage of net sales for the period indicated.

	Six Months Ended March 31,
	2005		2004
Net sales	100.0	%	100.0	%
Cost of sales	76.3		80.7
Gross profit	23.7		19.3
Operating expenses:
Sales and marketing	2.7		3.4
General and administrative	5.0		5.2
Total operating expenses	7.7		8.6
Operating income	16.0		10.7
Interest (income) / expense, net	(0.1	)	0.2
Other (income) / expense, net	0.0		0.3
Income before provision for income taxes	16.1		10.2
Provision for income taxes	(5.4	)	(3.0	)
Net income	10.7	%	7.2	%

Net Sales

The increase of $51.8 million was primarily attributable to further growth in wireless telecommunications sector of $42.5 million, which accounted for approximately 83% of total net sales for the six months ended March 31, 2005 versus 84% for the comparable period in the prior year. The increase in wireless net sales is due to the added level of phone features, which utilize additional flex circuits per phone. Industrial customer net sales, our second largest sector, increased by $4.3 million or 44% over the comparable period in the prior year due to the growth of several new programs related to bar code scanners and industrial data storage devices. The personal digital assistant, network telecommunications and power transmission sectors all remained relatively unchanged from the comparable period in the prior year.

Cost of Sales and Gross Profit

Cost of sales as a percentage of net sales for the six months ended March 31, 2005 was 76% versus 81% for the comparable period in the prior year. Increases in the material cost percentage of sales were partially offset by favorable declines in labor and overhead cost percentages, primarily attributable to the shifting of high volume production from the Anaheim facility to MFC2. The increase in material costs was due primarily to growth in sales volume and the value added assembly portion of our business, which carries a higher material cost of sales content, partially offset by improvements in production yields.

As a percentage of net sales, gross profit increased to 24% for the six months ended March 31, 2005 from 19% for the comparable period in the prior year. Gross profit increased to $38.4 million for the six months ended March 31, 2005 from $21.3 million in the comparable period in the prior year, an increase of 80%. The increase in gross profit was primarily due to the increased benefit derived from the lower offshore cost structure and fixed cost leveraging, as well as efficiency and

14

manufacturing yield improvements. Our gross profit for the six months ended March 31, 2005 included a $1.3 million accrual for additional value added tax, duty and penalties in China.

Sales and Marketing Expense

Sales representatives’ commissions and other sales related expense increased to $2.1 million for the six months ended March 31, 2005 from $2.0 million in the comparable period in the prior year, primarily due to higher revenue. As a percentage of sales, commissions decreased from 2% for the six months ended March 31, 2004 to 1% for the six months ended March 31, 2005, primarily due to lower commission rates paid on high volume programs. Compensation and benefit expense increased to $2.3 million for the six months ended March 31, 2005 from $1.8 million in the comparable period in the prior year, an increase of 28%, primarily as the result of headcount additions to support the increased business volume and wage increases. As a percentage of net sales, compensation and benefit expense decreased to 1% for the six months ended March 31, 2005 from 2% for the comparable period in the prior year due to the leveraging of fixed salary costs over increased sales. We believe sales and marketing expense as a percentage of sales may be at the lower end of our sustainable range.

General and Administrative Expense

As a percentage of net sales, general and administrative expense remained relatively unchanged at 5%. The $2.0 million increase in general and administrative expense was primarily attributable to an increase in expenses experienced as a result of being a public company, including increases in directors and officers insurance, audit and Sarbanes-Oxley expenses. Increased bonus expense, offset by a cessation of management fee charges by Wearnes, also contributed to the change in general and administrative expense between the two periods. As stated above with the sales and marketing expenses, we believe general and administrative expense as a percentage of sales may be at the lower end of our sustainable range.

Interest Income /(Expense), Net

Net interest income increased to $173,000 for the six months ended March 31, 2005 from expense of $378,000 in the comparable period in the prior year. The decrease in net interest expense was primarily due to the interest expense incurred on the GE Capital loan attributable to the loan installments paid during the period from October 2003 through January 2004 and interest penalty of $181,000 resulting from the early repayment of the debt in February 2004.

Other Income/(Expense), Net

Net other income / expense increased to income of $62,000 for the six months ended March 31, 2005 from expense of $259,000 for the comparable period in the prior year. The principal component of the change was the loss from our equity investment in Mind Wurx. The loss from the equity investment was $39,000 and $205,000 for the six months ended March 31, 2005 and 2004, respectively.

Income Taxes

The effective tax rate for the six months ended March 31, 2005 was 30% versus 29% for the comparable period of the prior year. The higher effective tax rate is primarily to the higher percentage of United States generated pre-tax income, which is taxed at a higher rate. The actual rate for the six months ended March 31, 2005 was incrementally increased by $670,000 due to the decrease in our deferred tax assets and liabilities from our revaluation of MFC1 deferred tax assets and liabilities required due an extension of the tax holiday for our MFC1 facility from the Chinese government. This tax holiday allows us to operate MFC1 for three calendar years, 2005, 2006 and 2007, at a reduced income tax rate of 12%, and will have a net favorable impact on our future effective tax rate. The actual rate for the six months ended March 31, 2005 was also incrementally increased by $400,000 due to the net impact of the accrual related to the Chinese Tax Authority’s transfer price audit for the calendar years 1999 through 2004.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash provided by operations, equity offerings and borrowings under our various credit facilities. Our principal uses of cash have been to finance working capital, facility expansions, capital expenditures and debt service requirements. We anticipate these uses will continue to be our principal uses of cash in the future. Cash and equivalents were $26.3 million at March 31, 2005 and $16.6 million at September 30, 2004.

During the six months ended March 31, 2005, net income of $17.4 million, adjusted for depreciation, deferred taxes, loss on equipment disposal, stock-based compensation expense and provision for doubtful accounts, generated $23.6 million

15

of operating cash. This amount was decreased by $9.4 million required for working capital, resulting in cash provided by operating activities of $14.2 million for the six months ended March 31, 2005 compared to cash used in operating activities of $9.1 million for the six months ended March 31, 2004. The increase in cash flow from operations was principally a result of an increase in net income in 2005 and positive changes in working capital.

It is our policy to carefully monitor the state of our business, cash requirements and capital structure. We believe that funds generated from our operations and available from our borrowing facilities will be sufficient to fund current business operations as well as anticipated growth over at least the next twelve months; however, there can be no assurance that any growth will occur and unexpected events may result in our need to raise additional capital.

Changes in the principal components of working capital for the six months ended March 31, 2005 were as follows:

Our net accounts receivable increased 16% to $51.5 million at March 31, 2005 from $44.4 million at September 30, 2004. The increase in outstanding accounts receivable was attributable to higher monthly sales during the six months ended March 31, 2005, as compared to the year ended September 30, 2004, as a result of a significant increase in business volumes. Our net inventory balances decreased to $37.1 million at March 31, 2005 from $39.2 million at September 30, 2004, a decrease of 5%. The principal reason for this decrease is improved inventory management. Our accounts payable remained stable at $26.1 million at March 31, 2005 and September 30, 2004.

Our principal investing and financing activities for the six months ended March 31, 2005 were as follows:

Net cash used in investing activities was $7.3 million for the six months ended March 31, 2005 compared to net cash used of $11.0 million for the six months ended March 31, 2004. The reduction of cash used in investing activities in 2005 was principally the result of the proceeds received on the sale of short term investments. Capital expenditures included $10.9 million of capital equipment and other assets, including $410,000 of deposits for fixed asset purchases, primarily for the purchase of machinery and equipment for our second China facility. Cash provided from the sale of marketable securities of $4.1 million during the six months ended March 31, 2005 were used for capital expenditures for our second China facility. Depreciation expense was $5.1 million for the six months ended March 31, 2005. As of March 31, 2005 and September 30, 2004, we had outstanding purchase commitments related to MFC2 capital projects which totaled $5.1 million and $18.0 million, respectively.

Net cash provided from financing activities was $2.8 million for the six months ended March 31, 2005 compared to cash provided of $24.1 million for the six months ended March 31, 2004. The reduction in cash used in financing activities was a result of reduced proceeds from borrowings under lines of credit and notes payable. Activity in 2005 consisted of net borrowings on our lines of credit and proceeds from exercise of stock options. Our loans payable and borrowings outstanding against credit facilities increased to $5.0 million as of March 31, 2005 from $3.4 million at September 30, 2004. The increase in outstanding loan amounts was due to additional amounts drawn to expand our China operations and fund working capital growth.

Critical Accounting Policies

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, revenues and expenses during the periods reported and related disclosures. Actual results could differ from those estimates. Information with respect to our critical accounting policies which we believe has the most significant effect on our reported results and require subjective or complex judgments of management is contained on pages 16-17 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the period ended September 30, 2004. Management believes that at March 31, 2005, there has been no material change to this information.

16

FACTORS THAT MAY AFFECT OUR OPERATING RESULTS

Risks Related to Our Business

We depend on Motorola and subcontractors of Motorola for a significant portion of our net sales and if we lose these relationships, our net sales would decline.

For the past several years, a substantial portion of our net sales have been derived from products that have been incorporated into products that are manufactured by or on behalf of Motorola, Inc. For the three months ended March 31, 2005, 79% of our net sales were to Motorola and 52 of its subcontractors. Several subcontractors of Motorola are also significant customers of ours. For the three months ended March 31, 2005, sales of our products to Hon Hai Group and Wintek Corporation accounted for 10% and 13% of our net sales, respectively. For the year ended September 30, 2004, sales of our products to Hosiden F.D. Corporation and its affiliates and Optrex Corporation Japan and its affiliates accounted for 11% and 10% of our net sales, respectively.

Although generally we assist Motorola in the design of products and Motorola directs subcontractors to purchase products from us, one or more subcontractors could look to another source for the components to be incorporated into the products they supply to Motorola. In addition, if Motorola were to reduce its orders to any of these customers or if Motorola were to choose another flexible printed circuit assembly manufacturer to supply any portion of its products, it could reduce the orders that these customers place with us, which could substantially harm our business, financial condition and results of operations.

We must obtain orders from new and existing customers on an ongoing basis to increase our net sales and grow our business. We are continuing our efforts to reduce dependence on a limited number of customers; however, net sales attributable to Motorola and its subcontractors are expected to continue to represent a substantial portion of our net sales for the foreseeable future. The loss of Motorola and its subcontractors, a significant reduction in sales we make to them, a reduction in the pricing of our products sold to them or any problem collecting accounts receivable from them would reduce our net income.

We are heavily dependent upon the wireless telecommunications industry, and any downturn in the industry may reduce our net sales.

For the three months ended March 31, 2005, 83% of our net sales were derived from sales to companies that provide products or services to the wireless telecommunications industry. In general, the wireless telecommunications industry is subject to economic cycles and has experienced in the past, and is likely to experience in the future, periods of slowdown. Intense competition, relatively short product life cycles and significant fluctuations in product demand characterize the industry as a whole. The wireless telecommunications industry also generally is subject to rapid technological change and product obsolescence. Fluctuations in demand for our products as a result of periods of slowdown in the telecommunications market or discontinuation of products or modifications developed in connection with next generation products could reduce our net sales.

Our customers have and may continue to cancel their orders, change production quantities, delay production or qualify additional vendors, any of which could reduce our net sales.

Substantially all of our sales are made on a purchase order basis, and we are not always able to predict with certainty the timing or magnitude of these orders. We cannot guarantee that we will continue to receive any order from our customers, and our sales will be harmed if we are unable to obtain a sufficient number of orders from customers in each quarter. In addition, because our customers purchase from us on a purchase order basis, they may cancel, change or delay product purchase commitments with little or no advance notice to us. Also, we believe customers may be increasing the number of vendors upon which they rely for manufacturing. Qualification of additional vendors for an application for which we are also qualified may cause our forecast of sales to be higher than actual sales. As a result of the foregoing factors, we are not able always to forecast with certainty the sales that we will make in a given period and sometimes we may increase our production capacity, working capital and overhead in expectation of orders that may never be placed, or, if placed, may be delayed, reduced or canceled. The following factors, among others, affect our ability to forecast accurately our sales and production capacity:

• changes in the specific products or quantities our customers order;

• variability in our manufacturing yields;

17

• long lead times and advance financial commitments for our plant and equipment expenditures;

• long lead times and advance financial commitments for components required to complete anticipated customer orders; and

• price reductions due to competitive pressure.

Delayed, reduced or canceled purchase orders also may result in our inability to recover costs that we incur in anticipation of those orders, such as costs associated with purchased raw materials, write-offs of obsolete inventory and the underutilization of our manufacturing capacity if we decline other potential orders because we expect to use our capacity to produce orders that are later delayed, reduced or canceled.

We will have difficulty selling our products if customers do not design our flexible printed circuit products into their product offerings or if our customers’ product offerings are not commercially successful.

We sell our flexible printed circuit products directly or indirectly to original equipment manufacturers, or OEMs, that include our products and component assemblies in their product offerings. As a result, we rely on OEMs to select our products to be designed into their product offerings. We must qualify our products with our customers, which involves demonstrating to our customers that our products can be manufactured within specified tolerances. This process can be time-consuming, complex, costly and difficult. If an OEM selects one of our competitors to provide a product instead of us, it becomes significantly more difficult for us to sell our products to that OEM because changing component providers after the initial production runs begin involves significant cost, time, effort and risk for the OEM. Our customers typically are not obligated to purchase products from us and can stop using our products at any time. Even if an OEM designs one of our products into its product offering, we have no assurance that the product will be commercially successful, that we will receive any order from that manufacturer or that we will not be undercut by a competitor’s pricing.

We cannot be certain that our products will continue to be selected for design into our customers’ products or that our customers will not also qualify an additional vendor for its products. If we are unable to obtain additional customer qualifications, if we cannot qualify our products for high-volume production quantities or if our customers increase their reliance on second sources for their production, our net sales may decrease.

WBL Corporation controls 63% of our outstanding common stock and is able to exert influence over us and our major corporate decisions.

WBL Corporation beneficially owns 63% of our outstanding common stock. As a result of WBL Corporation’s ownership interest and its influence over the composition of our board of directors, WBL Corporation has influence over our management, operations and potential significant corporate actions. For example, so long as WBL Corporation continues to control more than a majority of our outstanding common stock, it will have the ability to control who is elected to our board of directors each year; although, through our Stockholders Agreement with WBL Corporation, we have agreed that WBL Corporation may nominate up to one-third of the seats on our board of directors at any time.

This concentration of ownership may also discourage, delay or prevent a change of control of our company, which could deprive our other stockholders of an opportunity to receive a premium for their stock as part of a sale of our company, could harm the market price of our common stock and could impede the growth of our company. To the extent that WBL Corporation beneficially owns a significant portion of our outstanding common stock, even if less than a majority, it will continue to have significant influence over all matters submitted to our stockholders. WBL Corporation is not prohibited from selling a controlling interest in us to a third party, including a participant in our industry.

WBL Corporation and its designees on our board of directors may have interests that conflict with our interests.

WBL Corporation and its designees on our board of directors may have interests that conflict with, or are different from, the interests of our other stockholders. For example, MFS Technology Limited, or MFS, a subsidiary of WBL Corporation that is located in Singapore, competes with us in many markets, including telecommunications. Although WBL Corporation has advised us that the individuals who manage WBL’s investments in MFS are not the same as the individuals who manage WBL’s investments in us and are subject to confidentiality obligations, there is a risk that conflicts of interest may arise because of WBL Corporation’s substantial ownership of us and MFS. These conflicts of interest could include potential competitive business activities, corporate opportunities, indemnity arrangements, registration rights, sales or distributions by WBL Corporation of our common stock and the exercise by WBL Corporation of its ability to influence our

18

management and affairs. For example, WBL Corporation has issued bonds under an indenture that, among other things, contains restrictive covenants that prohibit WBL Corporation and its principal subsidiaries from incurring debt under some circumstances. Although we are not bound by the terms of the indenture, if we entered into an obligation that was prohibited by the indenture, it could result in WBL Corporation being in default under the indenture because the indenture prohibits principal subsidiaries of WBL Corporation, as defined in the indenture, from granting a security interest in or otherwise encumbering their assets. If these conflicts of interest are not resolved in a manner favorable to our stockholders, our stockholders’ interests may be substantially harmed.

As a stockholder, WBL Corporation does not have the ability to prevent us from making operational decisions that do not require stockholder approval; however, WBL Corporation does have the ability to nominate one-third of our board of directors and therefore can influence decisions that require board approval.

In general, our certificate of incorporation does not contain any provision designed to facilitate resolution of actual or potential conflicts of interest or to ensure that potential business opportunities that may become available to both WBL Corporation and us will be reserved for or made available to us.

WBL Corporation is currently unable to vote its shares on specified matters that require stockholder approval without obtaining its own stockholders’ and regulatory approval and it is possible that WBL Corporation’s stockholders or the relevant regulators may not approve the proposed corporate action.

We have been advised by WBL Corporation that the individuals representing WBL Corporation who are on our board have authority to vote our shares of common stock; however, prior to voting our shares of common stock on any significant matter or disposing of our shares of common stock, the approval of WBL Corporation’s board of directors must be obtained. In addition, WBL Corporation is listed on the Singapore Exchange. Under the rules of the Singapore Exchange, to the extent that we constitute a principal subsidiary of WBL Corporation, as defined by the rules of the Singapore Exchange, at any time that we submit a matter for the approval of our stockholders, WBL Corporation also may be required to obtain the approval of its own stockholders for such action before it can vote its shares with respect to our proposal or dispose of our shares of common stock. For the fiscal year ended September 30, 2004, we were a principal subsidiary of WBL Corporation as defined by the rules of the Singapore Exchange, which state that we are deemed a principal subsidiary of WBL Corporation for any given fiscal year that our audited consolidated pre-tax profits consolidated into WBL Corporation accounts for more than 20% of the consolidated pre-tax profits of WBL Corporation during our immediately prior fiscal year.

Examples of corporate action we may seek to take for which we would need to obtain our stockholder approval include:

• an amendment of our certificate of incorporation;

• a sale of all or substantially all of our assets;

• a merger or reorganization transaction; and

• an issuance of shares of our common stock in an offering other than a public offering at a price of less than fair market value if the number of shares being sold exceed 20% of our then outstanding common stock.

To obtain stockholder approval, WBL Corporation must prepare a circular describing the proposal, obtain approval from the Singapore Exchange and send the circular to its stockholders, which may take several weeks or longer. In addition, WBL Corporation is required under its corporate rules to give its stockholders notice of the meeting ranging from 14 to 28 days. Consequently, if we need to obtain the approval of WBL Corporation at a time in which we qualify as a principal subsidiary (including this year), the process of seeking WBL Corporation’s stockholder approval may delay our proposed action and it is possible that WBL Corporation’s stockholders may not approve our proposed corporate action. It is also possible that we might not be able to establish a quorum at our stockholder meeting if WBL Corporation was unable to vote at the meeting as a result of the Singapore Exchange rules.

The rules of the Singapore Exchange that govern WBL Corporation are subject to revision from time to time, and policy considerations may affect rule interpretation and application. It is possible that any change to or interpretation of existing or future rules may be more restrictive and adverse to us than the existing rules and interpretations.

19

If we are unable to retain our personnel necessary to operate our business, our ability to develop and market our products successfully could be harmed.

We are heavily dependent on our current executive officers and management. The loss of any key employee or the inability to attract or retain qualified personnel, including engineers and sales and marketing personnel, could delay the development and introduction of, and harm our ability to sell, our products and damage the market’s perception of us. We believe that our future success is highly dependent on the contributions of Philip A. Harding, our Chief Executive Officer and Chairman of the board of directors, and Reza Meshgin, our President and Chief Operating Officer. We do not have employment contracts with these or any other key personnel, and their knowledge of our business and industry would be extremely difficult to replace. In addition, an increase in the number of manufacturers in Suzhou, China and the surrounding areas could increase the competition for qualified employees and, accordingly, the costs of retaining such employees, in China. Our future success may also depend on our ability to attract and retain additional qualified management, engineering and sales and marketing personnel.

We are currently precluded from granting any security interest in or otherwise encumbering any of our assets, which could harm our ability to borrow funds.

WBL Corporation completed a corporate bond issuance in June 2000 in which WBL Corporation agreed that it and each of its principal subsidiaries, as defined in the indenture for the bonds, will not create or allow to continue to exist any security interest in or other encumbrance on any of their assets or revenue other than purchase money indebtedness. As of the end of fiscal year 2004, we were a principal subsidiary of WBL Corporation as defined in the bond indenture. At no time during past years in which we were a principal subsidiary, as defined in the bond indenture, did we create or allow to exist any indebtedness so as to cause a default under the indenture. The bonds issued by WBL Corporation mature in June 2005. WBL Corporation has advised us that it intends to refinance or repay the bonds in 2005 and to eliminate the restrictive covenant as it applies to us; however, there is no guarantee that WBL Corporation, if it refinances the bonds, will be successful in eliminating the covenant as it applies to us and it is possible that it may be required to agree to additional restrictive covenants that are more onerous.

Rapidly changing standards and competing technologies could make our products obsolete, which would cause our net sales to decrease.

The development and evolution of markets for our flexible printed circuit products depends on industry standards. Our products are designed to conform to current specific industry standards, such as operating temperature range. Competing standards may emerge that are preferred by our customers. We will need to make capital expenditures to support technological advances and to develop and manufacture new products and product features that our customers demand.

We also expect future flexible printed circuits to require higher performance specifications, including, for example, higher density circuitry than we are producing currently, and to incorporate new materials and components which may impact manufacturing yields and efficiencies. We may incur higher manufacturing costs if manufacturing processes or standards change, and we may need to replace, modify or design, build and install equipment, all of which would require additional capital expenditures. If our customers were to switch to alternative technologies or adopt new or competing industry standards with which our products are not compatible or fail to adopt standards with which our products are compatible, our existing products would become less desirable to our customers and our net sales may decrease.

Problems with manufacturing yields could result in higher operating costs and could impair our ability to meet customer demand for our products.

If we cannot achieve expected yields in the manufacture of our products, we may incur higher per unit costs, lower profits and reduced product availability. Low yields may result from, among other things, design errors or manufacturing failures in new or existing products. Any reduction in our ability to timely deliver products to customers could affect adversely our customer relationships and make it more difficult to sustain and grow our business.

We may not be able to compete effectively, which will cause our net sales and market share to decline.

On a global level, we compete primarily with large flexible printed circuit board manufacturers located in Taiwan, China or Japan and, to a lesser degree, with smaller manufacturers of flexible printed circuits and component assemblies located in Europe and North America. We also compete with MFS, a subsidiary of WBL Corporation located in Singapore. If we do not compete successfully, our net sales and market share may decline. We believe that one of our principal competitive advantages is our ability to interact closely with our customers throughout the design and engineering process. If we are not

20

successful in maintaining or establishing close relationships with customers in markets in which we compete, we may not be able to grow our market share or net sales. To the extent that we are not able to provide regular interaction between our engineers and our customers and potential customers, our business may be harmed. In some cases, our competitors may offer more favorable pricing to potential or existing customers. In addition, we believe more companies are now producing flexible printed circuits boards than before. Such competition could increase pressure on us to lower our prices, which, in turn, would harm our margins and operating results.

In addition, many of our customers are larger, established electronic manufacturing services, or EMS, providers. Certain of these EMS providers have developed their own flexible printed circuit manufacturing capabilities, and in the future may cease ordering products from us and may compete with us on future OEM programs. Furthermore, many companies in our target customer-base are moving the design and manufacturing of their products to original design manufacturers, or ODMs, in Asia. If we are unable to compete with these ODMs, we may be unable to sustain and grow our business.

Our products are subject to pricing pressure from our customers and market pressure from our competitors, either of which could harm our gross profit.

We deal with a limited number of large customers who are able to exert significant pricing pressure on us. We enter into price reduction negotiations with these customers on an annual, semi-annual or quarterly basis. We may lose our market share if we do not participate in such negotiations; furthermore, our participation in price reduction activities may result in lower margins for our company. Our selling prices are also affected by changes in overall demand for our products, changes in the specific products our customers buy, pricing of competitors’ products and our products’ life cycles. A typical life cycle for one of our products begins with higher prices when the product is introduced and decreasing prices as it matures. To offset price decreases during a product’s life cycle, we rely primarily on higher sales volume and improving our manufacturing yield and productivity to reduce a product’s cost. If we cannot reduce our manufacturing costs as prices decline during a product’s life cycle, our cost of sales may increase, which would result in decreased gross profit or increased gross loss in a period in which we do not have gross profit.

Significant product failures could harm our reputation and our business.

Continued improvement in manufacturing capabilities, quality control, material costs and successful product testing capabilities are critical to our growth. Our efforts to monitor, develop, modify and implement stringent testing and manufacturing processes for our products may not be sufficient. If any flaw in the design, production, assembly or testing of our flexible printed circuit products was to occur, we may experience a rate of failure in our products that would result in significant delays in product shipments, cancellation of orders, substantial repair or replacement costs and potential damage to our reputation.

Any failure to maintain ongoing sales through our independent sales representatives could harm our business.

To date, we have sold our products through our direct sales force and a network of non-exclusive independent sales representatives. We rely on these sales representatives to provide customer contacts and market our products directly to our global customer base. Our sales representatives are not obligated to continue selling our products, and they may terminate their arrangements with us at any time with limited notice. It is possible that we may not be able to maintain or expand these relationships successfully or secure agreements with additional sales representatives on commercially reasonable terms, or at all. Any failure to develop and maintain our relationships with these sales representatives and any failure of our sales representatives to effectively market our products could harm our business, financial condition and results of operations.

We must continue to be able to procure raw materials and components on commercially reasonable terms to manufacture our products profitably.

At times, there are worldwide shortages of the raw materials and components used in the fabrication of flexible printed circuits. Our customers require that we use raw materials and components that have been pre-qualified by them, which limits further the supply of raw materials and components available to us and frequently results in our need to seek raw materials and components from a limited number of suppliers. We generally do not maintain a large surplus stock of raw materials or components for our products because the specific assemblies are uniquely applicable to the products we produce for our customers; therefore, we rely on short-term supply contracts with third-party suppliers to provide these raw materials and components in a timely fashion and on commercially reasonable terms. Our operations would be negatively impacted if we are unable to receive components on a timely basis.

Given the rapid increase in demand for flexible printed circuits, a worldwide shortage for these materials may exist from time to time. In the past, a similar shortage required that we qualify an additional supplier in order to maintain the delivery of our largest production run. Historically, we have experienced component delays of one to ten days, which we have managed by expediting our production schedules, resulting in insignificant delays to our customers. We may not be

21

successful in the future in managing any shortage of raw materials or components that we may experience. We purchased greater than 99% of all materials used to make flexible printed circuits from two sources, E.I. Dupont de Nemours & Co. and Rogers Corporation for the three months ended March 31, 2005.

We face business, political, regulatory, operational, financial and economic risks because a significant portion of our operations and sales are to customers outside of the United States.

Our primary manufacturing facilities are located in China. Although our headquarters are located in California, we expect that our operations in China will continue to assume a larger and more important role in our business. We are subject to risks inherent in international business, many of which are beyond our control, including:

• difficulties in obtaining domestic and foreign export, import and other governmental approvals, permits and licenses and compliance with foreign laws, including employment laws;

• difficulties in staffing and managing foreign operations, including cultural differences in the conduct of business, labor and other workforce requirements and inadequate local infrastructure;

• trade restrictions or higher tariffs;

• transportation delays and difficulties of managing international distribution channels;

• longer payment cycles for, and greater difficulty collecting, accounts receivable;

• foreign currency exchange rate fluctuations that render our prices uncompetitive;

• unexpected changes in regulatory requirements, royalties and withholding taxes that restrict the repatriation of earnings and effects on our effective income tax rate due to profits generated or lost in foreign countries;

• political and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions;

• increases in the cost of doing business in China, including increases due to changes in environmental regulations, increased competition for employees and new or increased governmental fees or assessments;

• disruptions or shortages in the supply of electricity or other utilities; and

• public health emergencies such as SARS and avian bird flu.

Any of these factors could harm our future international sales and operations significantly.

Our manufacturing capacity may be interrupted, limited or delayed if we cannot maintain sufficient sources of electricity in China, or if there is a natural disaster or other catastrophic event in China.

The flexible printed circuit fabrication process requires a stable source of electricity. As our production capabilities increase in China and our business grows, our requirements for a stable source of electricity in China will grow substantially. We have experienced a lack of sufficient electricity supply and expect to continue to experience insufficient power supplies in the foreseeable future. We cannot be assured that our back-up generator(s) will produce sufficient electricity supply in the event of a disruption in power. Power interruptions, electricity shortages or government intervention, particularly in the form of rationing, are factors that could restrict our access to electricity in Suzhou, China, the location of our Chinese manufacturing facilities. Any such shortages could result in delays in our shipments to our customers and, potentially, the loss of customer orders.

Our two primary manufacturing facilities are both located in Suzhou, China. Natural disasters or other catastrophic events, including wildfires and other fires, earthquakes, terrorist attacks and wars, could disrupt our manufacturing ability, which could have a significant negative impact on our operations and financial results.

22

China’s legal system embodies uncertainties that could harm our business operations.

Since 1979, many new laws and regulations covering general economic matters have been promulgated in China. Despite the development of the legal system, China’s system of laws is not yet complete. Even where adequate law exists in China, enforcement of contracts based on existing law may be uncertain and sporadic, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. The relative inexperience of China’s judiciary in many cases creates additional uncertainty as to the outcome of any litigation. In addition, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes.

Our activities in China will be subject to administrative review and approval by various national and local agencies of China’s government. Given the changes occurring in China’s legal and regulatory structure, we may not be able to secure the requisite governmental approval for our activities. Failure to obtain the requisite governmental approval for any of our activities could impede our ability to operate our business or increase our expenses.

We may not address successfully problems encountered in connection with any future acquisition.

We expect to continue to consider opportunities to acquire or make investments in other technologies, products and businesses that could enhance our capabilities, complement our current products or expand the breadth of our markets or customer base. We have limited experience in acquiring other businesses and technologies. Potential and completed acquisitions and strategic investments involve numerous risks, including:

• problems assimilating the purchased technologies, products or business operations, including the timely integration of financial reporting systems;

• problems maintaining uniform standards, procedures, controls and policies;

• unanticipated costs associated with the acquisition;

• diversion of management’s attention from our core business;

• adverse effects on existing business relationships with suppliers and customers;

• risks associated with entering new markets in which we have no or limited prior experience;

• potential loss of key employees of acquired businesses;

• the need to hire additional employees to effectively operate the acquired businesses; and

• increased legal and accounting costs as a result of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act.

If we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations, our business may be disrupted and our operating results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our stockholders would be diluted.

We may have difficulty managing any growth that we might experience.

If we continue to experience growth in our operations, our operational and financial systems, procedures and controls may need to be expanded, which will distract our management team from our business plan and involve increased expenses. Our success will depend substantially on the ability of our management team to manage any growth effectively. These challenges may include:

• maintaining our cost structure at an appropriate level based on the net sales we generate;

• managing multiple, concurrent manufacturing expansion projects;

• implementing and improving our operational and financial systems, procedures and controls; and

• managing operations in multiple locations and multiple time zones.

23

In addition, we incur significant legal, accounting, insurance and other expenses as a result of being a public company. The Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC and Nasdaq, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and, from time to time, we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We continue to evaluate and monitor developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

Our business is capital intensive and the failure to obtain capital could require that we curtail capital expenditures.

To remain competitive, we must continue to make significant investments in capital equipment, facilities and technological improvements. We expect that substantial capital will be required to expand our manufacturing capacity and fund working capital for anticipated growth. We may need to raise additional funds through further debt or equity financings. We may not be able to raise additional capital on reasonable terms, or at all, and it is possible that WBL Corporation may not approve of any financing we may seek to complete, which could affect whether we are able to complete such a transaction. In addition, the terms of the WBL Corporation bond issue, which prohibits principal subsidiaries of WBL Corporation from granting any security interest with respect to any of their assets, could raise a conflict of interest between us and WBL Corporation if we needed to raise funds in a financing that involved a pledge of our assets. It is possible that, based upon this conflict, our board of directors could decide against such a financing. If we cannot raise the required capital when needed, we may not be able to satisfy the demands of existing and prospective customers and may lose net sales and market share.

The following factors could affect our ability to obtain additional financing on favorable terms, or at all:

• our results of operations;

• general economic conditions and conditions in the electronics industry;

• the perception of our business in the capital markets;

• our ratio of debt to equity;

• our financial condition;

• our business prospects;

• the international aspects of our business, including the foreign location of a majority of our physical assets and the fact that a majority of our customers are located overseas; and

• interest rates.

If we are unable to obtain sufficient capital in the future, we may have to curtail our capital expenditures. Any curtailment of our capital expenditures could result in a reduction in net sales, reduced quality of our products, increased manufacturing costs for our products, harm to our reputation, reduced manufacturing efficiencies or other harm to our business.

We are subject to the risk of increased income and other taxes in China.

We currently enjoy tax holidays and other tax incentives for our operations in China. The tax holiday for our first manufacturing facility in China, MFC1, at the reduced rate of income tax equal to 12% will expire at December 31, 2007. For the fiscal years ended September 30, 2004, and 2003, we realized tax savings of $2,750,000 and $258,000, respectively, for our operations in China related to MFC1.

We also have obtained a tax holiday for our second manufacturing facility in China, MFC2, that allows for tax-free operation for the first two years (beginning calendar year ending December 31, 2004) followed by three years of operation at a reduced rate of income tax equal to 12%. However, this tax holiday may be challenged, modified or even eliminated by taxing authorities or changes in law. We cannot determine with certainty the amount of tax savings we will realize, if any, as a result of this tax holiday.

24

In February 2004, China’s deputy finance minister announced that the Chinese government plans to unify the tax code for domestic and foreign companies by as early as 2006, thereby eliminating the current tax holidays. The new rate is expected to be between 24% and 26% and is expected to treat domestic and foreign entities equally. The exact timing and nature of the changes to China’s tax code are unknown at this time. Without the benefit of the tax holiday for our China operations, our net income in prior periods would have been reduced and net income in future periods will be reduced.

We are also currently in the process of a review in China of our import and export of raw and component materials at MFC1. We have been advised by the relevant custom authorities that upon completion of this review, we may be required to pay value added tax and duty, plus penalties, due to shortages in, and/or excess stock of, these raw and component materials. We estimate that the net impact of the value added tax, duty and penalties as a result of this review will be $1,300,000, which was included in our cost of sales for the three months ended December 31, 2004; however, this estimate may not be correct and we may be required to pay more, or less, as a result of such review.

Our bank facilities contain restrictive covenants that, if not satisfied or waived, could impact our ability to borrow money under these facilities and could result in acceleration of our debt obligations under these facilities that may be outstanding from time to time.

Our failure to comply with restrictive covenants in our bank facilities could result in an event of default which, if not satisfied or waived, could preclude us from borrowing money under one or more of these facilities or may result in us being required to repay any borrowings we may have under our facilities from time to time. If we were unable to borrow under these facilities to finance our operations or we were unable to refinance borrowings under our facilities that may come due, our financial condition and results of operations could be harmed.

If we fail to secure or protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position, reduce our revenue or increase our costs.

We primarily rely on trade secrets relating to our manufacturing processes to protect our proprietary rights. Our efforts to protect our intellectual property may not be effective and may be challenged by third parties. In addition, other parties may independently develop similar or competing technologies. We compete in industries with rapid development and technological innovation. If we fail to protect our proprietary rights adequately, our competitors could offer similar products using processes or technologies developed by us and thereby potentially harm our competitive position and our financial condition.

We may be sued by third parties for alleged infringement of their proprietary rights.

From time to time, we have received, and expect to continue to receive, notices of claims of infringement, misappropriation or misuse of other parties’ proprietary rights. Some of these claims may lead to litigation. Any intellectual property lawsuit, whether or not determined in our favor or settled, could be costly, could harm our reputation and could divert our management from normal business operations. Adverse determinations in litigation could subject us to significant liability and could result in the loss of our proprietary rights. A successful lawsuit against us could also force us to cease selling or redesign products that incorporate the infringed intellectual property. In addition, we could be required to seek a license from the holder of the intellectual property to use the infringed technology, and it is possible that we may not be able to obtain a license on reasonable terms, or at all. If we fail to develop a non-infringing technology on a timely basis or to license the infringed technology on acceptable terms, our business, financial condition and results of operations could be harmed.

Complying with environmental laws and regulations may increase our costs and reduce our profitability.

We are subject to a variety of environmental laws and regulations relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used in the manufacture of flexible printed circuits and component assemblies. A significant part of our manufacturing operations is located in China, where we are subject to constantly evolving environmental regulation. The costs of complying with any change in such regulations and the costs of remedying potential violations or resolving enforcement actions that might be initiated by governmental entities in China could be substantial.

Environmental laws require us to maintain and comply with a number of permits, authorizations and approvals and to maintain and update training programs and safety data for materials used in our manufacturing processes. We reserved

25

$122,000 and $124,000 of restricted cash as of September 30, 2004 and March 31, 2005, at the direction of the County of Orange, California, to finance estimated environmental clean-up costs in the event that we vacate our Anaheim facilities.

In the event of a violation, we may be required to halt one or more segments of our operations until such violation is cured. Although we attempt to operate in compliance with all applicable environmental laws and regulations, we may not succeed in this effort at all times. The costs of remedying violations or resolving enforcement actions that might be initiated by governmental authorities could be substantial. Any remediation of environmental contamination would involve substantial expense that could harm our results of operations. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our operations may be subject or the manner in which existing or future laws will be administered or interpreted. Future regulations may be applied to materials, products or activities that have not been subject to regulation previously. The costs of complying with new or more stringent regulations could be significant.

Risks Related to the Market for our Common Stock

Our stock price may be volatile, and you may not be able to resell our shares at a profit or at all.

The trading price of our common stock could fluctuate due to the factors discussed in this report and elsewhere in our SEC filings. The trading market for our common stock also may be influenced by the research and reports that industry or securities analysts publish about us or our industry. If one or more of the analysts who cover us were to publish an unfavorable research report or to downgrade our stock, our stock price likely would decline. If one or more of these analysts were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

In addition, the stock market in general, and Nasdaq and technology companies in particular, have experienced extreme price and volume fluctuations. These trading prices and valuations may not be sustainable. These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

In the event we are unable to remedy any deficiency we identify in our system of internal controls over financial reporting, or if our internal controls are not effective, our business and our stock price could suffer.

In preparation for the annual report of management regarding our evaluation of our internal controls that is required to be included in our annual report for the year ended September 30, 2005 by Section 404 of the Sarbanes-Oxley Act, or Section 404, we have begun a project work plan to assess the adequacy of our internal controls, remediate any deficiencies that we identify, validate that controls are functioning as documented and implement a continuous reporting process for internal controls. During the three months ended March 31, 2005, we discovered deficiencies relating to our information technology department and systems that require us to improve our procedures, processes and systems in order to ensure that our internal controls are adequate and effective and that we are in compliance with the requirements of Section 404. We have a timeline and schedule of activities that we believe are appropriate to comply with the requirements of Section 404; however, these requirements will be effective for the first time for our current fiscal year and neither we nor our auditors have previously performed such an evaluation on our business.

If any found deficiency is not adequately addressed, or if we are unable to complete all of our testing and any remediation in time for compliance with the requirements of Section 404 and the SEC rules thereunder, we would be unable to conclude that our internal controls over financial reporting are designed and operating effectively, which could adversely affect our investor confidence in our internal controls over financial reporting. If we do not complete our testing with sufficient time for independent accountants to complete their audit of internal controls, we may not be compliant with all of the requirements under Section 404 since we may not receive an Independent Registered Public Accounting Firms’ report, and our business and stock price may be adversely affected.

Fluctuations in our operating results on a quarterly and annual basis could cause the market price of our common stock to decline.

Our operating results fluctuate from quarter to quarter as a result of changes in demand for our products, our effectiveness in managing manufacturing processes and costs and the degree to which we are able to utilize our available manufacturing capacity. Historically, we have experienced a strong first fiscal quarter, followed by reduced net sales in the second fiscal quarter, as a result of partial seasonality of our major customers and the markets that we serve. We anticipate

26

that this seasonal impact on our net sales is likely to continue. As a result, our net sales and operating results have fluctuated significantly from period-to-period in the past and are likely to do so in the future. These fluctuations could cause the market price of our common stock to decline. You should not rely on period-to-period comparisons of our operating results as an indication of our future performance. In future periods, our net sales and results of operations may be below the expectations of analysts and investors, which could cause the market price of our common stock to decline.

Our expense levels in the future will be based, in large part, on our expectations regarding net sales. Many of our expenses are fixed in the short term or are incurred in advance of anticipated sales. We may not be able to decrease our expenses in a timely manner to offset any shortfall of sales.

Future sales of our common stock in the public market could cause our stock price to fall.

Future sales of our common stock in the public market, or the perception that such sales might occur, could cause the market price of our common stock to decline. As of May 6, 2005, we have 23,701,840 shares of common stock issued and outstanding and 1,346,300 shares subject to unexercised options that are fully vested. All of these shares are eligible for resale, subject to certain volume limitations. To the extent any major stockholder sells its shares into the market, the market price of our common stock could decline.

Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

• the establishment of a classified board of directors requiring that not all directors be elected at one time;

• a majority of our directors are required to be independent;

• the ability of our board of directors to increase or decrease the size of our board of directors without stockholder approval;

• the ability of our board of directors to fill vacancies on the board of directors created by the death, resignation or incapacity of a director or the enlargement of the board of directors without stockholder approval;

• the prohibition of cumulative voting in the election of directors which would otherwise allow less than a majority of stockholders to elect director candidates;

• advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;

• the ability of our board of directors to alter our bylaws without obtaining stockholder approval;

• the ability of the board of directors to issue and designate the rights of, without stockholder approval, up to 5,000,000 shares of preferred stock, which rights could be senior to those of common stock;

• the elimination of the right of stockholders to call a special meeting of stockholders and to take action by written consent; and

• so long as a single or related group of stockholders own at least one-third of our outstanding common stock, a transaction between us and any person or entity in which such stockholder or stockholders have a material interest, if required under applicable federal and state law and/or Nasdaq rules to be approved by our stockholders, will require approval of a majority of the outstanding shares not held by such interested stockholders present in person or by proxy at the meeting of stockholders held with respect to such transaction.

In addition, because we reincorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or Delaware law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our charter, bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be

27

willing to pay for shares of our common stock in the future and result in the market price being lower than it would without these provisions.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At March 31, 2005, we had $0, $1.95 and $3.0 million outstanding under our loan agreements with NLG, SPDB and BC, respectively. The amounts outstanding under these loan agreements at any time may fluctuate and we may from time to time be subject to refinancing risk. We do not believe that a change of 100 basis points in interest would have a material effect on our results of operations or financial condition. We derive a substantial portion of our sales outside of the United States. Approximately $151.5 million, or 71%, of total shipments to these foreign manufacturers for the year ended September 30, 2004 was made in U.S. Dollars. The balance of our sales is denominated in Chinese Renminbi, or RMB. The exchange rate for the RMB to the U.S. Dollar has been 8.3 RMB per U.S. Dollar for the fiscal year ended September 30, 2004 and the three months ended March 31, 2005. Transactions in RMB represent approximately 8% of total revenues from foreign customers for the six months ended March 31, 2005. We generally do not consider it necessary to hedge against currency risk, as a significant portion or our expenses are denominated in RMB, providing a natural hedge; however, we continue to be vulnerable to appreciation or depreciation of foreign currencies against the U.S. Dollar.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation carried out as of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, are effective.

Changes in Internal Control Over Financial Reporting

Section 404 of the Sarbanes-Oxley Act requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year beginning with 2005, and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports beginning with our annual report on Form 10-K for the fiscal year ending on September 30, 2005. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal controls over financial reporting.

In fiscal 2005, we initiated a company-wide review of our internal controls over financial reporting as part of the process of preparing for compliance with Section 404 and as a complement to our existing overall program of internal controls over financial reporting. As a result of this on-going review, we have taken measures to revise and improve the effectiveness of our internal controls. Through the period ended March 31, 2005, these measures included: (a) designing a reorganization plan for our information technology, or IT, department in order to enhance the segregation of duties and systems access, and beginning the implementation of such reorganization, (b) reviewing the system access of employees and restricting such system access where appropriate, (c) expanding and formalizing the documentation and maintenance of our IT function, especially in the areas of data back-up and monitoring of systems and (d) expanding and formalizing the processes performed by our finance department. We anticipate that improvements in above noted areas and other areas will continue to be made.

PART II. OTHER INFORMATION

Item 6. Exhibits

3.2*	Restated Certificate of Incorporation of the Company
3.4*	Amended and Restated Bylaws of the Company
4.1*	Form of Common Stock Certificate
10.1*	Form of Indemnification Agreement between the Registrant and its officers and directors
10.2*	1994 Stock Plan of the Registrant, as amended
10.3*	2004 Stock Incentive Plan of the Registrant

28

10.4*	Corporate Services Agreement dated as of June 4, 2004 by and among the Registrant and Wearne Brothers Services (Private) Limited
10.6*	Letter of Credit Agreement dated February 25, 2003 by and between M-FLEX Circuit Boards (Suzhou) Co. Ltd. and Bank of China
10.7*	Cooperation Agreement dated July 29, 2003 by and between Suzhou Multi Fineline Electronix Co. Ltd., M-FLEX Circuit Boards (Suzhou) Co. Ltd. and Shanghai Pudong Development Bank
10.8*	Revolving Credit Facility Agreement dated November 26, 2003 by and between the Registrant and Norddeutsche Landesbank Girozentrale
10.9*	Stockholders Agreement dated as of June 4, 2004 by and among the Registrant and WBL Corporation Limited and its affiliates
10.10*	Guarantee dated November 26, 2003 from WBL Corporation Limited in favor of Norddeutsche Landesbank Girozentrale, Singapore Branch
10.11*	Supplemental Letter to the Revolving Credit Facility Agreement dated November 26, 2003 by and between Mulit-Fineline Electronix, Inc. and Norddeutsche Landesbank Girozentrale, Singapore Branch
10.12	Bank and Company Cooperation Agreement dated July 29, 2003 by and between Bank of China Suzhou City Wuzhong Branch and Multi-Fineline Electronix (Suzhou) Co., Ltd.
10.13	Line of Credit Extension Agreement No: Wu Zhong Yin Shou Zi No: 0461175 dated October 20, 2004 by and between Bank of China Suzhou City Wuzhong Branch and Multi-Fineline Electronix (Suzhou No. 2) Co. Ltd.
10.14	Guarantee Contract (Line of Credit Extension) No.: Wu Zhong Yin Bao Zi No.: 0461175 dated October 20, 2004 by and among Multi-Fineline Electronix (Suzhou) Co., Ltd, Bank of China Suzhou City Wuzhong Branch and Multi-Fineline Electronix (Suzhou No. 2) Co. Ltd
10.15	Line of Credit Extension Agreement No.: Wu Zhong Yin Shou Zi No.: 0561002 dated February 25, 2005 by and between Multi-Fineline Electronix (Suzhou) Co., Ltd and Bank of China Suzhou City Wuzhong Branch
10.16	Bank and Company Cooperation Agreement dated July 30, 2004 by and among Shanghai Pudong Development Bank Suzhou Branch, Multi-Fineline Electronix (Suzhou No. 2) Co. Ltd and Multi-Fineline Electronix (Suzhou) Co., Ltd
10.17	Maximum Amount Guarantee Contract dated August 4, 2004 by and between Multi-Fineline Electronix (Suzhou) Co., Ltd and SPDB Suzhou
31.1	Section 302 Certification by the Company’s chief executive officer
31.2	Section 302 Certification by the Company’s principal financial officer
32.1	Section 906 Certification by the Company’s chief executive officer and principal financial officer

* Incorporated by reference to exhibits (with same exhibit number) to the Company’s Registration Statement on Form S-1, as amended (File No. 333-114510) declared effective by the Securities and Exchange Commission on June 24, 2004.

29

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

	Multi-Fineline Electronix, Inc., a Delaware corporation
Date: May 11, 2005	By:	/s/     CRAIG RIEDEL
		Craig Riedel Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer of the Registrant)

EXHIBIT INDEX

3.2*	Restated Certificate of Incorporation of the Company
3.4*	Amended and Restated Bylaws of the Company
4.1*	Form of Common Stock Certificate
10.1*	Form of Indemnification Agreement between the Registrant and its officers and directors.
10.2*	1994 Stock Plan of the Registrant, as amended.
10.3*	2004 Stock Incentive Plan of the Registrant.
10.4*	Corporate Services Agreement dated as of June 4, 2004 by and among the Registrant and Wearne Brothers Services (Private) Limited.
10.6*	Letter of Credit Agreement dated February 25, 2003 by and between M-FLEX Circuit Boards (Suzhou) Co. Ltd. and Bank of China.
10.7*	Cooperation Agreement dated July 29, 2003 by and between Suzhou Multi Fineline Electronix Co. Ltd., M-FLEX Circuit Boards (Suzhou) Co. Ltd. and Shanghai Pudong Development Bank.
10.8*	Revolving Credit Facility Agreement dated November 26, 2003 by and between the Registrant and Norddeutsche Landesbank Girozentrale.
10.9*	Stockholders Agreement dated as of June 4, 2004 by and among the Registrant and WBL Corporation Limited and its affiliates.
10.10*	Guarantee dated November 26, 2003 from WBL Corporation Limited in favor of Norddeutsche Landesbank Girozentrale, Singapore Branch
10.11*	Supplemental Letter to the Revolving Credit Facility Agreement dated November 26, 2003 by and between Multi-Fineline Electronix, Inc. and Noddeutsche Landesbank Girozentrale, Singapore Branch
10.12	Bank and Company Cooperation Agreement dated July 29, 2003 by and between Bank of China Suzhou City Wuzhong Branch and Multi-Fineline Electronix (Suzhou) Co., Ltd.
10.13	Line of Credit Extension Agreement No: Wu Zhong Yin Shou Zi No: 0461175 dated October 20, 2004 by and between Bank of China Suzhou City Wuzhong Branch and Multi-Fineline Electronix (Suzhou No. 2) Co. Ltd.
10.14	Guarantee Contract (Line of Credit Extension) No.: Wu Zhong Yin Bao Zi No.: 0461175 dated October 20, 2004 by and among Multi-Fineline Electronix (Suzhou) Co., Ltd, Bank of China Suzhou City Wuzhong Branch and Multi-Fineline Electronix (Suzhou No. 2) Co. Ltd
10.15	Line of Credit Extension Agreement No.: Wu Zhong Yin Shou Zi No.: 0561002 dated February 25, 2005 by and between Multi-Fineline Electronix (Suzhou) Co., Ltd and Bank of China Suzhou City Wuzhong Branch
10.16	Bank and Company Cooperation Agreement dated July 30, 2004 by and among Shanghai Pudong Development Bank Suzhou Branch, Multi-Fineline Electronix (Suzhou No. 2) Co. Ltd and Multi-Fineline Electronix (Suzhou) Co., Ltd
10.17	Maximum Amount Guarantee Contract dated August 4, 2004 by and between Multi-Fineline Electronix (Suzhou) Co., Ltd and SPDB Suzhou
31.1	Section 302 Certification by the Company’s chief executive officer
31.2	Section 302 Certification by the Company’s principal financial officer
32.1	Section 906 certification by the Company’s chief executive officer and principal financial officer

* Incorporated by reference to exhibits (with same exhibit number) to the Company’s Registration Statement on Form S-1, as amended (File No. 333-114510) declared effective by the Securities and Exchange Commission on June 24, 2004.