##### Table of Contents

---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-K



---



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



For the fiscal year ended September 30, 2004



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, Suite A

Anaheim, California 92806

(Address of principal executive offices, Zip code)



(714) 238-1488

(Registrants telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the
Act:



Common Stock, par value $0.0001 per share



---



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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. ̈



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



The aggregate market value of Common Stock held by non-affiliates of the
registrant (based upon the closing sale price of the NASDAQ National Market on December 1, 2004) was $286,338,543. The registrants common stock was not publicly traded as of the last business day of its most recently completed second fiscal
quarter (March 31, 2004). Shares held by each executive officer, director and by each person that owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other purposes.



The number of outstanding shares of the registrants Common Stock, $0.0001 par value, as of December 1, 2004 was 23,264,835.



DOCUMENTS INCORPORATED BY REFERENCE



Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12 (as to Beneficial Ownership),
13 and 14 of Part III incorporate by reference information from the registrants proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the registrants 2005 Annual
Meeting of Stockholders expected to be held on February 2, 2005.



---



---

##### Table of Contents

Multi-Fineline Electronix, Inc.



Index



|         |  |                                                                                                |  |   
|-------- |  | ---------------------------------------------------------------------------------------------- |  | --
|         |  | PART I                                                                                         |  |   
|         |  |                                                                                               
|Item 1.  |  | Business                                                                                       |  | 1 
|Item 2.  |  | Properties                                                                                     |  | 10
|Item 3.  |  | Legal Proceedings                                                                              |  | 11
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 11
|         |  |                                                                                               
|         |  | PART II                                                                                        |  |   
|         |  |                                                                                               
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 13
|Item 6.  |  | Selected Consolidated Financial Data                                                           |  | 14
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 15
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 36
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  | 37
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 63
|Item 9A. |  | Controls and Procedures                                                                        |  | 63
|         |  |                                                                                               
|         |  | PART III                                                                                       |  |   
|         |  |                                                                                               
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  | 63
|Item 11. |  | Executive Compensation                                                                         |  | 64
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 64
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  | 64
|Item 14. |  | Principal Accountant Fees and Services                                                         |  | 64
|         |  |                                                                                               
|         |  | PART IV                                                                                        |  |   
|         |  |                                                                                               
|Item 15. |  | Exhibits, Financial Statement Schedules                                                        |  | 64
|         |  | Signatures                                                                                     |  | 66



i



---

##### Table of Contents

Part. I



Item 1.    Business



Overview



This Annual Report on Form 10-K
(this Annual 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, needs for additional financing, use of working capital, the benefits of our China operations, plans for future products and services and
for enhancements of existing products and services, 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 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, 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 effectiveness in managing manufacturing processes and costs and expansion of our operations, the degree to which we are able to utilize available manufacturing capacity, the impact of competition and of technological
advances, and the risks set forth below under Item 7, Managements Discussion and Analysis of Financial Condition and Results of OperationsFactors That May Affect Future 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.



We are a global provider of high-quality, technologically advanced flexible printed circuits and value-added component assembly solutions to the
electronics industry. We believe that we are one of a limited number of manufacturers that has the ability to offer a seamless, integrated flexible printed circuit and assembly solution from design and application engineering and prototyping through
high-volume fabrication, component assembly and testing. We target our solutions within the electronics market and, in particular, we focus on applications where flexible printed circuits facilitate human interaction with an electronic device and
are the enabling technology in achieving a desired size, shape, weight or functionality of the device. Current applications for our products include mobile phones and smart mobile devices, portable bar code scanners, personal digital assistants,
power supplies and consumable medical sensors. We provide our solutions to original equipment manufacturers, or OEMs, such as Motorola, Inc., Symbol Technologies, Inc. and EMC Corporation, to electronic manufacturing services, or EMS, providers such
as Foxconn Electronics, Inc. and Flextronics International Ltd. and to display manufacturers such as Koninklijke Philips Electronics NV, Hosiden F.D. Corporation, Sharp Electronics Corporation and Optrex Corporation Japan.



We were incorporated as Multi-Fineline Electronix, Inc. in California in
October 1984. In connection with our initial public offering, we reincorporated as Multi-Fineline Electronix, Inc. in Delaware on June 4, 2004. References in this Annual Report to we, our, us and
M-Flex refer to Multi-Fineline Electronix, Inc. and our consolidated subsidiaries, Multi-Fineline Electronix (Suzhou) Co., Ltd., or MFC1, and Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd., or MFC2, except where it is made clear that
the term means only the parent company.



1



---

##### Table of Contents

Industry Background



We believe that the global market for flexible printed circuits will continue to grow over the coming years as consumers continue to demand smaller, more
functional devices. Given inherent design and cost advantages of flexible printed circuits, they quickly are becoming a favored solution for electronics manufacturers who are striving to increase the features and functionality of electronic devices
while reducing the size, shape and weight of such devices. Asia is the largest and fastest growing market for flexible printed circuits largely because of two trends that occurred in the early 1990sthe outsourcing by OEMs of their
manufacturing needs and the shift of manufacturing facilities in the United States to Asian countries.



Historically, electronics manufacturers have relied upon rigid printed circuit boards to provide the electrical interconnections between the components in
electronics devices. Rigid printed circuit boards consist of a board that contains multiple transistors, microprocessors and other components that are connected by copper wires embedded on the circuit board. Given that the rigid printed circuit
boards cannot bend or twist, they inherently limit the design options available to engineers. For example, in order to design and build flip-phone style mobile phones, engineers had to create a method to connect the rigid printed circuit
board in the base of the phone with the rigid printed circuit board in the screen. Copper wires could not be used because they are subject to failure as a result of stress from the constant bending and flexing of the wires; therefore, design
engineers had to look to new materials to provide a means of electrical interconnection between the various components of the device.



To address this need, companies such as M-Flex began to design flexible printed circuits and flexible printed circuits containing components, which we
refer to as component assemblies, to serve as electrical interconnections. These flexible printed circuits can twist, bend and flex in a device with less risk of failure while connecting the components of the device. In addition to these
functionality advantages, flexible printed circuits and component assemblies enable OEMs, EMS providers and display manufacturers to design and construct modular components that can be incorporated into the final product, which in turn reduces the
complexity of the assembly of the final product and manufacturing costs and facilitates human interaction with the electronic device. As a result, manufacturers can reduce the number of assembly operations required for a product and improve the
efficiency of their supply chains.



We believe that the overall
market for flexible printed circuits and component assemblies is poised for substantial growth over the next several years as a result of favorable technological and market developments, including:



| |  | Miniaturization, Portability and Complexity of Electronic Devices.    As electronic devices become more powerful, complex and compact, product size
becomes a principal design limitation. From an engineering standpoint, flexible printed circuits possess enhanced heat dissipation properties because they are thinner than rigid printed circuit boards, provide higher signal integrity interconnection
and enable faster operating speeds because the components can be placed closer together and can serve as a medium for analog and digital devices. As a result, the electronics industry has relied increasingly upon flexible printed circuits and
component assemblies. For example, the placement of chips and liquid crystal displays directly on the flexible printed circuit enables OEMs to increase functionality and improve packaging characteristics while managing time-to-market for their
products in an overall cost-effective manner. Moreover, as electronics companies develop increased functionality for semiconductors, the traditional packaging and mounting technologies are becoming more obsolete. For example, designs of electronics
devices that incorporate camera modules require the performance and flexibility characteristics offered by flexible printed circuits.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Outsourcing.    Electronics companies increasingly are relying upon outsourcing to technically qualified, strategically located manufacturing partners
that provide integrated, end-to-end flexible printed circuit and component assembly solutions comprised of design and application engineering, prototyping and competitive high-volume production services. By employing these end-to-end manufacturers,
electronics companies are able to reduce time-to-market, avoid product delays, reduce manufacturing costs, avoid logistical problems and focus on their core competencies.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2



---

##### Table of Contents

| |  | Expanding Markets and Flexible Component Demand.    The global demand for wireless communication products and the complexity of wireless devices,
including those supporting products with digital cameras and personal digital assistants, increasingly are driving the demand for more complex flexible printed circuits and component assemblies. Electronics companies have discovered that they can
increase the functionality of flexible printed circuits and reduce the number of required interconnects by mounting components, such as connectors, switches, resistors, capacitors, light emitting devices, integrated circuits and optical sensors, to
the flexible printed circuits. While the wireless telecommunications industry in general is expanding rapidly, we believe that the number of flexible printed circuits and component assemblies incorporated into these wireless devices will grow even
more rapidly, requiring significantly more flexible components per device than have been used in previous-generation wireless applications.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



An example of an industry where demand for flexible printed circuits and component assemblies is increasing rapidly is mobile phones and smart mobile
devices. While the mobile phone and smart mobile device industry in general is expanding rapidly, the number of flexible printed circuits and component assemblies incorporated into these mobile devices is growing even more rapidly. For example, the
number of circuit layers per part that we manufactured increased 23% for fiscal year 2004 as compared to fiscal year 2003. We expect that this number will continue to increase as OEMs, such as Motorola, strive to increase the features and
functionality and reduce the size, shape and weight of such devices in response to consumer demand.



Competitive Strengths



We are a leading global provider of high-quality, technologically advanced flexible printed circuit and component assembly solutions to the electronics industry. We believe our competitive strengths include:



| |  | Our Seamless and Efficient End-to-End Solution for Flexible Printed Circuit Applications.    We provide 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. By relying on a single provider for their flexible printed circuit
requirements, our customers can benefit from opportunities for more robust product designs and process optimization during the development phase. This, in turn, frequently leads to production cost savings and quicker time-to-market. Our operations
in the United States and China each possess the expertise and capabilities to provide a seamless, integrated end-to-end solution that provides our customers with the ability to leverage any one or more of our facilities to meet their global
requirements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our Design and Application Engineering Expertise Supports Our Strong Customer Relationships.    Our expertise in designing and manufacturing flexible
printed circuits and component assemblies has enabled us to become a partner to our customers at the earliest stages of product development. We employ our design and application engineers as part of our sales process; therefore, our customers rely
on us to assist them in the early design phase of their products. Early design participation enables us to gain intricate knowledge of our customers products and thereby provide value-added engineering support to them. Early design
participation also enables our customers to achieve lower production costs through better product design and utilization of our flexible printed circuit assembly expertise. In addition, this process fosters strong relationships with our customers,
often resulting in their reliance on our products and engineering support for the life of the specific application and subsequent generations of similar applications. We believe these strong customer relationships with leading OEMs represent entry
barriers for our competitors.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our Manufacturing Capabilities.    We maintain manufacturing facilities in the United States and China. Our U.S. operations provide
design and application engineering and manufacturing, while our Chinese operations are organized to duplicate the processes and tooling designed in the United States for automation while allowing us to consolidate the labor intensive aspects of
high-volume manufacturing in a cost-efficient environment. We also are continuing to enhance our design and application engineering capabilities in China to best position us to provide an integrated end-to-end solution to the
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



3



---

##### Table of Contents

| | emerging domestic electronics markets in China and other parts of Asia. Since 2000, we have expanded our manufacturing capacity in China by acquiring
additional and technologically advanced machinery and by expanding our manufacturing facilities. Our ongoing attention to integrating the manufacturing processes between our facilities allows us to improve our product yields, shorten our
customers supply chains and lower the overall costs of our products. Furthermore, the capital equipment addition at our second manufacturing facility in China, MFC2, which we expect to be completed in January 2005, will increase substantially
our manufacturing capacities in China and enable us to take on additional high-volume manufacturing programs. While we believe our Chinese manufacturing facilities benefit the company, they do subject us to additional risks inherent in international
business, including those detailed on pages 30 to 33 under Item 7, Managements Discussion and Analysis of Financial Condition and Results of OperationsFactors That May Affect Future Operating Results.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our Forward Integration in the Value Chain.    We have implemented a strategy of forward integration focusing on the value-added services that we provide
to our customersdesign and application engineering and component assemblyrather than only concentrating on acquiring the capabilities to produce the materials used to manufacture flexible printed circuits. By employing suppliers to
provide us with raw materials, we have avoided unnecessary capital equipment and research and development costs and have focused more intensely on the integral steps in the manufacturing process, from design and prototyping to high-volume
manufacturing and component assembly. The result of this strategy has been superior design and application engineering expertise, strong customer relationships and sequential net sales growth.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our Management Experience and Expertise.    All of our executive officers have been with us for between 12 and 18 years. During that time, our executive
management has made a number of critical, strategic decisions that successfully managed our growth and profitability, including pursuing a strategy of deploying our design and application engineers at the early stages of a customers product
designs, responding to the trend of OEM outsourcing, identifying Chinas manufacturing capabilities, creating a seamless, integrated end-to-end solution in each of our U.S. and Chinese operations to serve the needs of multinational OEMs, EMS
providers and display manufacturers and adopting a forward integration strategy in order to focus on the engineering and assembly needs of our customers.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Business Strategy



Our objective is to continue to expand our product offering to become a global provider of electronic products packaging technology and manufacturing by
using our core technologies of high-quality, technologically advanced flexible printed circuits and assemblies as the essential ingredients. To achieve our objective, we intend to pursue the following strategies:



| |  | Provide an Integrated Solution to Our Customers.    We intend to maintain our leadership in providing a complete end-to-end solution to our customers that
includes design and application engineering, prototyping, high-volume manufacturing, material acquisition, component assembly and testing. In addition, we intend to leverage our value-added servicesdesign and application engineering and
turnkey component assemblyto help solve our customers product design challenges and to provide our customers with flexible printed circuit solutions designed and manufactured to maximize the reliability and functionality of their end
products. By focusing on customers product applications and providing them with a seamless, integrated and cost-efficient flexible printed circuit and component assembly solution, we believe that we can continue to grow our market share by
eliminating the need of our customers to negotiate with multiple vendors and reducing the time-to-market for their products.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Support the Development of Applications for Flexible Printed Circuit Technology in New Markets.    We believe that flexible printed
circuit technology provides a cost-effective solution to improving the functionality and packaging of electronic devices. We believe that the trend towards miniaturization will continue to drive the growth of flexible printed circuits in many
industries that we currently do not serve. To address these new market opportunities, we will continue our efforts to research, develop and market new applications for flexible printed circuits and component assemblies. We believe that our
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4



---

##### Table of Contents

| | design and application engineering and manufacturing capabilities, coupled with our flexible printed circuit assembly expertise, will enable us to
effectively target additional high-volume flexible printed circuit applications in various markets of the electronics industry where size, shape and weight are primary drivers of product development.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Expand Our Existing Expertise in the Design and Manufacture of Flexible Printed Circuit Technology.    By expanding our market share in existing markets,
penetrating new markets and partnering with customers in the early stage design of their products, we will continue to expand our engineering and manufacturing expertise and capabilities for applications and functionality for electronic product
packaging technology and assist our customers in developing more efficient manufacturing processes for their products. We believe that we will be able to continue to capture additional market share in the sectors we serve and attract companies from
other markets of the electronics industry by utilizing our expertise in design and application engineering to expand product designs and applications for flexible printed circuit solutions in conjunction with our high-volume, cost-effective
manufacturing capabilities.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Diversify Our End Customers.    We primarily serve the wireless telecommunications sector. We plan to leverage our internal sales force comprised entirely
of design and application engineers with our existing outside non-exclusive sales representatives to attract new customers in the wireless telecommunications sector, as well as in other sectors of the electronics industry where functionality and
packaging size dictate the need for flexible printed circuits and component assemblies.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Increase Manufacturing Capacity and Capabilities.    We intend to continue to improve our manufacturing capabilities and cost reduction efforts through
increased integration of our engineering and manufacturing facilities in the United States and China. When our new capital expansion at MFC2 is complete, we will increase substantially our manufacturing capacity and still possess additional land for
future expansion of MFC2. In addition, MFC2 has been specifically designed and equipped for fine-line programs, which are flexible printed circuits with smaller features and a high density of components and interconnection. Fine-line programming
allows us to offer our customers an efficient, technologically advanced manufacturing process for complex flexible printed circuit fabrication.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Products



Our design and application engineering expertise enable us to offer flexible printed circuit and value-added component assembly solutions for a wide range
of electronic applications. We offer products in a broad range of markets, including mobile phones and smart mobile devices, portable bar code scanners, personal digital assistants, power supplies and consumable medical sensors. Representative OEM
customers and their end products that incorporate our flexible printed circuit products include the following:



|                           |  |                                       |  |                                                                                
|-------------------------- |  | ------------------------------------- |  | -------------------------------------------------------------------------------
|OEM Customer               |  | Product Category                      |  | Representative Application                                                     
|Motorola, Inc.             |  | Mobile phone and smart mobile devices |  | Keypad, camera, hinge and display flexible printed circuit component assemblies
|                           |  |                                      
|Symbol Technologies Inc.   |  | Bar code scanners                     |  | Rotating scanner flexible printed circuit component assemblies                 
|                           |  |                                      
|palmOne, Inc.              |  | Personal digital assistants           |  | Communicator flexible printed circuit component assemblies                     
|                           |  |                                      
|Tyco Amp and Power Systems |  | Power supplies                        |  | Transformer and computer chip connector flexible printed circuits              
|                           |  |                                      
|Research In Motion Ltd.    |  | Smart mobile devices                  |  | Track wheel flexible printed circuit component assemblies                      
|                           |  |                                      
|Masimo Corporation         |  | Blood oxygen sensor                   |  | Disposable flexible printed circuit contained in bandage                       



5



---

##### Table of Contents

Flexible Printed Circuits.    Flexible printed circuits, which consist of
copper conductive patterns that have been etched or printed while affixed to flexible substrate materials such as polyimide or polyester, are used to provide connections between electronic components and as a substrate to support these electronic
devices. The circuits are manufactured by subjecting the base materials to multiple processes, such as drilling, screening, photo imaging, etching, plating and finishing. We produce a wide range of flexible printed circuits, including single-sided,
double-sided, multi-layer (with and without gaps between layers) and rigid-flex. Single-sided flexible printed circuits, which have an etched conductive pattern on one side of the substrate, are normally less costly and more flexible than
double-sided flexible printed circuits because their construction consists of a single patterned conductor layer. Double-sided flexible printed circuits, which have conductive patterns or materials on both sides of the substrate that are
interconnected by a drilled or copper-plated hole, can provide either more functionality than a single-sided flexible printed circuit by containing conductive patterns on both sides or greater shielding of components against electromagnetic
interference than a single-sided flexible printed circuit by covering one side of the circuit with a shielding material rather than a circuit pattern. Multi-layer and rigid-flex printed circuits, which consist of layers of circuitry that are stacked
and then laminated, are used where the complexity of the design demands multiple layers of flexible printed circuitry. If some of the layers of circuitry are rigid printed circuit material, the product is known as a rigid-flex printed circuit.
Gapped flexible printed circuits, which consist of layers of circuitry that are stacked and separated in some parts of the circuit and laminated in other parts of the circuit, are used where the complexity of the design demands multiple layers of
flexible printed circuitry but the flexibility of a single-sided flexible printed circuit in some parts of the circuit.



Flexible Printed Circuit Assemblies.    Flexible printed circuits can be enhanced by attaching electronic components, such as
connectors, switches, resistors, capacitors, light emitting devices, integrated circuits, cameras and optical sensors, to the circuit. The reliability of flexible printed circuit component assemblies is dependent upon proper assembly design and the
use of appropriate fixtures to protect the flex-to-connector interface. Connector selection is also important in determining the signal integrity of the overall assemblya factor which is very important to devices that rely upon high system
speed to function properly. We are one of the pioneers in attaching connectors and components to flexible printed circuits and have developed the expertise and technology to mount a full range of electronic devices, from passive components to
computing devices.



Customers



Our customers include leading OEMs, EMS providers and display manufacturers
in a variety of sectors of the electronics industry. These sectors include mobile phones and smart mobile devices, portable bar code scanners, personal digital assistants, power supplies and consumable medical sensors. Our expertise in flexible
printed circuit design and component assembly enables us to assist our customers in resolving their design challenges through our design and assembly techniques, which results frequently in the customer placing our product designs on the
customers design specifications and enhances our likelihood of becoming the main provider for flexible printed circuits and component assembly included in that product. Achieving status as a main provider, or sole provider, to an OEM for a
high-volume program enables us to build strong customer relationships with respect to existing products and any future product that requires the use of flexible printed circuits and component assemblies.



We generally work with OEMs in the design of their products, and the OEMs
subsequently either purchase our products directly or instruct the EMS providers and display manufacturers to purchase our products to be incorporated into the OEMs product. EMS providers and display manufacturers that we sell to include
Foxconn, Flextronics, Philips, Hosiden, Optrex and Sharp Electronics. Our relationships with EMS providers and display manufacturers normally are directed by the OEMs; therefore, it is the OEMs that negotiate product pricing and volumes directly
with us, even though the purchase orders come from the EMS providers and display manufacturers. For the past several years, Motorola and its subcontractors have been our largest customers. In the fiscal years ended September 30, 2004, 2003 and 2002,
we sold products to be incorporated into Motorolas products to 40, 35 and 32 Motorola subcontractors, which aggregated 80%, 71% and 70% of our net sales (including direct sales to Motorola).



6



---

##### Table of Contents

Several subcontractors of Motorola also constitute significant customers of the company. In the fiscal
year ended September 30, 2004, sales to Hosiden and its affiliates, Optrex and its affiliates and Philips and its affiliates accounted for 11%, 10% and 7% of our net sales. In the fiscal year ended September 30, 2003, sales to Hosiden and its
affiliates, Optrex and its affiliates and Philips and its affiliates accounted for 14%, 12% and 21% of our net sales. In the fiscal year ended September 30, 2002, sales to Hosiden and its affiliates, Optrex and its affiliates and Philips and its
affiliates accounted for 14%, 7% and 24% of our net sales.



Our
net sales fluctuate from quarter to quarter as a result of changes in demand for our product. 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. Our major customers provide consumer-related products that generally experience their highest sales activity during the calendar year-end holiday season; therefore, we typically
experience a decline in our second quarter sales as this holiday period ends. We anticipate 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.



Our facilities in the United States and China enable us to manufacture products for shipment anywhere in the world. For the fiscal year ended September 30, 2004, we derived 13% of our net sales in North America and 83% of our net sales
outside the United States. For the fiscal year ended September 30, 2003, we derived 22% of our net sales in North America and 78% of our net sales outside the United States. For the fiscal year ended September 30, 2002, we derived 29% of our net
sales in North America and 71% of our net sales outside the United States.



For the fiscal year ended September 30, 2004, 16% of our net sales were attributed to Hong Kong, 46% of our net sales were attributed to China, 11% of our net sales were attributable to Japan, and 13% of our net sales
were attributed to North America. For the fiscal year ended September 30, 2003, 18% of our net sales were attributable to Hong Kong, 33% of our net sales were attributable to China, 13% of our net sales were attributable to Japan, and 22% of our net
sales were attributable to North America. For the fiscal year ended September 30, 2002, 16% of our net sales were attributable to Hong Kong, 37% of our net sales were attributable to China and 29% of our net sales were attributable to North America.



For the fiscal years ended September 30, 2004, 2003 and 2002,
we had long-lived assets of $17.9 million, $17.9 million and $7.5 million, respectively, in the United States and $46 million, $30.3 million and $16.4 million, respectively, in China.



Sales and Marketing



We sell our products primarily through our in-house design and application engineers, who meet regularly with our customers and potential customers to
assist in the initial design of the proposed products and to provide suggestions on how our flexible printed circuit solutions can enhance product design. By utilizing market and product teams in each sector of the electronics industry that we
target, we have successfully expanded our market penetration by leveraging our design and application engineers within each of these teams. In particular, these engineers apply the principal of concurrent engineering to our customers engineers
in the early phases of the product development cycle.



We
engage the services of 18 non-exclusive sales representatives to interact with customers and potential customers on our behalf. Thirteen of these sales representatives are located throughout the United States. We also have one sales representative
in each of Canada, Europe, Japan, Korea and Taiwan. We rely on these sales representatives to initiate contact with potential customers and provide leads to our internal sales and marketing teams, as well as to create, build and maintain our
customer relationships and assist in the resolution of contractual disputes.



As of September 30, 2004, our backlog, which constitutes customer orders placed with us but not yet shipped, believed to be firm was $90.9 million. We expect to ship this entire backlog during the current fiscal year.
We



7



---

##### Table of Contents

cannot guarantee that our customers will not cancel any or all of the orders in our backlog. Our current backlog also is not indicative of our future
operating results. As of September 30, 2003, our backlog believed to be firm was $50.2 million.



Technology



We are a
global provider of single, double-sided, multi-layer and gapped flexible printed circuit technology and component assemblies. Our process technology includes proprietary processes and chemical recipes, which coupled with our design expertise, unique
customized fixtures and tooling and manufacturing experience, enables us to deliver high unit volumes of complex flexible printed circuits and component assemblies at cost-effective yields.



Design Technology.    The flexible printed
circuits we manufacture are designed specifically for each application, frequently requiring significant joint design activities with the customer at the start of a project. We have developed design methodologies that solve difficult interconnection
problems and save our customers time and money. We design and mass produce flexible printed circuits that range from single-sided circuits to more complex double-sided, multi-layer (with and without gaps between layers) and rigid-flex. We
continually are investing in and improving our computer-based design tools to more quickly design new flexible printed circuits, enhance cooperative design and communication with our customers and more closely integrate design and application
engineering to our prototyping and manufacturing process.



Circuit Fabrication Technology.    We have extensive experience producing fine-line flexible printed circuits and have developed manufacturing processes that are designed to deliver high-unit volumes at
cost-effective yields. In the flexible printed circuit industry, fine-line flexible printed circuits are easier to construct as the thickness of the copper decreases; however, as the thickness of the copper decreases, the cost of fabrication
increases. We have developed a manufacturing process to pattern plate in selective regions of the circuitry pattern, such as around the holes used to connect the two sides of a double-sided flexible printed circuit. In addition, the normal
manufacturing technology, by itself, has been improved with new equipment which enables thicker, less expensive copper to be etched down precisely enough to form fine-line circuitry. The combination of these two processes allows us to achieve finer
patterns without a substantial increase in costs and with acceptable yields.



In addition to fine-line techniques, we have developed a proprietary process using ultraviolet lasers to drill 0.003 inch diameter holes, known as micro-vias, for the connection of circuits on the reverse side of the
substrate. The combination of the fine-lines and micro-vias are part of the new high density interconnect technology that is one of our primary marketing and engineering competitive strengths.



Component Assembly and Test Technology.    Our
component assembly and test technology involve the arrangement of the circuits on a panel to minimize material waste and facilitate requirements for component assembly, such as placing tooling holes, optical locators for vision-based machines, test
points and pre-cut zones to allow part removal without compromising the integrity of the components. We assemble passive electrical and various mechanical components, including capacitors, resistors, integrated circuits, connectors, stiffeners,
diodes and other devices to flexible printed circuits. We also perform advanced assembly of integrated circuit devices, as well as the functional testing of these flexible printed circuit component assemblies. Assembling these components directly
onto the flexible printed circuit increases performance and reduces space, weight and cost.



Intellectual Property



Our success will depend in part on our ability to protect our intellectual property. Our intellectual property relates to proprietary processes and know-how covering methods of designing and manufacturing flexible printed circuits and
attaching components. We regularly require our employees to enter into confidentiality agreements and assignment of invention agreements to protect our intellectual property. In addition, we consider filing patents on our inventions that are
significant to our business, although none of our existing patents or patent applications pertain to inventions that are significant to our current business. We also pursue trademarks where applicable and necessary.



8



---

##### Table of Contents

In the future, we may encounter disputes over rights and obligations concerning intellectual property. We
believe that our design and manufacturing processes do not infringe the intellectual property rights of any third party; however, we cannot assure you that we will prevail in any intellectual property dispute.



Suppliers



We purchase raw circuit materials, process chemicals and various components from a limited number of outside sources,
including E.I. DuPont de Nemours & Co., Rogers Corporation, Molex Inc. and Supertex, Inc. For components, we normally make short-term purchasing commitments to key suppliers for specific customer programs. These commitments are usually made for
three to 12-month periods. These suppliers agree to cooperate with us in engineering activities, as required, and in some cases maintain a local inventory to provide shorter lead times and reduced inventory levels for us. In most cases, suppliers
are approved and often dictated by our customers. For process chemicals, certain copper and polyimide laminate materials and certain specialty chemicals used in our manufacturing process, we rely on a limited number of key suppliers. Alternate
chemical products are available from other sources, but process chemical changes often require approval by our customers and requalification of the processes, which could take weeks or months to complete. We seek to mitigate these risks by
identifying stable companies with leading technology and delivery capabilities and by attempting to qualify at least two suppliers for all critical raw materials and components.



Competition



The flexible printed circuit market is competitive with a variety of large and small companies offering design and manufacturing services. The flexible
printed circuit market is differentiated by customers, applications and geography, with each niche requiring specific combinations of complex packaging and interconnection. We believe that our ability to offer an integrated, end-to-end flexible
printed circuit solution has enabled us to compete favorably with respect to design capabilities; product performance, reliability and consistency; price; customer support and application support; and resources, equipment and expertise in component
assembly on flexible printed circuits.



We compete on a global
level with a number of leading Japanese providers, such as Nippon Mektron, Nitto Denko Corporation and Fujikura Ltd., and with domestic providers, such as Innovex, Inc., Sheldahl, Inc. and Parlex Corporation. Also, we expect more competition from
emerging flexible printed circuit assembly producers in Taiwan, South Korea and China. We are aware of at least 20 companies in Asia with which we compete, and we expect others to enter the market in this region because of government subsidies and
lower labor rates available there. We also compete with MFS Technology Ltd., or MFS, which is a subsidiary of WBL Corporation Limited, or WBL Corporation, located in Singapore. WBL Corporation owns 64% of our outstanding common stock.



We believe that our technology leadership and capabilities in designing and
manufacturing flexible printed circuits have enabled us to build strong partnerships and customer relationships with many companies. We believe that customers typically rely upon one or two vendors designs for the life of specific applications
and, to the extent possible, subsequent generations of similar applications. Accordingly, it is difficult to achieve significant sales to a particular customer for any application once a different vendor has been selected to design and manufacture a
specific flexible printed circuit. This market paradigm may provide a barrier to our competitors in the markets in which we compete; however, it may also present an obstacle to our entry into other markets. Any expansion of existing products or
services could expose us to new competition.



Employees



As of October 31, 2004, we employed approximately 6,170 full-time employees
and 453 contract employees, including 597 full-time employees and 10 contract employees in the United States and 5,573 full-time employees and 443 contract employees in China. We have never had a work stoppage. We consider our employee relations to
be good.



9



---

##### Table of Contents

We do not have employment agreements with any of our executive officers. We have entered into employment
agreements with substantially all of our employees in China. In general, these employment agreements provide for either a one or two-year term.



In addition, we believe that less than ten of our employees in China have formed a trade union committee and thereafter proposed that we enter into a
collective bargaining agreement. At this time, we are not a party to, nor do we intend to enter into, a collective bargaining agreement with these or our other employees at MFC1 or any of our other China operations. We are not aware that the
committee represents any employee other than the employees who actually are members of the committee. We presently do not believe that we will experience any material harm to our business if we do not enter into a collective bargaining agreement.



Environmental Controls



Flexible printed circuit manufacturing requires the use of chemicals. As a
result, we are subject to a variety of environmental laws 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 to
manufacture our products in the United States and China. As of September 30, 2004 and 2003, we reserved $122,000 and $121,000 of restricted cash, 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; otherwise, our review of our facilities suggests that no material remediation costs will be required. However, given the uncertainties associated with environmental contamination, there can be no
assurance that such costs will not harm our business, financial condition or results of operations.



We believe we have been operating our facilities in substantial compliance in all material respects with existing environmental laws and regulations.
However, we cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed or how existing or future laws or regulations will be administered or interpreted with respect to products or activities to which
they have not previously been applied. For this reason, we implemented procedures geared toward minimizing the negative impacts and reducing potential financial risks arising from environmental issues. Compliance with more stringent laws or
regulations, or more vigorous enforcement policies of regulatory agencies could require substantial expenditures by us and could harm our business, results of operations and financial condition. We do not anticipate any material amount of
environmental-related capital expenditures in fiscal years 2005 or 2006.



Item 2.    Properties



Our corporate headquarters are located in Anaheim, California and our manufacturing facilities are located in Anaheim, California and Suzhou, China, as follows:



|                                                                    |  |                     |  |                                   |  |                                    
|------------------------------------------------------------------- |  | ------------------- |  | --------------------------------- |  | -----------------------------------
|Function                                                            |  | Location            |  | Square Feet                       |  | Lease Expiration Dates             
|Executive offices, engineering and circuit fabrication and assembly |  | Anaheim, California |  | Owned105,000 Leased57,000*      |  | N/A December 2004 to September 2006
|                                                                    |  |                     | 
|MFC1Engineering, circuit fabrication and assembly                  |  | Suzhou, China       |  | 88,000 105,600                    |  | March 2005 to August 2005 2043**   
|                                                                    |  |                     | 
|MFC2Engineering, circuit fabrication and assembly                  |  | Suzhou, China       |  | 285,000*** Temporary lease32,300 |  | 2052 September 2005                

---

|* | We have 16 leases relating to this space, which range in terms from one to three years and range in size from approximately 1,000 square feet to approximately 6,000 square feet.
These leases expire in various months of each year. In general, as these leases expire, we extend them on substantially the same terms.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|** | We have several other parcels that have long-term land leases expiring beyond 2043. Under the terms of these leases, we paid an upfront fee for use of the parcel through expiration
of the lease. We have no other financial obligations on these long-term land leases other than payments of real estate taxes.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10



---

##### Table of Contents

|*** | Our long-term land lease for MFC2 includes an additional 65,000 square feet of land that we have reserved for future expansion of our manufacturing operations. Under the terms of
this lease, we paid an upfront fee for use of the parcel through expiration of the lease. We have no other financial obligations on this long-term land lease other than payments of real estate taxes to local Chinese governmental authorities.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We believe our facilities are adequate for our
current needs and that suitable additional or substitute space will be available to accommodate foreseeable expansion of our operations or to move our operations in the event one or more of our short-term leases can no longer be renewed on
commercially reasonable terms at the expiration of its term.



Item 3.    Legal Proceedings



From time to time, we may be party to lawsuits in the ordinary course of business; however, we are currently not a party to any material legal proceeding.



Item 4.    Submission of Matters to a Vote of Security Holders



No matters were submitted to a vote of security holders during the fourth quarter of our fiscal year through the solicitation of proxies or otherwise.



Executive Officers of the Registrant



The following table sets forth information about our executive officers as
of November 30, 2004:



|                  |  |     |  |                                                               
|----------------- |  | --- |  | --------------------------------------------------------------
|Name              |  | Age |  | Position(s)                                                   
|Philip A. Harding |  | 72  |  | Chief Executive Officer and Chairman of the Board of Directors
|Reza Meshgin      |  | 41  |  | President and Chief Operating Officer                         
|Craig Riedel      |  | 48  |  | Chief Financial Officer and Secretary                         
|Thomas Lee        |  | 45  |  | Vice President of Operations                                  
|Charles Tapscott  |  | 62  |  | Vice President of Sales and Marketing                         



Philip A. Hardinghas served as our Chief Executive Officer since January 1988 and as a director since September 1988. In December 2003, Mr. Harding assumed the position of Chairman of the board of directors. Prior to joining us, Mr. Harding served as the Chief
Executive Officer of Weltec Digital Corporation from 1984 to 1987. From 1981 to 1984, Mr. Harding served as the President of the Remex Division of Excello Corporation after joining Excello in 1979 as the Vice President of Engineering. Prior to
joining Excello, Mr. Harding served as the General Manager of the Commercial Systems Division of Electronic Memories and Magnetics Corporation from 1973 to 1979. Each of these companies manufactured computer peripherals and components. From February
1988 to March 2004, Mr. Harding served as Chief Executive Officer of Wearnes Hollingsworth Corporation, an electronic connector company and a member of the WBL Corporation group of companies. Mr. Harding also served as Chairman of the board of
directors of Advanced Logic Research, Inc., a former member of the WBL Corporation group of companies, from October 1985 to March 1988. Mr. Harding also served as a member of the board of directors of MFS, a member of the WBL Corporation group of
companies, from October 1994 to September 2000. Mr. Harding holds a B.S.E.E. from Cooper Union College and an M.S. from Columbia University.



Reza Meshginjoined us in June 1989 and has served as Engineering Supervisor, Application Engineering Manager, Director of Engineering and
Telecommunications Division Manager. Prior to assuming his current position as President and Chief Operating Officer in January 2004, Mr. Meshgin served as Vice President and General Manager from May 2002 through December 2003. Mr. Meshgin holds a
B.S. in electrical engineering from Wichita State University and an M.B.A. from University of California at Irvine.



11



---

##### Table of Contents

Craig Riedelhas served as our Chief Financial Officer and Secretary since November 1992. Mr.
Riedel served as the Chief Financial Officer of Wearnes Hollingsworth Corporation from 1998 until March 2004. From 1986 to 1992, Mr. Riedel served in various positions, including Controller, for Interconnection Products, Inc., a member of the WBL
Corporation group of companies. Prior to joining Interconnection, Mr. Riedel held various finance positions from 1981 to 1986 and served as an accountant with Deloitte Haskins & Sells (now Deloitte & Touche LLP), most recently as Audit
Senior, from 1978 to 1981. Mr. Riedel holds an AA.S. in financial services and a B.S. in business administration from Lake Erie College.



Thomas Lee joined us in October 1986 as the Supervisor of Photo Department and subsequently served as our Manufacturing Manager and Director of
Operations from May 1995 to May 2002. Since May 2002, Mr. Lee has served as our Vice President of Operations. Prior to joining us, Mr. Lee served as a mechanical engineer at the Agricultural Corporation in Burma. Mr. Lee holds a B.E. in mechanical
engineering from the Rangoon Institute of Technology in Burma.



Charles Tapscott joined us in November 1994 as Director of Business Development and has served as our Vice President of Sales and Marketing since January 2002. Prior to joining us, Mr. Tapscott served as Vice President of Marketing
at Targ-It-Tronics, Inc. from July 1990 to November 1994. Prior to Targ-It-Tronics, Mr. Tapscott served in various positions at Harris Corporation supporting the development of defense-based communications from June 1966 to July 1990. Mr. Tapscott
holds a B.S.I.E., with a minor in electrical engineering, from the University of Florida.



12



---

##### Table of Contents

Part II



Item 5.    Market for Registrants Common Equity and Related Stockholder Matters



Our common stock, par value $0.0001 (Common Stock) is traded on the NASDAQ National Market (Nasdaq) under the symbol
MFLX. The following table sets forth, for the periods indicated, the high and low sales closing prices for the Common Stock on Nasdaq, as reported in its consolidated transaction reporting system:



|               |  |             |       |     |   |      
|-------------- |  | ----------- | ----- | --- | - | -----
|               |  | Fiscal 2004
|               |  | High        |       | Low
|Third Quarter  |  | $           | 10.04 |     | $ | 10.00
|Fourth Quarter |  |             | 10.50 |     |   | 6.90 



Stockholders of record
on October 31, 2004 numbered approximately 61. Because many of the shares of our Common Stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners represented by these
stockholders of record. We have never declared or paid any cash dividend on our Common Stock, nor do we currently intend to pay any cash dividend on our Common Stock in the foreseeable future. We expect to retain our earnings, if any, for the growth
and development of our business. In addition, the terms of our revolving credit facility limit our ability to pay cash dividends on our Common Stock. A description of the terms of our revolving credit facility can be found in this Annual Report
under Item 7 under the caption Liquidity and Capital Resources and under Item 8 under Note 7.



Securities Authorized for Issuance Under Equity Compensation Plans



Information regarding the Securities Authorized for Issuance under our Equity Compensation Plans can be found under Item 12 of this Annual Report.



Recent Sales of Unregistered Securities



In September 2003, we issued to all of our stockholders rights to acquire
shares of our common stock at a price of approximately $3.86 per share. In October 2003, certain of these stockholders exercised these rights to acquire an aggregate of 6,537,540 shares of common stock for aggregate consideration of $25,251,000. The
issuance of these shares of common stock was considered to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, as transactions by an issuer not involving a
public offering. The recipients of shares of common stock represented their intention to acquire the shares for investment only and not with a view to or for sale with any distribution thereof, and appropriate legends were affixed to the share
certificates issued in these transactions. All recipients had adequate access to information about the company through their relationship with the company.



Use of Proceeds from Registered Securities



We registered 5,566,508 shares of our Common Stock in connection with our initial public offering (IPO) under the Securities Act of 1933
(5,000,000 for us and 566,508 for our selling stockholders). The Securities and Exchange Commission (SEC) declared our Registration Statement on Form S-1, as amended (Reg. No. 333-114510), for the IPO effective on June 24, 2004. The net
offering proceeds to us after deducting expenses were $44,600,000. We used $21.0 million of the proceeds to pay the outstanding amount of the revolving line of credit with Norddeutsche Landesbank Girozentrale (NLG) through September 30,
2004. In addition, we used $2.0 million of the proceeds to pay the outstanding amount of the revolving line of credit with Bank of China (BC) in September 2004, and $1.0 million of the proceeds to reduce the outstanding balance of our
revolving line of credit with Shanghai Pudong Development Bank (SPDB). We also utilized $1.9 million of the proceeds to offset expenses incurred in the IPO. We invested the remaining net proceeds in seven-day municipal securities and in
a money market account.



13



---

##### Table of Contents

Item 6.    Selected Consolidated Financial Data



The following selected consolidated financial data is qualified by reference to, and should be read in conjunction with, Managements
Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related Notes included in Item 8 of this Annual Report. The selected consolidated statements of income data as of September
30, 2004, 2003 and 2002 and selected consolidated balance sheet data as of September 30, 2004 and 2003 are derived from audited consolidated financial statements included elsewhere in this Annual Report. The selected consolidated statements of
income data as of September 30, 2001 and 2000 and selected consolidated balance sheet data as of September 30, 2002, 2001 and 2000 were derived from audited consolidated financial statements not included in this Annual Report. Our historical results
are not necessarily indicative of our future results.



|                                                                           |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|-------------------------------------------------------------------------- |  | ----------------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                           |  | Year Ended September 30,                        |           
|                                                                           |  | 2004                                            |            |   | 2003 |   |            | 2002 |  |   | 2001       |   |  | 2000 |           
|                                                                           |  | (in thousands, except share and per share data) |           
|Net sales                                                                  |  | $                                               | 253,049    |   |      | $ | 129,415    |      |  | $ | 110,537    |   |  | $    | 84,640     |   |  | $ | 102,115    |  
|Operating income                                                           |  | $                                               | 36,419     |   |      | $ | 7,707      |      |  | $ | 7,850      |   |  | $    | 7,292      |   |  | $ | 16,501     |  
|Net income                                                                 |  | $                                               | 25,706     |   |      | $ | 4,577      |      |  | $ | 4,967      |   |  | $    | 4,776      |   |  | $ | 9,649      |  
|Earnings per share:                                                        |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Basic                                                                      |  | $                                               | 1.33       |   |      | $ | 0.39       |      |  | $ | 0.42       |   |  | $    | 0.41       |   |  | $ | 0.82       |  
|Diluted                                                                    |  | $                                               | 1.27       |   |      | $ | 0.38       |      |  | $ | 0.42       |   |  | $    | 0.41       |   |  | $ | 0.82       |  
|Shares used in calculating earnings per share:                             |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Basic                                                                      |  |                                                 | 19,310,044 |   |      |   | 11,720,295 |      |  |   | 11,720,295 |   |  |      | 11,720,295 |   |  |   | 11,720,295 |  
|Diluted                                                                    |  |                                                 | 20,306,842 |   |      |   | 11,978,610 |      |  |   | 11,763,885 |   |  |      | 11,763,885 |   |  |   | 11,763,885 |  
|Gross margin                                                               |  |                                                 | 22.0       | % |      |   | 17.0       | %    |  |   | 18.1       | % |  |      | 22.0       | % |  |   | 28.9       | %
|Operating margin                                                           |  |                                                 | 14.4       | % |      |   | 6.0        | %    |  |   | 7.1        | % |  |      | 8.6        | % |  |   | 16.2       | %
|Selling and marketing, general and administrative expenses as a % of sales |  |                                                 | 7.6        | % |      |   | 11.0       | %    |  |   | 11.0       | % |  |      | 13.4       | % |  |   | 12.7       | %
|Net income as a % of sales                                                 |  |                                                 | 10.2       | % |      |   | 3.5        | %    |  |   | 4.5        | % |  |      | 5.6        | % |  |   | 9.4        | %
|Return on average assets (a)                                               |  |                                                 | 17.8       | % |      |   | 5.8        | %    |  |   | 8.9        | % |  |      | 9.1        | % |  |   | 23.4       | %
|Working capital                                                            |  | $                                               | 78,961     |   |      | $ | 17,656     |      |  | $ | 17,268     |   |  | $    | 12,963     |   |  | $ | 18,702     |  
|Current ratio                                                              |  |                                                 | 2.7        |   |      |   | 1.5        |      |  |   | 1.9        |   |  |      | 1.6        |   |  |   | 2.2        |  
|Total assets                                                               |  | $                                               | 189,998    |   |      | $ | 98,729     |      |  | $ | 59,783     |   |  | $    | 51,966     |   |  | $ | 52,727     |  
|Cash and cash equivalents                                                  |  | $                                               | 38,196     |   |      | $ | 5,211      |      |  | $ | 4,349      |   |  | $    | 1,336      |   |  | $ | 274        |  
|Long-term debt                                                             |  |                                                 |           |   |      | $ | 4,358      |      |  | $ |           |   |  | $    |           |   |  | $ |           |  
|Stockholders equity                                                        |  | $                                               | 141,084    |   |      | $ | 45,486     |      |  | $ | 40,791     |   |  | $    | 35,589     |   |  | $ | 30,822     |  
|Book value per share (b)                                                   |  | $                                               | 6.06       |   |      | $ | 3.88       |      |  | $ | 3.48       |   |  | $    | 3.04       |   |  | $ | 2.63       |  

---

|(a) | Return on average assets is defined as net income divided by average total assets.
|--- | ----------------------------------------------------------------------------------

|(b) | Book value per share is defined as stockholders equity divided by common shares outstanding.
|--- | --------------------------------------------------------------------------------------------



14



---

##### Table of Contents

Item 7.    Managements Discussion and Analysis of Financial Condition and Results of Operations



Overview



We are a global provider of high-quality, technologically advanced flexible printed circuits and value-added component assembly solutions to the
electronics industry. We offer customized flexible printed circuit applications and services ranging from design and application engineering, prototyping and high-volume manufacturing to turnkey component assembly and testing. We focus on portions
of the electronics market where reduced packaging size and functionality dictate the need for flexible printed circuits and flexible printed circuit component assemblies, such as mobile phones and smart mobile devices, portable bar code scanners,
personal digital assistants, power supplies and consumable medical sensors.



From inception in 1984 until 1989, we were engaged primarily in the manufacturing of flexible printed circuits for military and aerospace applications. In early 1990, we began to develop the concept of attaching
components on flexible printed circuits for Motorola. Through these early efforts, we developed the concept of the value-added approach with respect to integrating our design engineering expertise with our component assembly capabilities. This
strategy has enabled us to capitalize on two trends over the course of the 1990s: the outsourcing by OEMs of their manufacturing needs and the shift of manufacturing facilities outside of the United States. In 1994, we formed a wholly owned Chinese
subsidiary, MFC1, to better serve customers that have production facilities in Asia and provide a cost-effective, high-volume production platform for the manufacture of our products. MFC1 provides a complete range of capabilities and services to
support our global customer base, including design engineering and high-volume production of single-sided, double-sided and multi-layer flexible printed circuits and component assemblies. In fiscal 2002, we formed a second wholly owned subsidiary in
China, MFC2, to further expand our flexible printed circuit manufacturing and assembly capacity.



Net Sales



We design and manufacture our products to customer specifications. We engage the services of 18 non-exclusive sales representatives to provide customer
contacts and market our products directly to our global customer base. Thirteen of these sales representatives are located throughout the United States. We also have one sales representative in each of Canada, Europe, Japan, Korea and Taiwan. The
variety of products our customers manufacture are referred to as programs. The majority of our sales are to customers outside of the United States. Sales volumes may be impacted by customer program and product mix changes and delivery schedule
changes imposed on us by our customers. All sales from our Anaheim, California facilities are denominated in U.S. Dollars. All sales from our China facilities are denominated in U.S. Dollars for sales outside China or Chinese Renminbi for sales made
in China.



Cost of Sales



Cost of sales consists of four major categories: material, overhead, labor
and purchased process services. Material cost relates primarily to the purchase of copper foil, polyimide substrates and electronic components. Overhead costs include all materials and facilities associated with manufacturing support, processing
supplies and expenses, support personnel costs, utilities, amortization of facilities and equipment and other related costs. Labor cost represents the cost of personnel related to the manufacture of the completed product. Purchased process services
relate to the subcontracting of specific manufacturing processes to outside contractors. Cost of sales may be impacted by capacity utilization, manufacturing yields, product mix and production efficiencies. Also, we may be subject to increased costs
as a result of changing material prices because we do not have long-term fixed supply agreements.



Sales and Marketing Expense



Sales and marketing expense includes commissions paid to sales representatives, personnel-related costs associated with our customer division support
groups and expenses for overseas sales support, trade show and



15



---

##### Table of Contents

promotional and marketing brochures. We expect our sales and marketing expense to increase in absolute dollars as we hire additional personnel to expand our
marketing efforts and pay increased sales commissions on higher net sales volumes.



General and Administrative Expense



General and administrative expense primarily consists of salaries and benefits of administrative, finance, human resources, regulatory, information services and executive personnel and other expenses related to
external accounting, legal and professional expenses, business insurance, management information systems, travel and entertainment and other corporate office expenses. We anticipate that general and administrative expense will increase in absolute
dollars as we hire additional personnel and incur costs related to the anticipated growth of our company and our operations as a public company.



Interest Expense, Net



Interest expense, net, consists of interest income earned on cash and cash equivalents balances and interest expense incurred on our lines of credit and
loans payable.



Other (Income) Expense



Other income and expense consists primarily of income
or loss on our investment in Mind Wurx LLC, or Mind Wurx. In April 2002, we agreed to provide Mind Wurx with advances to fund its operations and use of our facilities and personnel support in exchange for 15% of its equity. Due to our ability to
significantly influence the operations of Mind Wurx, we accounted for this investment under the equity method of accounting. We terminated our agreements with Mind Wurx in their entirety in March 2004; however, we have retained our 15% ownership
interest.



Provision for Income Taxes



We record a provision for income taxes based on the statutory rates
applicable in the countries we do business, subject to any tax holiday periods granted by the respective governmental authorities. The provision for income taxes represents the income taxes payable plus the changes in deferred tax assets and
liabilities.



Subsequent to our year end, The American Job
Creation Act of 2004 (the Act) was signed into law on October 22, 2004. The Act contains provisions that will replace an export incentive with a deduction from domestic manufacturing income. As we are both an exporter and a domestic
manufacturer, we are determining the impact this change could have on our future income tax provision. The Act also allows us to repatriate, subject to certain restrictions, including restrictions on dividend payments by the foreign jurisdiction,
our permanently reinvested foreign earnings in 2005, at an effective tax rate of 5.25%. We are still evaluating whether to take advantage of this opportunity and the potential impact on our tax provision.



Critical Accounting Policies and Estimates



This Managements Discussion and Analysis of Financial Condition
and Results of Operations section is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of consolidated financial
statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including those related to inventories,
income taxes, accounts receivable allowances and warranty. We base our estimates on historical experience, performance metrics and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ from these estimates under different assumptions or conditions.



16



---

##### Table of Contents

We apply the following critical accounting policies in the preparation of our consolidated financial
statements:



| |  | Revenue Recognition.    Revenues are generated from the sale of flexible printed circuit boards, which are sold to OEMs, subcontractors and EMS providers
to be included in other electronic products. We recognize revenue when there is persuasive evidence of an arrangement with the customer that states a fixed or determinable sales price, when title and risk of loss transfers, and when delivery of the
product has occurred in accordance with the terms of the sale and collectibility of the related account receivable is reasonably assured. Our remaining obligation to customers after delivery is limited to our warranty obligations on our product.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Inventories.    We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value
of the inventory. We regularly review our inventory and record a provision for excess or obsolete inventory based primarily on historical usage and our estimate of expected and future product demand. Our estimates of future product demand will
differ from actual demand; therefore, our estimates of the provision required for excess and obsolete inventory may increase or decrease, which we will record in the period such determination was made.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Income Taxes.    We determine if our deferred tax assets and liabilities are realizable on an ongoing basis by assessing our need for a valuation
allowance and by adjusting the amount of such allowance, as necessary. In the determination of any valuation allowance, we have considered taxable income in prior carryback years, future taxable income and the feasibility of tax planning
initiatives. If we determine that it is more likely than not that we will realize certain of our deferred tax assets for which we previously provided a valuation allowance, an adjustment would be required to reduce the existing valuation allowance.
Conversely, if we determine that we would not be able to realize our recorded net deferred tax asset, an adjustment to increase the valuation allowance would be charged to our results of operations in the period such conclusion was reached. In
addition, we operate within multiple domestic and foreign taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time for resolution. Although we believe
that adequate consideration has been made for such issues, it is possible that the ultimate resolution of such issues could be significantly different than originally estimated.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Accounts Receivable Allowance.    We perform ongoing credit evaluations of our customers and adjust credit limits and their credit worthiness, as
determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based on our historical experience, our anticipation of uncollectible
amounts and any specific customer collection issues that we have identified. While our credit losses historically have been within our expectations and the allowance provided, we might not continue to experience the same credit loss rates that we
have in the past. The majority of our receivables are concentrated in relatively few customers; therefore, a significant change in the liquidity or financial position of any one customer could make it more difficult for us to collect our accounts
receivable and require us to increase our allowance for doubtful accounts.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Warranty Reserves.    We provide a 60-day warranty on our products. We provide a warranty reserve for the estimated cost of product warranties at the time
the net sales are recognized. While we engage in quality programs and processes, up to and including the final product, our warranty obligation is affected by product failure rates, the cost of the failed product and the inbound and outbound freight
costs incurred in replacing defective parts. We continuously monitor and analyze product returns for warranty and maintain a reserve for the related warranty costs based on historical experience and assumptions. If actual failure rates and the
resulting cost of replacement vary from our historically based estimates, revisions to the estimated warranty reserve would be required.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



17



---

##### Table of Contents

Results of Operations



The following table sets forth the Statement of Operations data of M-Flex expressed as a percentage of net sales for the periods indicated.



|                                   |  |                          |   |  |       |   |  |       |  
|---------------------------------- |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                                   |  | Year Ended September 30, |  
|                                   |  | 2004                     |   |  | 2003  |   |  | 2002  |  
|Net sales                          |  | 100.0                    | % |  | 100.0 | % |  | 100.0 | %
|Cost of sales                      |  | 78.0                     |   |  | 83.0  |   |  | 81.9  |  
|                                   |  |                          |   |  |       |   |  |       |  
|Gross profit                       |  | 22.0                     |   |  | 17.0  |   |  | 18.1  |  
|Sales and marketing expense        |  | 3.0                      |   |  | 4.3   |   |  | 4.4   |  
|General and administrative expense |  | 4.6                      |   |  | 6.7   |   |  | 6.6   |  
|                                   |  |                          |   |  |       |   |  |       |  
|Operating income                   |  | 14.4                     |   |  | 6.0   |   |  | 7.1   |  
|Interest expense, net              |  | 0.2                      |   |  | 0.3   |   |  | 0.1   |  
|Other (income) expense, net        |  | 0.0                      |   |  | 0.4   |   |  | 0.2   |  
|                                   |  |                          |   |  |       |   |  |       |  
|Income before income taxes         |  | 14.2                     |   |  | 5.3   |   |  | 6.8   |  
|Provision for income taxes         |  | (4.0                     | ) |  | (1.8  | ) |  | (2.3  | )
|                                   |  |                          |   |  |       |   |  |       |  
|Net income                         |  | 10.2                     | % |  | 3.5   | % |  | 4.5   | %
|                                   |  |                          |   |  |       |   |  |       |  



Year Ended September 30, 2004
Compared to Year Ended September 30, 2003



Net
Sales.The increase of $123.6 million was attributable primarily to $112.7 million of increased net sales to the wireless telecommunications sector, which accounted for approximately 83% of total net
sales in fiscal year 2004 versus 75% in fiscal 2003. The increased wireless sales were attributable to the increased unit volume shipped and continued transition to flip phone style models, which utilize flexible circuitry, and the added
level of phone features, which utilize additional flex circuits and value-added components per phone. Industrial customers net sales, our second largest sector, increased by $8.6 million or 48% as compared to fiscal 2003, 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 prior year levels.



Cost of Sales and Gross
Profit.Cost of sales as a percentage of net sales decreased to 78% versus 83% in the prior year. Increases in the material cost percentage of sales were offset by favorable declines in labor and
overhead cost percentages, primarily attributable to the commencement of high volume production at MFC2 during the year. The increase in material costs was due primarily to growth in net 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.



Gross profit increased to $55.6 million in fiscal 2004 from $22.0 million in fiscal 2003. As a percentage of sales, gross profit increased to 22% from 17%
in the prior year. The increase in gross margin was primarily due to the increased benefit derived from the lower offshore cost structure and increased plant utilization, the leveraging of our fixed overhead cost structure on increased sales volume,
as well as efficiency and manufacturing yield improvements on stable high volume production levels during fiscal 2004.



Sales and Marketing Expense.Sales representatives commissions and other sales related expense increased to
$4.1 million for fiscal 2004 from $2.5 million in fiscal 2003, an increase of 64%, primarily due to higher net sales. As a percent of net sales, commissions remained relatively unchanged at approximately 2%. Compensation and benefit expense
increased to $3.5 million in fiscal 2004 from $3.1 million in fiscal 2003, an increase of 13%, 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% in fiscal 2004 from 2% in fiscal 2003, due to the leveraging of fixed marketing expense, primarily compensation and benefits, over increased net sales. Even with our focus to continually decrease operating expenses as
a percentage of sales, this may be at the lower end of our sustainable range.



18



---

##### Table of Contents

General and Administrative Expense.    As a percentage of net sales, general
and administrative expense decreased to 5% in fiscal 2004 from 7% in fiscal 2003. This percentage decrease was primarily attributable to leveraging of a small increase in the compensation and benefits expense, due to increased headcount, over a much
larger increase in net sales. As stated above, we believe this may be at the lower end of our sustainable range.



Interest Expense, Net.Net interest expense increased to $468,000 for fiscal 2004 from $310,000 for fiscal
2003, an increase of 51%. The increase in interest expense, net was primarily due to increased borrowings to support working capitals needs as a result of the business growth and to support the capacity expansion in MFC2. Additional interest expense
was incurred on the GE Capital Asset loan as well as an interest penalty of $181,000 resulting from the early repayment of that debt in February 2004. We expect to reduce our interest expense, net amount in fiscal 2005 based on our repayment of debt
with proceeds from the IPO.



Other (Income) Expense,
Net.    The principal component of the other expense for fiscal 2004 and fiscal 2003 was a $250,000 and $441,000, respectively, loss from our investment in Mind Wurx.



Income Taxes.    The effective tax rate for fiscal
2004 was 28% compared to 33% for fiscal 2003. The lower effective tax rate is due primarily to foreign tax credits utilized and a higher percentage of China generated pre-tax income, which is taxed at a lower rate. We expect our overall tax rate to
increase 3% to 5% in fiscal 2005 due to the expiration of the MFC1 tax holiday on December 31, 2004.



Year Ended September 30, 2003 Compared to Year Ended September 30, 2002



Net Sales.    Approximately $17.8 million of the increase in net sales was attributable to increased demand in the wireless
telecommunications sector, which accounted for approximately 75% of net sales in fiscal 2003 versus 72% in fiscal 2002, and not to price increases as the competitive global environment has experienced limited product price increases. Improved net
sales were the result of increased unit volume shipments and the transition to flip-phone style mobile devices that require flexible printed circuitry and added levels of phone features, which in turn require additional flexible printed
circuits per phone. Sales in our industrial sector increased by approximately $2.4 million and accounted for 13% of net sales in fiscal 2003 and 14% in the prior year. These favorable trends were offset by declines in sales to our tape and disk
drive customers. The personal digital assistant, network telecommunications and power transmission sectors all remained relatively unchanged from the prior year levels.



Cost of Sales and Gross Profit.    Cost of sales as a percentage of net sales increased to 83%
from 82% for the prior year. Increased business volumes required facility and infrastructure expansion in both the United States and China. The need to produce a high-volume program at our Anaheim facilities that was originally intended for
production in China required an increase in headcount at higher labor rates than China and resulted in additional labor costs of $1.1 million due to the higher average hourly rate. High-volume programs, which potentially involve quantities in the
millions, must be competitively priced and are normally scheduled for offshore production in order to take advantage of the lower offshore cost structure. Total overhead costs increased as a result of headcount and infrastructure increases to
support the additional business volumes. Total overhead compensation and benefits expense increased $3.2 million in fiscal 2003 versus the prior year due to headcount increases. Depreciation expense increased by $1.6 million as the result of
increased capital expenditures for new equipment. Freight, duty and VAT expense increased $1.3 million as a result of increased transfer of product between our Anaheim and China operations. Increased manufacturing output resulted in an increase in
manufacturing expenses of $872,000.



Gross profit increased to
$22.0 million in fiscal 2003 from $20.0 million in the prior year. As a percentage of sales, gross profit decreased to 17% from 18% for the prior year. The decrease in gross profit percentage was caused primarily by the increased cost of component
material included on the flexible circuits. The rapid growth of new Motorola programs also had an adverse impact on production yields, which increased total cost of sales and labor costs as a result of producing a high-volume fine-line program at
our Anaheim facilities. Gross profit realized on the production of flexible printed circuit assemblies depends on the level of components included on



19



---

##### Table of Contents

the flexible printed circuit, the complexity of flexible printed circuit design, the stage in program life cycle and production yields. Production yields are
expected to improve as programs reach stable production levels. We expect gross profit to increase in the second and third quarters of fiscal 2004 as production levels for newer programs reach optimum volumes and the manufacturing process
stabilizes, including the transfer of programs to MFC2.



Sales and Marketing Expense.    Sales representatives commissions increased to $2.5 million in fiscal 2003 from $2.2 million in the prior year on the higher net sales volumes. As a percentage of net sales,
commissions remained relatively unchanged at 2% in fiscal 2003 from the prior year due to lower average commission rates paid on larger high-volume programs. Compensation and benefits expense increased to $3.1 million in fiscal 2003 from $2.7
million in the prior year, primarily as a result of headcount additions to support the increased business volume and wage increases. As a percentage of net sales, compensation and benefits expense decreased to 2% in fiscal 2003 from 3% in the prior
year, primarily due to the leveraging of expense over the increased net sales.



General and Administrative Expense.    As a percentage of net sales, administrative expense remained unchanged at approximately 7%. General and administrative expense increased primarily as
a result of increased compensation and benefits expense from headcount additions of $425,000, enterprise resource planning, or ERP, system training expense of $271,000, increases in office and telephone expenses of $189,000 and insurance expense of
$52,000 (as a result of premium and coverage increases and expanded coverage) due to increased business activity.



Interest Expense, Net.    The $210,000 increase in net interest expense in fiscal 2003 was primarily due to interest on the GE
Capital loan of $127,000 incurred in connection with the purchase of our headquarters facility in Anaheim, California and $65,000 in interest accrued on advances from Wearnes Technology Pte. Ltd.



Other (Income) Expense, Net.    The principal
component in fiscal 2003 was a $441,000 loss from our investment in Mind Wurx, whereas the principal component in the prior year was a $189,000 loss from our investment in Mind Wurx.



Income Taxes.    The effective tax rate for fiscal 2003 was 33% compared to 34% for the prior
year. The lower effective tax rate is due primarily to the higher percentage of China generated pre-tax income, which is taxed at a lower rate, to total pre-tax income during the current versus the prior year. We had no tax liability in China for
the first quarter of fiscal 2002.



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.



The following table sets forth, for the years indicated, our net cash flows provided by (used in) operating, investing and financing activities, our period-end cash and cash equivalents and other operating measures:



|                                                     |  |                                          |         |   |      |   |         |      |  |   |        |  
|---------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                     |  | Years Ended September 30, (in thousands) |        
|                                                     |  | 2004                                     |         |   | 2003 |   |         | 2002 | 
|Cash flow provided by operating activities           |  | $                                        | 5,116   |   |      | $ | 5,879   |      |  | $ | 10,929 |  
|Cash flow used in investing activities               |  |                                          | (20,682 | ) |      |   | (29,201 | )    |  |   | (7,611 | )
|Cash flow provided by (used in) financing activities |  |                                          | 48,481  |   |      |   | 24,196  |      |  |   | (305   | )
|Cash and cash equivalents at year end                |  |                                          | 38,196  |   |      |   | 5,211   |      |  |   | 4,349  |  
|                                                     |  |                                          |        
|Days sales outstanding                               |  |                                          | 46.5    |   |      |   | 54      |      |  |   | 52     |  
|Inventory turnover                                   |  |                                          | 6.5     |   |      |   | 6.3     |      |  |   | 7.3    |  



20



---

##### Table of Contents

Net cash generated from operations during fiscal 2004 was $5.1 million. During fiscal 2004, net income of
$25.7 million, adjusted for depreciation, deferred taxes, loss on equipment disposal and loss on equity investment generated $29.8 million of operating cash, offset by $24.7 million required for working capital.



It is our policy to carefully monitor the state of our business, cash
requirements and capital structure. We believe that cash on hand and 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 12 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 in our 2004 fiscal year were as follows:



| |  | Our net accounts receivable increased to $44.4 million at September 30, 2004 from $21 million for the prior year, an increase of 111%. The increase in outstanding accounts
receivable was attributable to the higher average monthly sales in fiscal 2004 versus the prior year. Our net inventory balances increased to $39.2 million at September 30, 2004 from $21.9 million for the prior year, an increase of 79%. The
principal reason for the increase was the expected growth in program order volumes for high-volume, high-density flexible printed circuit assembly programs for the wireless telecommunications sector. Our accounts payable increased to $26.1 million
at September 30, 2004 from $21 million for the prior year, an increase of 24%, as a result of increased purchases in support of the higher business volumes. Depreciation and amortization expense was $6.7 million for fiscal 2004 versus $4.4 million
in the prior year due to the increased fixed asset base.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our principal investing and financing activities in our 2004 fiscal year were as follows:



| |  | Net cash used in investing activities was $20.7 million for fiscal 2004. Capital expenditures included $20.4 million of capital equipment and other assets, including $321,000 of
deposits for fixed asset purchases, primarily for the construction of our MFC2 facility and the purchase of machinery and equipment for our new China operations. As of September 30, 2004 and 2003, we had outstanding purchase commitments related to
MFC2 capital projects which totaled $18 million and $5.7 million, respectively.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Net cash provided by financing activities was $48.5 million for fiscal 2004 and consisted of $54.8 million of proceeds from the sale of stock and $6.3 million of net payments on our
line of credit and notes payable. Our loans payable and borrowings outstanding against credit facilities decreased to $3.4 million at September 30, 2004 from $9.7 million at September 30, 2003. The decrease in outstanding loan amounts was due to the
pay down in debt from our proceeds from the initial public offering.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net cash generated from operations during fiscal 2003 was $5.9 million. During fiscal 2003, net income of $4.6 million, adjusted for depreciation and amortization, deferred taxes, loss on equipment disposal and loss
on equity investment generated $9.6 million of operating cash, offset by $3.7 million required for working capital.



Changes in the principal components of working capital in our 2003 fiscal year were as follows:



| |  | Our net accounts receivable increased to $21.0 million at September 30, 2003 from $17.8 million for the prior year, an increase of 18%. The increase in outstanding accounts
receivable was attributable to the higher average monthly sales in fiscal 2003 versus the prior year. Our net inventory balances increased to $22.0 million at September 30, 2003 from $12.4 million for the prior year, an increase of 77%. The
principal reason for the increase was due to the growth in program order volumes for high-volume, high-density flexible printed circuit assembly programs for the wireless telecommunications sector. Our accounts payable increased to $21.0 million at
September 30, 2003 from $11.3 million for the prior year, an increase of 86%, primarily due to increased purchasing volumes of raw and component materials in support of the improving business activity. Depreciation and amortization expense increased
to $4.4 million for fiscal 2003 versus $2.8 million in the prior year due to the increased fixed asset base.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21



---

##### Table of Contents

Our principal investing and financing activities in our 2003 fiscal year were as follows:



| |  | Net cash used in investing activities was $29.2 million for fiscal 2003. Capital expenditures included $28.7 million of capital equipment and other assets, including $652,000 of
software related to the planned implementation of an ERP system. Investing activities also included the advance of $522,000 to Mind Wurx, an equity method investee. Our net fixed assets increased to $42.3 million at September 30, 2003 from $20.2
million in the prior year. Capital expenditures for plant and equipment were $23.8 million for the year ended September 30, 2003 versus $4.6 million in the prior year. Expenditures for plant and equipment were primarily for the purchase of machinery
and equipment for MFC1 and construction costs and related machinery and equipment for MFC2. Both activities are in furtherance of increasing our China-based capacity and manufacturing capabilities. In addition, purchases were made for our Anaheim
facilities to upgrade technology for fine-line processing.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Net cash provided by financing activities was $24.2 million for fiscal 2003 and represented $4.6 million of net proceeds from the GE Capital loan used for the purchase of our
headquarters building in Anaheim, California, $4.6 million net borrowings on our lines of credit and $15.0 million deposit by Wearnes Technology Pte. Ltd. related to its purchase of our common stock.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Capital Commitments



As of September 30, 2004, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the SECs Regulation
S-K. The following summarizes our contractual obligations at September 30, 2004 and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in thousands):



|                              |  |                        |        |                 |   |             |  |             |     |                  |   |    |  |   |  
|----------------------------- |  | ---------------------- | ------ | --------------- | - | ----------- |  | ----------- | --- | ---------------- | - | -- |  | - | -
|                              |  | Payments Due by Period
|Contractual Obligations       |  | Total                  |        | Less than1 year |   | 1 to 3years |  | 3 to 5years |     | More than5 years
|Short-term borrowings         |  | $                      | 3,369  |                 | $ | 3,369       |  | $           |    |                  | $ |   |  | $ | 
|Long-term debt                |  |                        |       |                 |   |            |  |             |    |                  |   |   |  |   | 
|Operating leases (facilities) |  |                        | 622    |                 |   | 484         |  |             | 138 |                  |   |   |  |   | 
|Capital lease obligations     |  |                        | 302    |                 |   | 55          |  |             | 207 |                  |   | 40 |  |   | 
|Purchase obligations (MFC2)   |  |                        | 18,000 |                 |   | 18,000      |  |             |    |                  |   |   |  |   | 



In May 2002, we
executed a purchase and sale agreement with Glenborough Fund VIII, LLC for the purchase of a 93,000 square feet leased facility located at 3140 East Coronado Street, Anaheim, California for a negotiated purchase price of $6.4 million. In October
2002, we signed a commitment letter with GE Capital for the financing of the facility being purchased for an amount equal to 75% of the propertys appraised market value, or approximately $4.8 million. The remaining 25% was paid using on-hand
cash balances. The terms of the GE Capital commitment letter called for a 15-year note, at an interest rate of LIBOR plus 2.35%, and the payment of a 1% loan fee, or $48,000. The transaction closed in December 2002. We repaid the loan in full on
February 2004 by taking an advance on our facility with NLG (thereby eliminating all of our long-term debt in the table above). As a result of the early repayment of the loan, we paid a penalty of $181,000.



In March 2003, we commenced construction of a new 285,000 square feet
manufacturing facility at MFC2 to provide additional capacity for flexible printed circuit assembly production and to support other new business activities. The purchase obligations related to MFC 2 relate to amounts due to complete construction of
the facility and amounts to be paid for the purchase of manufacturing equipment.



Recent Accounting Pronouncements



In December
2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB No. 104), which codifies, revises and rescinds certain sections of SAB No. 101, Revenue Recognition, in order to make this
interpretive guidance consistent with current authoritative accounting and auditing guidance



22



---

##### Table of Contents

and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on the Companys financial position, results of
operations or cash flows.



In March 2004, a consensus was
reached in EITF Issue No. 03-16, Accounting for Investments in Limited Liability Companies. The EITF concluded that an investment in a limited liability company (LLC) that maintains a specific ownership account for
each investor should be viewed as similar to an investment in a limited partnership for determining whether a noncontrolling investment in an LLC should be accounted for using the cost or equity method. The changes noted in EITF Issue No. 03-16 did
not have a material effect on the Companys financial position, results from operations or cash flows.



In June 2004, a consensus was reached in EITF Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The EITF concluded that a common approach to evaluating other-than-temporary impairment for certain debt and equity securities would reduce the ambiguities in existing literature and reduce the inconsistent application of such
guidance. A consensus was reached that the application guidance for certain investments, as defined, should be used to determine when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an
impairment loss. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary
impairments. The changes noted in EITF Issue No. 03-01 did not have a material effect on the Companys financial position, results of operations or cash flows.



23



---

##### Table of Contents

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 has been derived from products that have been incorporated into products that are manufactured by or on behalf of Motorola, Inc. For the years ended
September 30, 2004 and 2003, 80% and 71%, respectively, of our net sales were to Motorola and 40 and 35 of its subcontractors, respectively. Several subcontractors of Motorola also constitute significant customers of ours. For the years ended
September 30, 2004 and 2003, sales of our products to Hosiden F.D. Corporation and its affiliates, Optrex Corporation Japan and its affiliates and Koninklijke Philips Electronics NV and its affiliates accounted for 11%, 10% and 7%, and 14%, 12% and
21% 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 problems 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 years
ended September 30, 2004 and 2003, 83% and 75%, respectively, 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



24



---

##### Table of Contents

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;
| | - | ----------------------------------------



| |  | 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
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | unanticipated 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 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 assurances 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 64% of our outstanding common stock and is able to exert influence over us and our major corporate decisions.



WBL Corporation beneficially owns 64% 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, it has agreed not to nominate WBL Corporation representatives to more than 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



25



---

##### Table of Contents

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, 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 investment in MFS are not the same as the individuals who manage WBLs investment 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 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 will not have the ability to
prevent us from making operational decisions that do not require stockholder approval; however, WBL Corporation will 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;
| | - | -------------------------------------------------



26



---

##### Table of Contents

| |  | 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.



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 according, 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.



27



---

##### Table of Contents

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 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. Such competitive pricing 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 EMS providers. It is possible that any of
these EMS providers may develop their own flexible printed circuit manufacturing capabilities, in which case they may cease ordering products from us and may compete with us on future OEM programs.



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



28



---

##### Table of Contents

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. Our ability to increase our net sales in the future will depend in large part on our success in
developing and maintaining relationships with these representatives. 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.



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 successful in the future in managing any shortage of raw materials or components that we may experience.



We purchase substantially all of our materials used to make flexible printed
circuits from two sources, E.I. Dupont de Nemours & Co. and Rogers Corporation. In the fiscal years 2004, 2003 and 2002, we purchased approximately 77%, 87% and 89% of these materials from Dupont and approximately 23%, 13% and 11% from Rogers.
Currently, Molex Inc., Supertex, Inc. and Panasonic are our largest component suppliers. In the fiscal



29



---

##### Table of Contents

year 2004, we purchased 10%, 2% and 13% of our components from Molex, Supertex, and Panasonic. In the fiscal year 2003, we purchased 11%, 8% and 5% of our
components from Molex, Supertex, and Panasonic. In the fiscal year 2002, we purchased 12%, 10% and 5% of our components from Molex, Supertex and Panasonic.



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. Although we have purchased a generator and plan to purchase or lease additional
generators, we cannot be assured that such generators 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.



30



---

##### Table of Contents

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 acquisitions.



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;
| | - | ----------------------------------------------------------------------------------



| |  | 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; and
| | - | -----------------------------------------------------------



| |  | increased legal and accounting costs as a result of the newly adopted rules and regulations related to the Sarbanes-Oxley Act of 2002.
| | - | --------------------------------------------------------------------------------------------------------------------------------------



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.
| | - | ------------------------------------------------------------------



31



---

##### Table of Contents

In addition, we will incur significant legal, accounting, insurance and other expenses as a result of
being a public company. The Sarbanes-Oxley Act of 2002, 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 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 currently are evaluating and monitoring developments with respect to these new 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; 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, will expire at December 31, 2004. 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 are in the process of an audit of our tax holiday for MFC1 by the relevant taxing authorities in China. Upon completion of this audit, we may be required to pay increased taxes and penalties.



We also have obtained a tax holiday for our new manufacturing
facility in China, MFC2, that allows for tax-free operation for the first five years (beginning in the first year of profitability) followed by five years of



32



---

##### Table of Contents

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.



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 an audit in China relating to the
import and export of raw and component materials at MFC1. We have been advised by the relevant custom authorities that upon completion of this audit, we may be required to pay penalties due to excess stock of these raw and component materials.



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



33



---

##### Table of Contents

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 changes 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 $122,000 and 121,000 of restricted cash for the fiscal years ended September 30, 2004 and 2003, respectively, 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 section 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.



We may not have effective
internal controls if we fail to remedy any deficiency we may identify in our system of internal controls.



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 of 2002 (Section 404), we are adopting a project work plan to assess the adequacy of our internal controls, remediate any weakness that may be identified,
validate that controls are functioning as documented and implement a continuous reporting and improvement process for internal controls. We may discover deficiencies 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. If the deficiencies are not adequately addressed, or if we are unable to complete all of our testing and any



34



---

##### Table of Contents

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 accountants report.



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 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 November 30, 2004 we have 23,264,835 shares of common stock outstanding and 1,768,305 shares subject to unexercised options that are fully vested. Of these shares,



| |  | 6,189,255 shares are eligible for resale; and
| | - | ---------------------------------------------



| |  | 18,843,885 shares will be available for sale December 23, 2004 (i.e., following the expiration of lock-up agreements the underwriters entered into with the holders of our
common stock in connection with our initial public offering), subject to certain volume limitations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Any or all of the shares subject to the lock-up agreements may be released prior to expiration of the lock-up period at the discretion of Needham &
Company, Inc. To the extent shares are released before the expiration of the lock-up period and these shares are sold 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;
| | - | ------------------------------------------------------------------------------------------------------------------------------



35



---

##### Table of Contents

| |  | 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 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 7A.    Quantitative and Qualitative Disclosures About Market Risks



Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At September 30, 2004, we had $0, $3.4
and $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 fiscal 2004 was made in U.S. Dollars. The balance of our sales are 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. Transactions in RMB represent approximately 29% of total revenues from foreign customers for the fiscal year ended September 30, 2004. 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.



36



---

##### Table of Contents

Item 8.    Financial Statements and Supplementary Data



MULTI-FINELINE ELECTRONIX, INC.



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                              |  |     
|----------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                              |  | Page
|Report of Independent Registered Public Accounting Firm                                                                       |  | 38  
|Consolidated Balance Sheets as of September 30, 2004 and 2003                                                                 |  | 39  
|Consolidated Statements of Income for the Years Ended September 30, 2004, 2003 and 2002                                       |  | 40  
|Consolidated Statements of Stockholders Equity for the Years Ended September 30, 2004, 2003 and 2002                         |  | 41  
|Consolidated Statements of Cash Flows for the Years Ended September 30, 2004, 2003 and 2002                                   |  | 42  
|Notes to Consolidated Financial Statements                                                                                    |  | 43  
|Schedule IIConsolidated Valuation and Qualifying Accounts and Reserves for the Years Ended September 30, 2004, 2003 and 2002 |  | 62  



37



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders

of Multi-Fineline Electronix, Inc.



In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the
financial position of Multi-Fineline Electronix, Inc. and its subsidiaries at September 30, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2004 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



/s/ PricewaterhouseCoopers LLP



PricewaterhouseCoopers LLP

Orange County, California

November 22, 2004



38



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Per Share and Share Data)



|                                                                                                                                        |  |               |         |      |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ---- | - | ------ | -
|                                                                                                                                        |  | September 30, |        
|                                                                                                                                        |  | 2004          |         | 2003 |  
|ASSETS                                                                                                                                  |  |               |         |      |   |        |  
|Cash and cash equivalents                                                                                                               |  | $             | 38,196  |      | $ | 5,211  |  
|Restricted cash                                                                                                                         |  |               | 181     |      |   | 133    |  
|Accounts receivable, net of allowances of $250 and $379                                                                                 |  |               | 44,382  |      |   | 20,987 |  
|Inventories                                                                                                                             |  |               | 39,217  |      |   | 21,929 |  
|Due from affiliates                                                                                                                     |  |               | 43      |      |   | 1      |  
|Deferred taxes                                                                                                                          |  |               | 3,343   |      |   | 1,826  |  
|Other current assets                                                                                                                    |  |               | 807     |      |   | 393    |  
|                                                                                                                                        |  |               |         |      |   |        |  
|Total current assets                                                                                                                    |  |               | 126,169 |      |   | 50,480 |  
|Property, plant and equipment, net                                                                                                      |  |               | 59,914  |      |   | 42,340 |  
|Restricted cash                                                                                                                         |  |               | 122     |      |   | 121    |  
|Deferred taxes                                                                                                                          |  |               | 1,790   |      |   |       |  
|Other assets                                                                                                                            |  |               | 2,003   |      |   | 5,788  |  
|                                                                                                                                        |  |               |         |      |   |        |  
|Total assets                                                                                                                            |  | $             | 189,998 |      | $ | 98,729 |  
|                                                                                                                                        |  |               |         |      |   |        |  
|                                                                                                                                        |  |              
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                    |  |               |         |      |   |        |  
|Accounts payable                                                                                                                        |  | $             | 26,079  |      | $ | 21,015 |  
|Accrued liabilities                                                                                                                     |  |               | 5,990   |      |   | 4,838  |  
|Due to affiliates                                                                                                                       |  |               | 5,471   |      |   | 1,334  |  
|Line of credit                                                                                                                          |  |               | 3,369   |      |   | 5,085  |  
|Current portion of note payable                                                                                                         |  |               |        |      |   | 253    |  
|Income taxes payable                                                                                                                    |  |               | 6,299   |      |   | 299    |  
|                                                                                                                                        |  |               |         |      |   |        |  
|Total current liabilities                                                                                                               |  |               | 47,208  |      |   | 32,824 |  
|Deposits from Wearnes for purchase of common stock                                                                                      |  |               |        |      |   | 15,000 |  
|Note payable, net of current portion                                                                                                    |  |               |        |      |   | 4,358  |  
|Other liabilities                                                                                                                       |  |               | 361     |      |   | 78     |  
|Deferred taxes                                                                                                                          |  |               | 1,345   |      |   | 983    |  
|                                                                                                                                        |  |               |         |      |   |        |  
|Total liabilities                                                                                                                       |  |               | 48,914  |      |   | 53,243 |  
|                                                                                                                                        |  |               |         |      |   |        |  
|Commitments and contingencies (Note 10)                                                                                                 |  |               |         |      |   |        |  
|Stockholders equity                                                                                                                    |  |               |         |      |   |        |  
|Preferred stock, $0.0001 par value, 5,000,000 and zero shares authorized; none issued or outstanding                                    |  |               |        |      |   |       |  
|Common stock, $0.0001 par value; 100,000,000 and 150,000,000 shares authorized; 23,264,835 and 11,720,295 shares issued and
outstanding |  |               | 2       |      |   | 1      |  
|Additional paid-in capital                                                                                                              |  |               | 89,110  |      |   | 8,429  |  
|Unearned deferred compensation                                                                                                          |  |               |        |      |   | (14    | )
|Retained earnings                                                                                                                       |  |               | 51,971  |      |   | 37,139 |  
|Accumulated other comprehensive (income) loss                                                                                           |  |               | 1       |      |   | (69    | )
|                                                                                                                                        |  |               |         |      |   |        |  
|Total stockholders equity                                                                                                              |  |               | 141,084 |      |   | 45,486 |  
|                                                                                                                                        |  |               |         |      |   |        |  
|Total liabilities and stockholders equity                                                                                              |  | $             | 189,998 |      | $ | 98,729 |  
|                                                                                                                                        |  |               |         |      |   |        |  



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



39



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share and Share Data)



|                                                                                                         |  |                           |            |   |      |   |            |      |  |   |            |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                         |  | Years Ended September 30, |           
|                                                                                                         |  | 2004                      |            |   | 2003 |   |            | 2002 | 
|Net sales                                                                                                |  | $                         | 253,049    |   |      | $ | 129,415    |      |  | $ | 110,537    |  
|Cost of sales                                                                                            |  |                           | 197,412    |   |      |   | 107,418    |      |  |   | 90,553     |  
|                                                                                                         |  |                           |            |   |      |   |            |      |  |   |            |  
|Gross profit                                                                                             |  |                           | 55,637     |   |      |   | 21,997     |      |  |   | 19,984     |  
|                                                                                                         |  |                           |            |   |      |   |            |      |  |   |            |  
|Operating expenses                                                                                       |  |                           |            |   |      |   |            |      |  |   |            |  
|Sales and marketing                                                                                      |  |                           | 7,649      |   |      |   | 5,621      |      |  |   | 4,880      |  
|General and administrative (includes stock-based compensation expense of $14, $130 and $0, respectively) |  |                           | 11,569     |   |      |   | 8,669      |      |  |   | 7,254      |  
|                                                                                                         |  |                           |            |   |      |   |            |      |  |   |            |  
|Total operating expenses                                                                                 |  |                           | 19,218     |   |      |   | 14,290     |      |  |   | 12,134     |  
|                                                                                                         |  |                           |            |   |      |   |            |      |  |   |            |  
|Operating income                                                                                         |  |                           | 36,419     |   |      |   | 7,707      |      |  |   | 7,850      |  
|Other (income) expense, net                                                                              |  |                           |            |   |      |   |            |      |  |   |            |  
|Loss from equity method investee, net                                                                    |  |                           | 250        |   |      |   | 441        |      |  |   | 189        |  
|Interest expense                                                                                         |  |                           | 614        |   |      |   | 321        |      |  |   | 130        |  
|Interest income                                                                                          |  |                           | (146       | ) |      |   | (11        | )    |  |   | (30        | )
|Other (income) expense, net                                                                              |  |                           | (150       | ) |      |   | 84         |      |  |   |           |  
|                                                                                                         |  |                           |            |   |      |   |            |      |  |   |            |  
|Income before provision for income taxes                                                                 |  |                           | 35,851     |   |      |   | 6,872      |      |  |   | 7,561      |  
|Provision for income taxes                                                                               |  |                           | (10,145    | ) |      |   | (2,295     | )    |  |   | (2,594     | )
|                                                                                                         |  |                           |            |   |      |   |            |      |  |   |            |  
|Net income                                                                                               |  | $                         | 25,706     |   |      | $ | 4,577      |      |  | $ | 4,967      |  
|                                                                                                         |  |                           |            |   |      |   |            |      |  |   |            |  
|Net income per share                                                                                     |  |                           |            |   |      |   |            |      |  |   |            |  
|Basic                                                                                                    |  | $                         | 1.33       |   |      | $ | 0.39       |      |  | $ | 0.42       |  
|Diluted                                                                                                  |  | $                         | 1.27       |   |      | $ | 0.38       |      |  | $ | 0.42       |  
|Shares used in computing net income per share                                                            |  |                           |            |   |      |   |            |      |  |   |            |  
|Basic                                                                                                    |  |                           | 19,310,044 |   |      |   | 11,720,295 |      |  |   | 11,720,295 |  
|Diluted                                                                                                  |  |                           | 20,306,842 |   |      |   | 11,978,610 |      |  |   | 11,763,885 |  



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



40



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(In Thousands, Except Share Data)



|                                                                                               |  |              |  |                          |   |                              |   |        |                  |   |     |                                     |  |   |                          |   |  |                     |     |   |  |   |         |   |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------------ | - | ---------------------------- | - | ------ | ---------------- | - | --- | ----------------------------------- |  | - | ------------------------ | - |  | ------------------- | --- | - |  | - | ------- | - |  | - | ------ | -
|                                                                                               |  | Common Stock |  | AdditionalPaid-inCapital |   | UnearnedDeferredCompensation |   |        | RetainedEarnings |   |     | AccumulatedOtherComprehensiveIncome |  |   | TotalStockholdersEquity |   |  | ComprehensiveIncome |    
|                                                                                               |  | Shares       |  | Amount                   |   |                              |   |        |                  |  
|Balance at September 30, 2001                                                                  |  | 11,720,295   |  | $                        | 1 |                              | $ | 8,285  |                  |   |    |                                     |  | $ | 27,595                   |   |  | $                   | (57 | ) |  | $ | 35,824  |   |  | $ | 4,776  |  
|                                                                                               |  |              |  |                          |   |                              |   |        |                  |   |     |                                     |  |   |                          |   |  |                     |     |   |  |   |         |   |  |   |        |  
|Net income                                                                                     |  |             |  |                          |  |                              |   |       |                  |   |    |                                     |  |   | 4,967                    |   |  |                     |    |   |  |   | 4,967   |   |  |   |        |  
|                                                                                               |  |              |  |                          |   |                              |   |        |                  |   |     |                                     |  |   |                          |   |  |                     |     |   |  |   |         |   |  |   |        |  
|Balance at September 30, 2002                                                                  |  | 11,720,295   |  |                          | 1 |                              |   | 8,285  |                  |   |    |                                     |  |   | 32,562                   |   |  |                     | (57 | ) |  |   | 40,791  |   |  | $ | 4,967  |  
|                                                                                               |  |              |  |                          |   |                              |   |        |                  |   |     |                                     |  |   |                          |   |  |                     |     |   |  |   |         |   |  |   |        |  
|Stock-based compensation                                                                       |  |             |  |                          |  |                              |   | 57     |                  |   | (57 | )                                   |  |   |                         |   |  |                     |    |   |  |   |        |   |  |   |        |  
|Amortization of stock-based compensation                                                       |  |             |  |                          |  |                              |   |       |                  |   | 43  |                                     |  |   |                         |   |  |                     |    |   |  |   | 43      |   |  |   |        |  
|Compensation relating to the modification of stock options                                     |  |             |  |                          |  |                              |   | 87     |                  |   |    |                                     |  |   |                         |   |  |                     |    |   |  |   | 87      |   |  |   |        |  
|Net income                                                                                     |  |             |  |                          |  |                              |   |       |                  |   |    |                                     |  |   | 4,577                    |   |  |                     |    |   |  |   | 4,577   |   |  | $ | 4,577  |  
|Translation adjustment                                                                         |  |             |  |                          |  |                              |   |       |                  |   |    |                                     |  |   |                         |   |  |                     | (12 | ) |  |   | (12     | ) |  |   | (12    | )
|                                                                                               |  |              |  |                          |   |                              |   |        |                  |   |     |                                     |  |   |                          |   |  |                     |     |   |  |   |         |   |  |   |        |  
|Balance at September 30, 2003                                                                  |  | 11,720,295   |  |                          | 1 |                              |   | 8,429  |                  |   | (14 | )                                   |  |   | 37,139                   |   |  |                     | (69 | ) |  |   | 45,486  |   |  | $ | 4,565  |  
|                                                                                               |  |              |  |                          |   |                              |   |        |                  |   |     |                                     |  |   |                          |   |  |                     |     |   |  |   |         |   |  |   |        |  
|Issuance of shares in conjunction with rights offering, net of issuance costs of $80           |  | 6,537,540    |  |                          | 1 |                              |   | 36,045 |                  |   |    |                                     |  |   | (10,874                  | ) |  |                     |    |   |  |   | 25,172  |   |  |   |        |  
|Exercise of stock options                                                                      |  | 7,000        |  |                          |  |                              |   | 26     |                  |   |    |                                     |  |   |                         |   |  |                     |    |   |  |   | 26      |   |  |   |        |  
|Issuance of shares in connection with initial public offering, net of issuance costs of $5,408 |  | 5,000,000    |  |                          |  |                              |   | 44,610 |                  |   |    |                                     |  |   |                         |   |  |                     |    |   |  |   | 44,610  |   |  |   |        |  
|Amortization of stock-based compensation                                                       |  |             |  |                          |  |                              |   |       |                  |   | 14  |                                     |  |   |                         |   |  |                     |    |   |  |   | 14      |   |  |   |        |  
|Net income                                                                                     |  |             |  |                          |  |                              |   |       |                  |   |    |                                     |  |   | 25,706                   |   |  |                     |    |   |  |   | 25,706  |   |  | $ | 25,706 |  
|Translation adjustment                                                                         |  |             |  |                          |  |                              |   |       |                  |   |    |                                     |  |   |                         |   |  |                     | 70  |   |  |   | 70      |   |  |   | 70     |  
|                                                                                               |  |              |  |                          |   |                              |   |        |                  |   |     |                                     |  |   |                          |   |  |                     |     |   |  |   |         |   |  |   |        |  
|Balance at September 30, 2004                                                                  |  | 23,264,835   |  | $                        | 2 |                              | $ | 89,110 |                  | $ |    |                                     |  | $ | 51,971                   |   |  | $                   | 1   |   |  | $ | 141,084 |   |  | $ | 25,776 |  
|                                                                                               |  |              |  |                          |   |                              |   |        |                  |   |     |                                     |  |   |                          |   |  |                     |     |   |  |   |         |   |  |   |        |  





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



41



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)



|                                                                                           |  |                           |         |   |      |   |         |      |  |   |        |  
|------------------------------------------------------------------------------------------ |  | ------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                           |  | Years Ended September 30, |        
|                                                                                           |  | 2004                      |         |   | 2003 |   |         | 2002 | 
|Cash flows from operating activities                                                       |  |                           |         |   |      |   |         |      |  |   |        |  
|Net income                                                                                 |  | $                         | 25,706  |   |      | $ | 4,577   |      |  | $ | 4,967  |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities |  |                           |         |   |      |   |         |      |  |   |        |  
|Depreciation and amortization                                                              |  |                           | 6,704   |   |      |   | 4,378   |      |  |   | 2,809  |  
|Loss from equity method investee                                                           |  |                           | 250     |   |      |   | 441     |      |  |   | 189    |  
|Provision for doubtful accounts                                                            |  |                           | 26      |   |      |   | 112     |      |  |   | 256    |  
|Deferred taxes                                                                             |  |                           | (2,945  | ) |      |   | (205    | )    |  |   | 672    |  
|Stock-based compensation expense                                                           |  |                           | 14      |   |      |   | 130     |      |  |   |       |  
|Loss on disposal of equipment                                                              |  |                           | 60      |   |      |   | 125     |      |  |   | 195    |  
|Changes in operating assets and liabilities                                                |  |                           |         |   |      |   |         |      |  |   |        |  
|Accounts receivable                                                                        |  |                           | (23,421 | ) |      |   | (3,325  | )    |  |   | (3,875 | )
|Inventories                                                                                |  |                           | (17,288 | ) |      |   | (9,565  | )    |  |   | 180    |  
|Due to/from affiliates, net                                                                |  |                           | 4,095   |   |      |   | 1,007   |      |  |   | (588   | )
|Other current assets                                                                       |  |                           | (414    | ) |      |   | (203    | )    |  |   | 188    |  
|Other assets                                                                               |  |                           | (171    | ) |      |   | (142    | )    |  |   | 659    |  
|Accounts payable                                                                           |  |                           | 5,064   |   |      |   | 9,675   |      |  |   | 967    |  
|Accrued liabilities                                                                        |  |                           | 1,153   |   |      |   | (86     | )    |  |   | 1,783  |  
|Income tax payable                                                                         |  |                           | 6,000   |   |      |   | (344    | )    |  |   | 2,531  |  
|Other liabilities                                                                          |  |                           | 283     |   |      |   | (696    | )    |  |   | (4     | )
|                                                                                           |  |                           |         |   |      |   |         |      |  |   |        |  
|Net cash provided by operating activities                                                  |  |                           | 5,116   |   |      |   | 5,879   |      |  |   | 10,929 |  
|                                                                                           |  |                           |         |   |      |   |         |      |  |   |        |  
|Cash flows from investing activities                                                       |  |                           |         |   |      |   |         |      |  |   |        |  
|Cash paid for property and equipment                                                       |  |                           | (20,042 | ) |      |   | (23,809 | )    |  |   | (4,590 | )
|Purchases of software and capitalized internal-use software                                |  |                           | (563    | ) |      |   | (652    | )    |  |   | (169   | )
|Deposits on property and equipment                                                         |  |                           | (321    | ) |      |   | (4,207  | )    |  |   | (2,860 | )
|Cash advances to equity investees                                                          |  |                           | (242    | ) |      |   | (522    | )    |  |   | (307   | )
|Proceeds from sale of equipment                                                            |  |                           | 535     |   |      |   | 125     |      |  |   |       |  
|Decrease (increase) in restricted cash, net                                                |  |                           | (49     | ) |      |   | (136    | )    |  |   | 315    |  
|                                                                                           |  |                           |         |   |      |   |         |      |  |   |        |  
|Net cash used in investing activities                                                      |  |                           | (20,682 | ) |      |   | (29,201 | )    |  |   | (7,611 | )
|                                                                                           |  |                           |         |   |      |   |         |      |  |   |        |  
|Cash flows from financing activities                                                       |  |                           |         |   |      |   |         |      |  |   |        |  
|Borrowings on line of credit                                                               |  |                           | 30,972  |   |      |   | 9,085   |      |  |   | 500    |  
|Payments on line of credit                                                                 |  |                           | (32,688 | ) |      |   | (4,500  | )    |  |   | (805   | )
|Deposits from Wearnes for purchase of common stock                                         |  |                           |        |   |      |   | 15,000  |      |  |   |       |  
|Proceeds from note payable                                                                 |  |                           |        |   |      |   | 4,800   |      |  |   |       |  
|Principal payments on note payable                                                         |  |                           | (4,611  | ) |      |   | (189    | )    |  |   |       |  
|Proceeds from exercise of options                                                          |  |                           | 26      |   |      |   |        |      |  |   |       |  
|Proceeds from issuance of common stock, net of issuance costs of $5,488                    |  |                           | 54,782  |   |      |   |        |      |  |   |       |  
|                                                                                           |  |                           |         |   |      |   |         |      |  |   |        |  
|Net cash provided by (used in) financing activities                                        |  |                           | 48,481  |   |      |   | 24,196  |      |  |   | (305   | )
|                                                                                           |  |                           |         |   |      |   |         |      |  |   |        |  
|Effect of exchange rate changes on cash                                                    |  |                           | 70      |   |      |   | (12     | )    |  |   |       |  
|                                                                                           |  |                           |         |   |      |   |         |      |  |   |        |  
|Net increase in cash                                                                       |  |                           | 32,985  |   |      |   | 862     |      |  |   | 3,013  |  
|Cash and cash equivalents at beginning of year                                             |  |                           | 5,211   |   |      |   | 4,349   |      |  |   | 1,336  |  
|                                                                                           |  |                           |         |   |      |   |         |      |  |   |        |  
|Cash and cash equivalents at end of year                                                   |  | $                         | 38,196  |   |      | $ | 5,211   |      |  | $ | 4,349  |  
|                                                                                           |  |                           |         |   |      |   |         |      |  |   |        |  
|Supplemental disclosure                                                                    |  |                           |         |   |      |   |         |      |  |   |        |  
|Interest paid                                                                              |  | $                         | 590     |   |      | $ | 281     |      |  | $ | 130    |  
|Income taxes paid                                                                          |  |                           | 7,089   |   |      |   | 3,249   |      |  |   | 1,276  |  
|Noncash financing activities                                                               |  |                           |         |   |      |   |         |      |  |   |        |  
|Issuance of common stock to Wearnes                                                        |  | $                         | 15,000  |   |      | $ |        |      |  | $ |       |  
|Capital lease obligations incurred                                                         |  | $                         | 318     |   |      | $ |        |      |  | $ |       |  



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



42



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Per Share and Share Data)



1.    Basis of Presentation



Description of the Company



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.



During the year ended September 30, 2004, the board of directors approved the
reincorporation of the Company from California to Delaware and 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.



Affiliates and subsidiaries
of WBL Corporation Limited (collectively Wearnes), a Singapore company, owned approximately 72% of the Companys outstanding common stock as of September 30, 2003, allowing Wearnes to exercise operating control over the Company.
Wearnes ownership decreased to approximately 64% as of September 30, 2004 as a result of the initial public offering, which closed on June 30, 2004.



During the year ended September 30, 2003, the board of directors approved the increase in the authorized shares of common stock from 15,000,000 to
150,000,000. In connection with the reincorporation completed during the year ended September 30, 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.



During the year ended September 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.



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.



Use of Estimates



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used in the determination of accounts receivable allowances, valuation of inventory, warranty reserves, valuation of the Companys
common stock (prior to the completion of the Companys initial public offering) and income tax contingencies. Actual results could differ from those estimates.



Cash Equivalents



The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents as of
September 30, 2004 and 2003 consisted of money market funds and seven day municipal bonds. The Company holds the seven day municipal bonds to their maturity and records them at amortized cost, which approximates their fair value.



43



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



Fair Value of Financial Instruments



The carrying amounts of the Companys financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short maturities. The carrying value of the Companys line of credit and note payable approximate fair value based on
borrowing rates currently available to the Company.



Concentrations of Credit Risk



Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, to the extent balances exceed limits that are insured by the Federal Deposit Insurance Corporation, and
accounts receivable. The Company maintains its cash with major financial institutions. Credit risk exists because the Companys flexible printed circuit boards and related component assemblies are sold to a limited number of customers (Note 9).
The Company does not require collateral and maintains reserves for potential credit losses. Such losses have historically been within managements expectations.



Inventories



Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. The Company records a provision for excess
and obsolete inventory based on historical usage and expected future product demand.



Property, Plant and Equipment



Property, plant, and equipment are stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets as follows:



|                        |  |           
|----------------------- |  | ----------
|Building                |  | 30 years  
|Machinery and equipment |  | 3-10 years
|Furniture and fixtures  |  | 5 years   
|Leasehold improvements  |  | 5-10 years



Leasehold improvements
are amortized over the shorter of their estimated useful lives or the term of the related lease. Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major renewals and betterments to property and equipment are
capitalized. The cost of assets and related accumulated depreciation are removed from the balance sheet when such assets are disposed of, and any related gains or losses are included in operating expenses.



Capitalized Software Costs



Costs incurred to develop software for internal use are accounted for in
accordance with Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. In accordance with SOP No. 98-1, expenses related to preliminary project assessment,
research and development, re-engineering, training and application maintenance are expensed as incurred. Costs that qualify for capitalization under SOP No. 98-1 are included in other assets and consist primarily of purchased software, payroll costs
and consulting fees related to the development of the internal use software. Capitalized costs commence depreciation when they are put in service and are amortized using the straight-line method over a period of three years.



44



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



Revenue Recognition



The Companys revenues are generated from the sale of flexible printed circuit boards and related component assemblies,
which are sold to original equipment manufacturers and electronic manufacturing services providers to be included in other electronic products. The Company recognizes revenue when there is persuasive evidence of an arrangement with the customer that
states a fixed or determinable sales price, when title and risk of loss transfers, and when delivery of the product has occurred in accordance with the terms of the sale and collectibility of the related accounts receivable is reasonably assured.
The Company does not have any post-shipment obligations (e.g., installation or training), customer acceptance or multiple-element arrangements. The Companys remaining obligation to its customer after delivery is limited to warranty on its
product.



Shipping and Handling Costs



Products shipped utilizing the customer specified shipping service are
paid directly by the customer. Products that are not shipped utilizing customer shipping services are charged by the Company to its customers and are included in net sales. Shipping and handling costs incurred by the Company are expensed as incurred
and are recorded as a component of cost of sales.



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 years ended September 30, 2004, 2003 and 2002 was as follows:



|     |  |                                       |     |                      |   |        |                                     |  |                                       |       |  |   |      
|---- |  | ------------------------------------- | --- | -------------------- | - | ------ | ----------------------------------- |  | ------------------------------------- | ----- |  | - | -----
|     |  | WarrantyAccrualBalance atSeptember 30 |     | WarrantyExpenditures |   |        | Provision forEstimatedWarranty Cost |  | WarrantyAccrualBalance atSeptember 30
|2004 |  | $                                     | 337 |                      | $ | (1,918 | )                                   |  | $                                     | 3,130 |  | $ | 1,549
|2003 |  |                                       | 445 |                      |   | (1,816 | )                                   |  |                                       | 1,708 |  |   | 337  
|2002 |  |                                       | 208 |                      |   | (1,587 | )                                   |  |                                       | 1,824 |  |   | 445  



Income Taxes



Income taxes are computed using the asset and
liability method. Under this method, deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the tax bases and financial reporting amounts of existing assets and liabilities.
Valuation allowances are established when it is more likely than not that such deferred tax assets will not be realized. The Company does not file a consolidated return with its foreign wholly owned subsidiaries.



Long-Lived Assets



The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted cash flows attributable to such assets, including cash flows from
their



45



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



eventual disposition, to their carrying value. If the carrying value of the assets exceeds the forecasted undiscounted cash flows, the assets are written
down to their fair value. The Company estimates fair value by using discounted cash flows. As of September 30, 2004 and 2003, there were no such impairments.



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 non-owner sources. The difference between net income and comprehensive income for the years ended September 30, 2004 and 2003 was comprised entirely of the Companys foreign currency translation adjustment. There was no
difference between comprehensive income and net income for the year ended September 30, 2002.



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 years ended September 30, 2004, 2003 and 2002, foreign exchange transaction gains and
losses were included in other expenses and were net losses of $10, $58, and $0, 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 (SFAS) 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.



46



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



Had compensation cost for the Companys stock option plan (Note 12) 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 years ended September 30, 2004, 2003 and 2002, would have decreased to the pro forma amounts below:



|                                                                                                         |  |                           |            |   |      |   |            |      |  |   |           
|-------------------------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ----------
|                                                                                                         |  | Years Ended September 30,
|                                                                                                         |  | 2004                      |            |   | 2003 |   |            | 2002
|Net income, as reported                                                                                  |  | $                         | 25,706     |   |      | $ | 4,577      |      |  | $ | 4,967     
|Stock-based compensation, intrinsic value method, net of tax                                             |  |                           | 9          |   |      |   | 85         |      |  |   |          
|Total stock-based employee compensation expense determined under fair value-based method for all options |  |                           | (284       | ) |      |   | (228       | )    |  |   |          
|                                                                                                         |  |                           |            |   |      |   |            |      |  |   |           
|Pro forma net income                                                                                     |  | $                         | 25,431     |   |      | $ | 4,434      |      |  | $ | 4,967     
|                                                                                                         |  |                           |            |   |      |   |            |      |  |   |           
|Net income per share                                                                                     |  |                           |            |   |      |   |            |      |  |   |           
|Basic, as reported                                                                                       |  | $                         | 1.33       |   |      | $ | 0.39       |      |  | $ | 0.42      
|Basic, pro forma                                                                                         |  | $                         | 1.32       |   |      | $ | 0.38       |      |  | $ | 0.42      
|Diluted, as reported                                                                                     |  | $                         | 1.27       |   |      | $ | 0.38       |      |  | $ | 0.42      
|Diluted, pro forma                                                                                       |  | $                         | 1.25       |   |      | $ | 0.37       |      |  | $ | 0.42      
|Shares used in computing net income per share                                                            |  |                           |            |   |      |   |            |      |  |   |           
|Basic                                                                                                    |  |                           | 19,310,044 |   |      |   | 11,720,295 |      |  |   | 11,720,295
|Diluted                                                                                                  |  |                           | 20,306,842 |   |      |   | 11,978,610 |      |  |   | 11,763,885



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:



|                                                                                                                             |  |                           |  |            |  |           
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ---------- |  | ----------
|                                                                                                                             |  | Years Ended September 30,
|                                                                                                                             |  | 2004                      |  | 2003       |  | 2002      
|Basic weighted-average number of common shares outstanding                                                                   |  | 19,310,044                |  | 11,720,295 |  | 11,720,295
|Dilutive effect of outstanding stock options                                                                                 |  | 996,798                   |  | 258,315    |  | 43,590    
|                                                                                                                             |  |                           |  |            |  |           
|Diluted weighted-average number of common and potential common shares outstanding                                            |  | 20,306,842                |  | 11,978,610 |  | 11,763,885
|                                                                                                                             |  |                           |  |            |  |           
|Potential common shares excluded from the per share calculation because the effect of their inclusion would be anti-dilutive |  | 1,014,000                 |  |           |  |          
|                                                                                                                             |  |                           |  |            |  |           



Recent
Accounting Pronouncements



In December 2003, the SEC
issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition(SAB No. 104), which codifies, revises and rescinds certain sections of SAB No. 101, Revenue Recognition, in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on the Companys financial position, results of operations or cash
flows.



47



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



In March 2004, a consensus was reached in EITF Issue No. 03-16, Accounting for Investments in
Limited Liability Companies. The EITF concluded that an investment in a limited liability company (LLC) that maintains a specific ownership account for each investor should be viewed as similar to an investment in a
limited partnership for determining whether a noncontrolling investment in an LLC should be accounted for using the cost or equity method. The changes noted in EITF Issue No. 03-16 did not have a material effect on the Companys financial
position, results from operations or cash flows.



In June 2004,
a consensus was reached in EITF Issue No. 03-01,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The EITF concluded that a common approach to evaluating other-than-temporary impairment for certain
debt and equity securities would reduce the ambiguities in existing literature and reduce the inconsistent application of such guidance. A consensus was reached that the application guidance for certain investments, as defined, should be used to
determine when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The guidance also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The changes noted in EITF Issue No. 03-01 did not have a material effect on the
Companys financial position, results of operations or cash flows.



2.    Restricted Cash



Restricted cash consists of funds held in short-term deposits that are legally restricted as to withdrawal. Restricted cash of $181 and $133 as of September 30, 2004 and 2003, respectively, was required to secure a letter of credit at
Shanghai Pudong Development Bank.



The Company also had
restricted cash of $122 and $121 as of September 30, 2004 and 2003, respectively, held at the direction of the County of Orange, California, to finance environmental clean-up costs, estimated by the Company and approved by the County, in the event
the Company vacates its Anaheim, California manufacturing facilities. The Company is not a party to any environmental claims. As of September 30, 2004, the Company believes the amount held as restricted cash is sufficient to pay environmental
clean-up costs that may exist, if any, should the Company vacate its facilities.



3.    Related Party Transactions



During the years ended September 30, 2004, 2003 and 2002, the Company has recognized revenue and recorded purchases from the following affiliated companies: (a) Wearnes Hollingsworth Corporation; (b) MFS Technology Ltd. and its
subsidiaries, Wearnes Greatwall Circuits and MFS Technologies (M) Sdn. Bhd. MFS Technology Ltd. is a subsidiary of Wearnes; and (c) Suzhou Wearnes-Xirlink Electric Co. Ltd., a subsidiary of Wearnes. As discussed in Note 1, Wearnes owns 64% and 72%
of the Companys common stock as of September 30, 2004 and 2003, respectively.



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



|                                         |  |               |    |      |   |  
|---------------------------------------- |  | ------------- | -- | ---- | - | -
|                                         |  | September 30,
|                                         |  | 2004          |    | 2003
|Due from affiliates                      |  |               |    |      |   |  
|MFS Technologies (M) Sdn. Bhd.           |  | $             |   |      | $ | 1
|Wearnes Greatwall Circuits               |  |               | 1  |      |   | 
|Suzhou Wearnes-Xirlink Electric Co. Ltd. |  |               | 42 |      |   | 
|                                         |  |               |    |      |   |  
|                                         |  | $             | 43 |      | $ | 1
|                                         |  |               |    |      |   |  



48



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



|                                  |  |               |       |      |   |      
|--------------------------------- |  | ------------- | ----- | ---- | - | -----
|                                  |  | September 30,
|                                  |  | 2004          |       | 2003
|Due to affiliates                 |  |               |       |      |   |      
|MFS Technology Ltd.               |  | $             | 5,063 |      | $ | 461  
|Wearnes                           |  |               | 84    |      |   | 458  
|Wearnes Greatwall Circuits        |  |               |      |      |   | 76   
|Wearnes Hollingsworth Corporation |  |               | 324   |      |   | 339  
|                                  |  |               |       |      |   |      
|                                  |  | $             | 5,471 |      | $ | 1,334
|                                  |  |               |       |      |   |      



Sales to and purchases
from affiliates comprise the following:



|                               |  |                           |       |      |   |       |  |   |    
|------------------------------ |  | ------------------------- | ----- | ---- | - | ----- |  | - | ---
|                               |  | Years Ended September 30,
|                               |  | 2004                      |       | 2003 |   | 2002 
|Sales to affiliates            |  |                           |       |      |   |       |  |   |    
|MFS Technology Ltd.            |  | $                         | 517   |      | $ | 32    |  | $ | 20 
|Wearnes Greatwall Circuits     |  |                           | 1     |      |   | 26    |  |   | 25 
|MFS Technologies (M) Sdn. Bhd. |  |                           | 2     |      |   | 4     |  |   | 5  
|                               |  |                           |       |      |   |       |  |   |    
|                               |  | $                         | 520   |      | $ | 62    |  | $ | 50 
|                               |  |                           |       |      |   |       |  |   |    
|Purchases from affiliates      |  |                           |       |      |   |       |  |   |    
|MFS Technology Ltd.            |  | $                         | 9,577 |      | $ | 474   |  | $ | 14 
|Wearnes Greatwall Circuits     |  |                           |      |      |   | 677   |  |   | 337
|                               |  |                           |       |      |   |       |  |   |    
|                               |  | $                         | 9,577 |      | $ | 1,151 |  | $ | 351
|                               |  |                           |       |      |   |       |  |   |    



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 $194, $375 and $311 for the years ended September 30, 2004,
2003 and 2002, respectively. During the year ended September 30, 2003, the Company recorded $72 for the purchase of software and maintenance and $40 for internal audit fees from Wearnes. Rental fees charged by the Company to Wearnes Hollingsworth
Corporation for the years ended September 30, 2004, 2003 and 2002 were $0, $15 and $75, respectively, as consideration for the storage of certain assets at the Companys facilities. In June 2004, the Company formalized an agreement with Wearnes
whereby the Company is billed for corporate services on a time and materials basis in lieu of management fees that previously were charged to the Company. No services were provided under this agreement through September 30, 2004.



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 years ended September 30, 2004 and 2003, the Company paid $339 and $387, respectively to Wearnes Hollingsworth Corporation.



The Company paid $99, $141 and $140 for consulting services during each of the years ended September 30, 2004, 2003 and 2002, respectively, to two
separate individuals, who were, at the time of the payments, members of the Companys board of directors. In connection with the initial public offering, 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.



49



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



During the year ended September 30, 2003, the Company received $15,000 of deposits from Wearnes,
which were used to purchase common stock of the Company upon completion of the rights offering (Note 11). The Company paid interest at the rate of LIBOR (1.13% at September 30, 2003) plus 1.5% on these deposits. Accrued interest as of September 30,
2003 was $65. In October 2003, the Company issued 6,472,515 shares of common stock to Wearnes (Note 11).



In November 2003, the Company executed a $25.0 million credit facility with Norddeutsche Landesbank Girozentrale (NLG). In connection with the
Companys initial public offering, the parties agreed to reduce the facility to $15.0 million 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 was 64% as of the completion of the Companys initial public offering. 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 common stock (the NLG Amendment). As of September 30, 2004, the Company had no outstanding balance on the NLG line of credit.



4.    Composition of Certain Balance Sheet Components



Inventories comprise the following:



|                           |  |               |        |      |   |       
|-------------------------- |  | ------------- | ------ | ---- | - | ------
|                           |  | September 30,
|                           |  | 2004          |        | 2003
|Raw materials and supplies |  | $             | 23,796 |      | $ | 12,146
|Work-in-progress           |  |               | 9,788  |      |   | 8,288 
|Finished goods             |  |               | 5,633  |      |   | 1,495 
|                           |  |               |        |      |   |       
|                           |  | $             | 39,217 |      | $ | 21,929
|                           |  |               |        |      |   |       



Property, plant, and
equipment comprise the following:



|                                          |  |               |         |   |      |   |         |  
|----------------------------------------- |  | ------------- | ------- | - | ---- | - | ------- | -
|                                          |  | September 30, |        
|                                          |  | 2004          |         |   | 2003 |  
|Land                                      |  | $             | 3,730   |   |      | $ | 3,730   |  
|Building                                  |  |               | 17,347  |   |      |   | 10,367  |  
|Machinery and equipment                   |  |               | 52,189  |   |      |   | 36,946  |  
|Furniture and fixtures                    |  |               | 2,342   |   |      |   | 1,650   |  
|Leasehold improvements                    |  |               | 2,783   |   |      |   | 2,403   |  
|                                          |  |               |         |   |      |   |         |  
|                                          |  |               | 78,391  |   |      |   | 55,096  |  
|Accumulated depreciation and amortization |  |               | (18,477 | ) |      |   | (12,756 | )
|                                          |  |               |         |   |      |   |         |  
|                                          |  | $             | 59,914  |   |      | $ | 42,340  |  
|                                          |  |               |         |   |      |   |         |  



Depreciation expense
for the years ended September 30, 2004, 2003 and 2002, was $6,372, $4,232 and $2,625, respectively.



Included in other assets as of September 30, 2004 and 2003 is $984 and $750, respectively, of capitalized purchased software and internally developed
software costs, net of accumulated depreciation of $667 and $338, respectively. The Company capitalized $563 and $421 of internally developed software costs during the year ended September 30, 2004 and 2003. No costs were capitalized during the year
ended September 30, 2002. Amortization of software costs for the years ended September 31, 2004, 2003 and 2002, was $329, $146 and $94, respectively.



50



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



In addition, included in other assets as of September 30, 2004 and 2003 is $321 and $4,207,
respectively, of deposits on equipment to be purchased.



Accrued liabilities comprise the following:



|                       |  |               |       |      |   |      
|---------------------- |  | ------------- | ----- | ---- | - | -----
|                       |  | September 30,
|                       |  | 2004          |       | 2003
|Wages and compensation |  | $             | 3,509 |      | $ | 3,602
|Warranty               |  |               | 1,549 |      |   | 337  
|Other                  |  |               | 932   |      |   | 899  
|                       |  |               |       |      |   |      
|                       |  | $             | 5,990 |      | $ | 4,838
|                       |  |               |       |      |   |      



5.    Equity
Investments



Mind Wurx



In April 2002, the Company signed a binding Memorandum of Understanding
(Memorandum) with Mind Wurx LLC (Mind Wurx), a private entity. Mind Wurx designs and manufactures an anti-theft device for shopping carts. Under the terms of the Memorandum, the Company agreed to purchase 15% of Mind Wurx in
exchange for the Company providing office facilities, product development space, marketing and business support, management expertise, and manufacturing support for the Mind Wurx anti-theft device. In addition, the Company agreed to provide
unsecured advances to Mind Wurx to fund its operations. The amounts of these advances were determined periodically based on the working capital needs of Mind Wurx. The support and unsecured advances are referred to as the Mind Wurx Commitment.



In November 2003, the Company signed an Ownership Interest
Agreement (Purchase Agreement) with Mind Wurx, which superceded the Memorandum. The Purchase Agreement requires the Company to continue to provide the Mind Wurx Commitment unless the actual sales of the UnCart device are materially less
than projections, in which case the Company can reduce, modify or terminate the Mind Wurx Commitment. The unsecured advances are repayable only upon the ability of Mind Wurx to make payments from its net positive cash, which is defined as cash less
its current operating obligations, tax distributions to its members and estimated amounts to be used to fund its long-term obligations and reasonable growth.



In connection with the Purchase Agreement, an Option Agreement was entered into between the Company and Mind Wurx whereby the Company was granted the
options to purchase an additional 36% ownership interest from existing Mind Wurx members for $2,500. The option period commences on January 1, 2005 and extends through December 31, 2007. The Company has estimated that the fair value of the option is
insignificant.



The Mind Wurx Commitment expires upon the
earlier of the Companys exercise of the Option and full payment of the exercise price or the expiration of the Option in December 2007.



Although the Companys ownership percentage for Mind Wurx is below 20%, the Companys representation on Mind Wurxs Board of Directors and
financial support provided by the Company result in the Company having significant influence over the operations of Mind Wurx. Accordingly, the Company recognizes its share of the net losses generated by Mind Wurx in the Companys consolidated
statement of income. In accordance with EITF 99-10, Percentage Used to Determine the Amount of Equity Method Losses, 100% of Mind Wurxs net losses were recorded against the unsecured advances since there was no other equity ownership by
the Company and there were no other parties providing support to Mind Wurx. The Company also evaluates the realizability of the remaining unsecured advance balance at the end of each period based on the ability of Mind Wurx to satisfy the
obligation.



51



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



During the years ended September 30, 2004 and 2003, the Company made advances of $92 and $522,
respectively, which were used by Mind Wurx to fund operations. Given that Mind Wurx is a development stage company and has incurred losses since inception, the Company concluded that the unsecured advances were not fully realizable. The Company
estimates the realizability of the unsecured advances based on Mind Wurxs tangible assets, consisting of cash and equipment, and has reduced its unsecured advances to this amount at the end of each reporting period.



During the years ended September 30, 2004 and 2003, the Company recognized
losses totaling $250 and $441, respectively. As of September 30, 2004 and 2003, the Company had a net investment balance (consisting of advances to Mind Wurx) of $40 and $199, respectively, which was included in other assets.



In March 2004, the Company entered into a mutual termination and release
agreement with Mind Wurx. Under this agreement, the two parties agreed to terminate all of the relationships that had been created by the Memorandum, Purchase Agreement and the Option Agreement, with the sole exceptions that the Company retained its
15% ownership interest in Mind Wurx. The Company accounts for its investment in Mind Wurx using the equity method of accounting.



Cornerstone



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 September 30, 2004 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.



6.    Income Taxes



United States and foreign income before taxes are as follows:



|              |  |                           |        |      |   |       |  |   |      
|------------- |  | ------------------------- | ------ | ---- | - | ----- |  | - | -----
|              |  | Years Ended September 30,
|              |  | 2004                      |        | 2003 |   | 2002 
|United States |  | $                         | 25,107 |      | $ | 5,150 |  | $ | 5,771
|Foreign       |  |                           | 10,744 |      |   | 1,722 |  |   | 1,790
|              |  |                           |        |      |   |       |  |   |      
|              |  | $                         | 35,851 |      | $ | 6,872 |  | $ | 7,561
|              |  |                           |        |      |   |       |  |   |      



52



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



The provision for income taxes consisted of the following components:



|         |  |                           |        |   |      |   |       |      |  |   |      
|-------- |  | ------------------------- | ------ | - | ---- | - | ----- | ---- |  | - | -----
|         |  | Years Ended September 30,
|         |  | 2004                      |        |   | 2003 |   |       | 2002
|Current  |  |                           |        |   |      |   |       |      |  |   |      
|Federal  |  | $                         | 8,240  |   |      | $ | 1,720 |      |  | $ | 1,284
|State    |  |                           | 2,214  |   |      |   | 518   |      |  |   | 424  
|Foreign  |  |                           | 2,635  |   |      |   | 263   |      |  |   | 215  
|         |  |                           |        |   |      |   |       |      |  |   |      
|         |  |                           | 13,089 |   |      |   | 2,501 |      |  |   | 1,923
|         |  |                           |        |   |      |   |       |      |  |   |      
|Deferred |  |                           |        |   |      |   |       |      |  |   |      
|Federal  |  |                           | (1,154 | ) |      |   | (93   | )    |  |   | 588  
|State    |  |                           | (221   | ) |      |   | (99   | )    |  |   | 37   
|Foreign  |  |                           | (1,569 | ) |      |   | (14   | )    |  |   | 46   
|         |  |                           |        |   |      |   |       |      |  |   |      
|         |  |                           | (2,944 | ) |      |   | (206  | )    |  |   | 671  
|         |  |                           |        |   |      |   |       |      |  |   |      
|         |  | $                         | 10,145 |   |      | $ | 2,295 |      |  | $ | 2,594
|         |  |                           |        |   |      |   |       |      |  |   |      



Deferred tax assets
and (liabilities) comprise the following:



|                                             |  |               |        |   |      |   |        |  
|-------------------------------------------- |  | ------------- | ------ | - | ---- | - | ------ | -
|                                             |  | September 30, |       
|                                             |  | 2004          |        |   | 2003 |  
|Deferred tax assets                          |  |               |        |   |      |   |        |  
|Inventory                                    |  | $             | 1,096  |   |      | $ | 593    |  
|Depreciation                                 |  |               | 1,166  |   |      |   |       |  
|Stock-based compensation                     |  |               | 286    |   |      |   | 367    |  
|Accrued expenses                             |  |               | 356    |   |      |   | 403    |  
|Allowance for doubtful accounts              |  |               | 103    |   |      |   | 157    |  
|Warranty reserve                             |  |               | 673    |   |      |   | 148    |  
|Benefit from net operating loss carryforward |  |               |       |   |      |   | 184    |  
|Royalty Payment                              |  |               | 360    |   |      |   |       |  
|Investments                                  |  |               | 338    |   |      |   |       |  
|State taxes                                  |  |               | 698    |   |      |   | 88     |  
|Other                                        |  |               | 57     |   |      |   | 61     |  
|                                             |  |               |        |   |      |   |        |  
|Total deferred tax assets                    |  |               | 5,133  |   |      |   | 2,001  |  
|                                             |  |               |        |   |      |   |        |  
|Deferred tax liabilities                     |  |               |        |   |      |   |        |  
|Depreciation                                 |  |               | (1,232 | ) |      |   | (1,153 | )
|Other                                        |  |               | (113   | ) |      |   | (4     | )
|                                             |  |               |        |   |      |   |        |  
|Total deferred tax liabilities               |  |               | (1,345 | ) |      |   | (1,157 | )
|                                             |  |               |        |   |      |   |        |  
|Net deferred tax assets                      |  | $             | 3,788  |   |      | $ | 844    |  
|                                             |  |               |        |   |      |   |        |  



53



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



The provision for income taxes differs from the amount obtained by applying the statutory tax rate as
follows:



|                                             |  |                           |    |  |      |    |  |      |   
|-------------------------------------------- |  | ------------------------- | -- |  | ---- | -- |  | ---- | --
|                                             |  | Years Ended September 30, |   
|                                             |  | 2004                      |    |  | 2003 |    |  | 2002 |   
|Provision for income taxes at statutory rate |  | 35.0                      | %  |  | 35.0 | %  |  | 35.0 | % 
|Increase (decrease) in taxes resulting from: |  |                           |    |  |      |    |  |      |   
|State taxes, net of federal benefit          |  | 3.4                       | %  |  | 4.0  | %  |  | 4.0  | % 
|Foreign tax credit                           |  | (1.2                      | )% |  |     |    |  |     |   
|Foreign rate variance                        |  | (8.0                      | )% |  | (5.2 | )% |  | (4.8 | )%
|Nondeductible expenses                       |  | 0.1                       | %  |  | 0.8  | %  |  |     |   
|Other                                        |  | (1.0                      | )% |  | (1.2 | )% |  | 0.1  | % 
|                                             |  |                           |    |  |      |    |  |      |   
|                                             |  | 28.3                      | %  |  | 33.4 | %  |  | 34.3 | % 
|                                             |  |                           |    |  |      |    |  |      |   



The Company operates
under a tax holiday in China, which was effective for MFC1 until December 31, 2001. Beginning January 1, 2002, the zero percent tax rate expired for MFC1 and the Company became subject to a tax rate equal to 12% (versus the applicable Chinese tax
rate of approximately 27%). This change in the tax holiday is similar to a change in enacted tax rates and has been reflected in the Companys deferred tax computation as of September 30, 2004 and 2003. MFC1 will continue to be subject to taxes
equal to 12% until December 31, 2004. After this time, MFC1 will be subject to the statutory rate of 27%. The Company has also obtained a tax holiday for MFC2 that allows for a zero percent tax rate for the first five years (beginning in the first
year of profitability) followed by five years of operation at a reduced income tax equal to 12% (versus the applicable Chinese tax rate of approximately 27%).



Had the Company not received the tax holiday for its operations in China, net income for the years ended September 30, 2004, 2003 and 2002 would have
been decreased to the pro forma amounts below:



|                        |  |                           |        |   |      |   |       |      |  |   |       |  
|----------------------- |  | ------------------------- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | -
|                        |  | Years Ended September 30, |       
|                        |  | 2004                      |        |   | 2003 |   |       | 2002 | 
|Net income, as reported |  | $                         | 25,706 |   |      | $ | 4,577 |      |  | $ | 4,967 |  
|Additional tax in China |  |                           | (2,750 | ) |      |   | (258  | )    |  |   | (268  | )
|                        |  |                           |        |   |      |   |       |      |  |   |       |  
|Pro forma net income    |  | $                         | 22,956 |   |      | $ | 4,319 |      |  | $ | 4,699 |  
|                        |  |                           |        |   |      |   |       |      |  |   |       |  
|Net income per share    |  |                           |        |   |      |   |       |      |  |   |       |  
|Basic, as reported      |  | $                         | 1.33   |   |      | $ | 0.39  |      |  | $ | 0.42  |  
|Basic, pro forma        |  | $                         | 1.23   |   |      | $ | 0.37  |      |  | $ | 0.40  |  
|Diluted, as reported    |  | $                         | 1.27   |   |      | $ | 0.38  |      |  | $ | 0.42  |  
|Diluted, pro forma      |  | $                         | 1.17   |   |      | $ | 0.36  |      |  | $ | 0.40  |  



Undistributed earnings
of the Companys foreign subsidiaries amounted to approximately $ 14,264, $4,175 and $3,134 at September 30, 2004, 2003 and 2002, respectively. Those earnings are considered to be permanently reinvested and, accordingly, no provision for U.S.
federal and state taxes has been provided thereon. Upon repatriation of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (less any applicable foreign tax credits) and withholding taxes
payable to the foreign country. It is not practical to estimate the amount of unrecognized deferred U.S. taxes on those undistributed earnings.



The Chinese Tax Authority is currently auditing MFC1s income tax returns for fiscal years 1999 through 2003. While it is often difficult to predict
the final outcome or the timing of resolution of any particular tax



54



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



matter, the Company believes the results of the audit are not expected to have a material impact on the Companys financial position or results of
operations. Unfavorable settlement of any particular tax issue would require use of cash. As of September 30, 2004 no amounts have been recorded related to the possible outcome of the audit since management believes it is not probable a loss
contingency has been incurred. The Companys tax reserves are included in the balance sheet with income taxes payable.



7.    Lines of Credit and Note Payable



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, 2003). The line of credit will mature in February 2005, as amended, and bears interest at LIBOR (1.91% at September 30, 2004) plus 0.4%, which is payable quarterly. Borrowings outstanding under this line of credit as
of September 30, 2004 and 2003 were $0 and $3,000, respectively.



The Company also maintains a $20,000 line of credit with Shanghai Pudong Development Bank (Shanghai), as last amended in September 2004. The line of credit will mature in December 2004 and bears interest at LIBOR (1.91% at
September 30, 2004) plus 0.4%, which is payable quarterly. As of September 30, 2004, the Company had borrowings outstanding of $3,369, $2,000 of which was paid on November 30, 2004. The remaining $1,369 is due in full on December 31, 2004. As of
September 30, 2003, the Company had two short-term loans of $1,000 and $1,085 outstanding under this line of credit, which were paid in full in October 2003 and January 2004, respectively.



In November 2003, the Company entered into a $25,000 unsecured revolving line
of credit with NLG. The line of credit will mature in December 2004 and can be automatically extended for one year at the request of the Company. Borrowings bear interest at the SIBOR correlating to the time period of the borrowing. As of September
30, 2004, the Company had no borrowings outstanding under this line of credit. A portion of the line of credit is guaranteed by Wearnes (Note 3). Further, the Company is required to maintain stockholders equity of at least $40 million 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 September 30, 2004, the Company was in compliance with these covenants.



In October 2002, the Company entered into a note payable with General
Electric Capital Business Funding Corporation (GE Capital) providing for financing of a building purchased by the Company in December 2002. The total amount of the note was $4,800, which represented an amount equal to 75% of the
propertys appraised market value, and was collateralized by the related building. The note bore interest at LIBOR (1.13% at September 30, 2003) plus 2.35% and was payable over 15 years in equal monthly principal and interest payments of $34.
As of September 30, 2003, $4,611 was outstanding, of which $253 represented the current portion. In February 2004, the Company repaid the outstanding loan balance of $4,531. As a result of the early repayment of the loan, the Company incurred a
prepayment penalty of $181.



55



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



A summary of the lines of credit follows:



|                           |  |                     |        |                       |      |       |  |   |      
|-------------------------- |  | ------------------- | ------ | --------------------- | ---- | ----- |  | - | -----
|                           |  | AmountsAvailable at |        | AmountsOutstanding at
|                           |  | September 30,2004   |        | September 30,        
|                           |  |                     | 2004   |                       | 2003
|Line of credit (BC)        |  | $                   | 7,229  |                       | $    |      |  | $ | 3,000
|Line of credit (Shanghai)  |  |                     | 16,631 |                       |      | 3,369 |  |   | 2,085
|Line of credit (NLG)       |  |                     | 15,000 |                       |      |      |  |   |     
|Property loan (GE Capital) |  |                     |       |                       |      |      |  |   | 4,611
|                           |  |                     |        |                       |      |       |  |   |      
|                           |  | $                   | 38,860 |                       | $    | 3,369 |  | $ | 9,696
|                           |  |                     |        |                       |      |       |  |   |      



8.    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 subsidiary is domiciled). The financial results of the
Companys geographic segments are presented on a basis consistent with the consolidated financial statements.



Financial information by geographic segment is as follows:



|                              |  |                           |         |   |      |   |         |      |  |   |         |  
|----------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                              |  | Years Ended September 30, |        
|                              |  | 2004                      |         |   | 2003 |   |         | 2002 | 
|Net sales                     |  |                           |         |   |      |   |         |      |  |   |         |  
|United States                 |  | $                         | 185,422 |   |      | $ | 113,742 |      |  | $ | 97,336  |  
|China                         |  |                           | 119,751 |   |      |   | 35,361  |      |  |   | 24,939  |  
|Eliminations                  |  |                           | (52,124 | ) |      |   | (19,688 | )    |  |   | (11,738 | )
|                              |  |                           |         |   |      |   |         |      |  |   |         |  
|Total                         |  | $                         | 253,049 |   |      | $ | 129,415 |      |  | $ | 110,537 |  
|                              |  |                           |         |   |      |   |         |      |  |   |         |  
|Operating income              |  |                           |         |   |      |   |         |      |  |   |         |  
|United States                 |  |                           | 22,331  |   |      |   | 5,844   |      |  |   | 5,813   |  
|China                         |  |                           | 14,088  |   |      |   | 1,863   |      |  |   | 2,037   |  
|                              |  |                           |         |   |      |   |         |      |  |   |         |  
|Total                         |  | $                         | 36,419  |   |      | $ | 7,707   |      |  | $ | 7,850   |  
|                              |  |                           |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization |  |                           |         |   |      |   |         |      |  |   |         |  
|United States                 |  |                           | 2,491   |   |      |   | 1,747   |      |  |   | 1,566   |  
|China                         |  |                           | 4,213   |   |      |   | 2,631   |      |  |   | 1,243   |  
|                              |  |                           |         |   |      |   |         |      |  |   |         |  
|Total                         |  | $                         | 6,704   |   |      | $ | 4,378   |      |  | $ | 2,809   |  
|                              |  |                           |         |   |      |   |         |      |  |   |         |  



56



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)





|                  |  |               |         |   |      |   |         |  
|----------------- |  | ------------- | ------- | - | ---- | - | ------- | -
|                  |  | September 30, |        
|                  |  | 2004          |         |   | 2003 |  
|Total assets      |  |               |         |   |      |   |         |  
|United States     |  | $             | 161,797 |   |      | $ | 79,875  |  
|China             |  |               | 69,766  |   |      |   | 41,567  |  
|Eliminations      |  |               | (41,565 | ) |      |   | (22,713 | )
|                  |  |               |         |   |      |   |         |  
|Total             |  | $             | 189,998 |   |      | $ | 98,729  |  
|                  |  |               |         |   |      |   |         |  
|Long-lived assets |  |               |         |   |      |   |         |  
|United States     |  | $             | 17,879  |   |      | $ | 17,911  |  
|China             |  |               | 45,950  |   |      |   | 30,338  |  
|                  |  |               |         |   |      |   |         |  
|Total             |  | $             | 63,829  |   |      | $ | 48,249  |  
|                  |  |               |         |   |      |   |         |  



|                     |  |                           |        |      |   |       
|-------------------- |  | ------------------------- | ------ | ---- | - | ------
|                     |  | Years Ended September 30,
|                     |  | 2004                      |        | 2003
|Capital Expenditures |  |                           |        |      |   |       
|United States        |  | $                         | 2,247  |      | $ | 10,814
|China                |  |                           | 18,116 |      |   | 17,202
|                     |  |                           |        |      |   |       
|Total                |  | $                         | 20,363 |      | $ | 28,016
|                     |  |                           |        |      |   |       



9.    Significant Concentrations



Customers and Vendors



Net sales to the
Companys customers, which account for more than 10% of the Companys net sales are presented below. The Companys customers consist principally of major U.S. based electronic companies and their subcontractors. In addition, purchases
from the Companys vendors, which account for more than 10% of the Companys purchases, are presented below.



|           |  |                           |   |  |      |   |  |      |  
|---------- |  | ------------------------- | - |  | ---- | - |  | ---- | -
|           |  | Years Ended September 30, |  
|           |  | 2004                      |   |  | 2003 |   |  | 2002 |  
|Net sales  |  |                           |   |  |      |   |  |      |  
|CustomerA |  | 29                        | % |  | 7    | % |  | 13   | %
|CustomerB |  | 11                        | % |  | 14   | % |  | 14   | %
|CustomerC |  | 7                         | % |  | 21   | % |  | 24   | %
|CustomerD |  | 10                        | % |  | 12   | % |  | 7    | %



|                    |  |               |   |  |      |   |  |      |  
|------------------- |  | ------------- | - |  | ---- | - |  | ---- | -
|                    |  | September 30, |  
|                    |  | 2004          |   |  | 2003 |   |  | 2002 |  
|Accounts Receivable |  |               |   |  |      |   |  |      |  
|CustomerA          |  | 31            | % |  | 10   | % |  | 11   | %
|CustomerB          |  | 4             | % |  | 19   | % |  | 14   | %
|CustomerC          |  | 5             | % |  | 18   | % |  | 23   | %
|CustomerD          |  | 6             | % |  | 14   | % |  | 17   | %



57



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



Customers B, C and D are subcontractors of Customer A. In addition, during the years ended September
30, 2004, 2003 and 2002, 80%, 71% and 70% of the Companys net sales were realized from Customer A and its subcontractors.



|                 |  |                           |   |  |      |   |  |      |  
|---------------- |  | ------------------------- | - |  | ---- | - |  | ---- | -
|                 |  | Years Ended September 30, |  
|                 |  | 2004                      |   |  | 2003 |   |  | 2002 |  
|Purchases        |  |                           |   |  |      |   |  |      |  
|VendorA         |  | 18                        | % |  | 18   | % |  | 24   | %
|VendorB         |  | 8                         | % |  | 11   | % |  | 12   | %
|VendorC         |  | 2                         | % |  | 8    | % |  | 10   | %
|VendorD         |  | 10                        | % |  | 2    | % |  | 2    | %
|                 |  | September 30,             |  
|                 |  | 2004                      |   |  | 2003 |   |  | 2002 |  
|Accounts payable |  |                           |   |  |      |   |  |      |  
|VendorA         |  | 9                         | % |  | 12   | % |  | 17   | %



The Companys
customers require the use of materials that have been pre-qualified by them. Any interruption in pre-qualified sources of materials may result in the Companys inability to timely deliver products to customers.



Geographic



Information regarding net sales by geographical area based on the location
of the customer is summarized below:



|                   |  |                           |         |      |   |         |  |   |        
|------------------ |  | ------------------------- | ------- | ---- | - | ------- |  | - | -------
|                   |  | Years Ended September 30,
|                   |  | 2004                      |         | 2003 |   | 2002   
|North America      |  | $                         | 33,819  |      | $ | 28,275  |  | $ | 32,226 
|China              |  |                           | 116,713 |      |   | 42,103  |  |   | 40,935 
|Hong Kong          |  |                           | 39,925  |      |   | 22,785  |  |   | 17,137 
|Japan              |  |                           | 27,487  |      |   | 16,945  |  |   | 7,891  
|Other Asia-Pacific |  |                           | 20,144  |      |   | 11,104  |  |   | 6,549  
|Europe             |  |                           | 14,418  |      |   | 8,113   |  |   | 5,799  
|Other foreign      |  |                           | 543     |      |   | 90      |  |   |       
|                   |  |                           |         |      |   |         |  |   |        
|                   |  | $                         | 253,049 |      | $ | 129,415 |  | $ | 110,537
|                   |  |                           |         |      |   |         |  |   |        



Sales to customers in
North America include the United States, Canada, Mexico and Puerto Rico. Sales to customers in other Asia-Pacific countries include Singapore, Malaysia, Thailand, Taiwan, the Philippines and Korea. Sales to customers in Europe include the
Netherlands, the Czech Republic, Ireland, Belgium, Denmark, Finland, Scotland, Germany, France and the United Kingdom.



Industry



In the years ended September 30, 2004, 2003 and 2002, 83%, 75% and 72% of net sales were derived from sales to companies that provide products or services
to the wireless telecommunications industry. The wireless telecommunications industry is subject to economic cycles and has experienced period of slowdown in the past.



58



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



10.    Commitments and Contingencies



Operating Leases



The Company leases its facilities and certain assets under noncancelable
operating leases which expire at various dates through 2006. Future minimum lease payments under noncancelable operating leases at September 30, 2004 are as follows:



|                          |  |                 |    
|------------------------- |  | --------------- | ---
|Year Ending September 30, |  | OperatingLeases
|2005                      |  | $               | 484
|2006                      |  |                 | 138
|                          |  |                 |    
|                          |  | $               | 622
|                          |  |                 |    



Total rent expense was
$692, $761 and $1,136 for the years ended September 30, 2004, 2003 and 2002, respectively.



During the year ended September 30, 2004, the Company recorded a capital lease obligation of $318 related to the acquisition of a new phone system. The Company is obligated to pay $55, $69, $69, $69 and $40 during the
years ended September 30, 2005 through 2009, respectively.



As
of September 30, 2004 and 2003, the Company had outstanding purchase commitments related to MFC2 capital projects which totaled $18,002 and $5,678, respectively.



As of September 30, 2003, the Company was committed to fund the operations of Mind Wurx until March 31, 2004, when the
Company entered into a mutual termination and release agreement (Note 5).



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 after-tax profit, subject to certain cumulative limits. These restrictions on after-tax profit for the years ended September 30, 2004, 2003 and 2002 are equal to $111, $116 and $186, respectively.



Litigation



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.



11.    Rights Offering



In September 2003, the Company initiated a rights offering whereby existing
stockholders were given the opportunity to purchase additional shares of the Companys common stock at a price of $3.86 per share through October 15, 2003. As of September 30, 2003, no shares had been issued.



In October 2003, the Company issued 6,472,515 shares of common stock to
Wearnes upon exercise of their rights for $10,000 in cash and $15,000 in deposits received from Wearnes during the year ended September 30, 2003 (Note 3). In addition, the Company issued 65,025 shares of common stock for total proceeds of $251 to
other existing stockholders upon exercise of their rights. Total proceeds from the rights offering were $25,171, net of $80 in issuance costs.



59



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



In connection with the issuance of the common stock, the Company recorded the $10,874 difference
between the estimated fair value of the common stock on the issuance date ($5.53 per share) and the purchase price ($3.86 per share) as a deemed dividend, resulting in a reduction in retained earnings.



12.    Stock Option Plans



1994 Stock Option Plan



In December 1994, the Company adopted the 1994 Stock Plan (the 1994
Plan) that is administered by the Companys board of directors. The 1994 Plan provides for the granting of stock options, stock appreciation rights and restricted common stock to employees, nonemployee advisors, consultants, and directors
that generally expire ten years after the grant date. Options granted under the 1994 Plan vest based on periods determined by the Companys board of directors, which has been one year for employees with greater than one year of service with the
Company and two years for employees with less than one year of service with the Company. A total of 2,049,750 shares of common stock have been authorized for issuance and reserved under the 1994 Plan. During the year ended September 30, 2004, the
Company did not issue any options under the 1994 Plan. Effective with the adoption of the 2004 Stock Incentive Plan, the Company ceased granting options under the 1994 Plan. The 1994 Plan will officially terminate on December 9, 2004.



2004 Stock Incentive Plan



In June 2004, the Company adopted the 2004 Stock Incentive Plan (the
2004 Plan) that is administered by the Companys board of directors. The 2004 Plan provides for the granting of stock options, stock appreciation rights and restricted common stock to employees, nonemployee advisors, consultants,
and directors. Options granted under the Plan vest and will expire based on periods determined by the Companys board of directors, but in no event can the expiration date be later than ten years from the date of grant. Options may be either
incentive stock options or nonqualified stock options. The per share exercise price on an incentive stock option shall not be less than 100% of the fair market value of the Companys common stock on the date the option is granted. The per share
exercise price of a nonqualified stock option shall not be less than 85% of the fair market value of the Companys common stock on the date the option is granted. A total of 2,876,400 shares of common stock have been authorized for issuance and
reserved under the 2004 Plan.



Stock option activity under the
plans is summarized as follows:



|                                                   |  |                  |   |  |                                 |     
|-------------------------------------------------- |  | ---------------- | - |  | ------------------------------- | ----
|                                                   |  | Number of Shares |   |  | Weighted-Average Exercise Price
|Options outstanding at September 30, 2001 and 2002 |  | 1,483,305        |   |  | $                               | 2.88
|Granted                                            |  | 300,000          |   |  | $                               | 3.73
|                                                   |  |                  |   |  |                                 |     
|Options outstanding at September 30, 2003          |  | 1,783,305        |   |  | $                               | 3.02
|Granted                                            |  | 1,034,000        |   |  | $                               | 9.98
|Exercised                                          |  | (7,000           | ) |  | $                               | 3.73
|Forfeited                                          |  | (11,900          | ) |  | $                               | 3.73
|                                                   |  |                  |   |  |                                 |     
|Options outstanding at September 30, 2004          |  | 2,798,405        |   |  | $                               | 5.58
|                                                   |  |                  |   |  |                                 |     



Options exercisable at
September 30, 2003 and 2002 were 1,768,305 and 1,483,305, with a weighted-average exercise price of $2.94 and $2.88, respectively.



60



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



The following table summarizes information about stock options outstanding and exercisable as of
September 30, 2004:



|                         |  |                     |  |                                                      |  |                                 |       |                              |           |                                |   |     
|------------------------ |  | ------------------- |  | ---------------------------------------------------- |  | ------------------------------- | ----- | ---------------------------- | --------- | ------------------------------ | - | ----
|                         |  | Options Outstanding |  | Options Exercisable                                 
|Range of Exercise Prices |  | Outstanding         |  | Weighted-Average RemainingContractual Life (inyears) |  | Weighted-Average Exercise Price |       | Number of Shares Exercisable |           | Weighted-AverageExercise Price
|$2.00$2.07              |  | 851,460             |  | 4.3                                                  |  | $                               | 2.04  |                              | 851,460   |                                | $ | 2.04
|$3.73$4.00              |  | 916,845             |  | 5.3                                                  |  | $                               | 3.92  |                              | 916,845   |                                | $ | 3.92
|$8.75                    |  | 20,000              |  | 9.9                                                  |  | $                               | 8.75  |                              |          |                                | $ |    
|$10.00                   |  | 1,010,100           |  | 9.8                                                  |  | $                               | 10.00 |                              |          |                                | $ |    
|                         |  |                     |  |                                                      |  |                                 |       |                              |           |                                |   |     
|                         |  | 2,798,405           |  |                                                      |  | $                               | 5.58  |                              | 1,768,305 |                                | $ | 5.58
|                         |  |                     |  |                                                      |  |                                 |       |                              |           |                                |   |     



At September 30, 2004,
the number of shares available for issuance under the 2004 and 1994 Plans was 1,846,300.



In June 2003, the Company granted 300,000 stock options at exercise prices below the estimated fair value of the Companys common stock at the date of grant. In accordance with APB 25, the Company recorded
stock-based compensation totaling $57, which equaled the intrinsic value on the date of grant that will be amortized over the related vesting period of one year. The Company recorded $14 and $43 of compensation expense during the years ended
September 30, 2004 and 2003, respectively.



In March and May
2003, the Company extended the exercise period to ten years from the grant date for fully vested options for certain employees who had resigned from the Company. The extension of the exercise period resulted in a new measurement date under the
provisions of FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensationan interpretation of APB Opinion No. 25. For stock options with respect to 45,000 shares of common stock, the Company recorded
compensation expense of $87 related to this modification, which was based on the difference between the estimated fair value of the Companys common stock on the date of modification and the related exercise price.



Pro Forma Effect of Stock-Based Compensation



In calculating pro forma information as required by SFAS 123, the fair value
of stock options granted was estimated at the date of grant using the minimum value method for each option grant preceding the Companys initial public offering and the Black-Scholes model for each option grant subsequent to the Companys
initial public offering, with the following weighted-average assumptions: a risk-free interest rate of 3.84% and 2.77% for the years ended September 30, 2004 and 2003, respectively, no dividend yield and expected life of five years. Volatility of
73% was used for the year ended September 30, 2004. No volatility was used for the year ended September 30, 2003, as the minimum value method calculation does not include volatility. The weighted average fair value of options granted during the year
ended September 30, 2004 and 2003 was $6.19 and $0.48, respectively. There were no stock options granted during the year ended September 30, 2002.



13.    Employee Benefit Plan



The Company maintains a 401(k) defined contribution plan (the Benefit Plan). The Benefit Plan covers substantially all employees of the
Company who meet minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions are determined at the discretion of the Companys board of directors.
Contributions to the Benefit Plan were $120, $106 and $102 for the years ended September 30, 2004, 2003 and 2002, respectively.



61



---

##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



SCHEDULE II

CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002

(In Thousands)



|                               |  |                              |      |  
|------------------------------ |  | ---------------------------- | ---- | -
|                               |  | Accounts Receivable Reserves |     
|Balances at September 30, 2001 |  | $                            | 212  |  
|Charged to operations          |  |                              | 256  |  
|Write-offs                     |  |                              | (201 | )
|                               |  |                              |      |  
|Balances at September 30, 2002 |  |                              | 267  |  
|Charged to operations          |  |                              | 112  |  
|Write-offs                     |  |                              |     |  
|                               |  |                              |      |  
|Balances at September 30, 2003 |  |                              | 379  |  
|Charged to operations          |  |                              | 26   |  
|Write-offs                     |  |                              | (155 | )
|                               |  |                              |      |  
|Balances at September 30, 2004 |  | $                            | 250  |  
|                               |  |                              |      |  



62



---

##### Table of Contents

|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------



There have been no changes in our independent accountants or disagreements with such accountants on any matter of accounting
principles or practices, financial statement disclosure or auditing scope of procedure.



|Item 9A. | Controls and Procedures
|-------- | -----------------------



Based on an evaluation carried out as of the end of the period covered by this Annual Report, under the supervision and with the participation of our
management, including our Chief Executive Officer (CEO) and Chief Financial Officer (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 and Exchange Act of 1934, as amended (Exchange Act)) are effective. During the fourth fiscal quarter, there was no change in our internal control over financial reporting identified in connection with the
evaluation described above that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



We are, however, beginning the evaluation of our internal controls over financial reporting in order to comply with Section 404 of the Sarbanes-Oxley Act
of 2002. Section 404 requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year beginning in 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.



Part III



|Item 10. | Directors and Executive Officers of the Registrant
|-------- | --------------------------------------------------



The information required by this item (with respect to our directors) will be contained in the section called Election of Directors in our
Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for our 2005 Annual Meeting of Stockholders expected to be held on February 2, 2005 (our 2005 Proxy Statement), and is incorporated herein by
reference. Certain information regarding our executive officers required by this item is set forth in Part I of this Annual Report under the caption Executive Officers of the Registrant.



The information required by this item regarding compliance with Section 16(a)
of the Exchange Act will be contained in, and is hereby incorporated by reference to, our 2005 Proxy Statement under the caption Other InformationSection 16(a) Beneficial Ownership Reporting Compliance.



We have adopted a Code of Ethics for Senior Officers that applies to our CEO,
President, CFO and other key management employees (including other senior financial officers) who have been identified by the board of directors (the Code of Ethics). We have also adopted a Code of Business Conduct that applies to all of
our employees, officers and directors (the Code of Business Conduct). A copy of each of the Code of Ethics and the Code of Business Conduct are included as Exhibits 14.1 and 14.2 to this Annual Report. The Code of Ethics and Code of
Business Conduct are also available on our website at www.mflex.com. We will post (i) any waiver, if and when granted, to any provision of the Code of Ethics or Code of Business Conduct (for executive officers or directors) and (ii) any
amendment to the Code of Ethics or Code of Business Conduct on our website.



We have a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Sanford L. Kane (Chairperson), Richard J. Dadamo
and Sam Yau. All of such members meet the independence standards established by Nasdaq for serving on an audit committee and the requirements under Section 10A of the Exchange Act. Our board of directors has determined that Mr. Kane qualifies as an
audit committee financial expert within the meaning of such regulations.



63



---

##### Table of Contents

|Item 11. | Executive Compensation
|-------- | ----------------------



The information required by this item regarding executive compensation will be contained in, and is hereby incorporated by reference to, our 2005 Proxy
Statement under the captions Election of DirectorsCompensation of Directors, Executive Compensation and Election of DirectorsCompensation Committee Interlocks and Insider Participation.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------



The information required by this item regarding security ownership of certain beneficial owners and management will be
contained in the section called Security Ownership of Certain Beneficial Owners and Management in our 2005 Proxy Statement, and is incorporated herein by reference.



Equity Compensation Plan Information



The following summarizes our equity compensation plans at September 30, 2004:



|                                                           |  |                                                                                         |  |                                                                          |      |                                                                                                                                       |          
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ---- | ------------------------------------------------------------------------------------------------------------------------------------- | ---------
|                                                           |  | (a)                                                                                     |  | (b)                                                                      |      | (c)                                                                                                                                  
|Plan Category                                              |  | Number of Securitiesto be issued uponexercise ofoutstanding options,warrants and rights |  | Weighted-averageexercise price ofoutstanding options,warrants and rights |      | Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding securitiesreflected in
column(a))
|Equity compensation plans approved by security holders     |  | 2,798,405                                                                               |  | $                                                                        | 5.58 |                                                                                                                                       | 1,846,300
|Equity compensation plans not approved by security holders |  | None                                                                                    |  |                                                                          | None |                                                                                                                                       | None     
|Total                                                      |  | 2,798,405                                                                               |  | $                                                                        | 5.58 |                                                                                                                                       | 1,846,300



|Item 13. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------



The information required by this item regarding certain relationships and related transactions will be contained under the caption Certain
Relationships and Related Party Transactions in our 2005 Proxy Statement, and is incorporated herein by reference.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------



The information required by this item is incorporated by reference to the information which will be contained under the captions Ratification of
Independent AccountantsPrincipal Accountant Fees and Services and Ratification of Independent AccountantsPre-Approval Policies and Procedures contained in our 2005 Proxy Statement.



Part IV.



|Item 15. | Exhibits, Financial Statement Schedules
|-------- | ---------------------------------------



| | (a) | Documents filed as part of this report:
| | --- | ---------------------------------------



| | (1) | Financial Statements
| | --- | --------------------

See Index to
Consolidated Financial Statements under Item 8



| | (2) | Financial Statement Schedule
| | --- | ----------------------------

See Index to
Consolidated Financial Statements under Item 8



| | (3) | Exhibits
| | --- | --------

See Item 15(b) below. Each management contract
or compensatory plan or arrangement required to be filed has been so identified.



64



---

##### Table of Contents

(b) 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                                                                                                                                     
|       | 
|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                                               
|       | 
|14.1   |  | Code of Ethics for Senior Officers                                                                                                                                              
|       | 
|14.2   |  | Code of Business Conduct                                                                                                                                                        
|       | 
|21.1*  |  | List of Subsidiaries of the Registrant                                                                                                                                          
|       | 
|23.1   |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                           
|       | 
|24.1   |  | Power of Attorney (see page 66 of this Annual Report)                                                                                                                           
|       | 
|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 (File No. 333-114510) declared effective by the SEC on June
24, 2004.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



65



---

##### Table of Contents

SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.



|                       |  |                                                        |  |                                     
|---------------------- |  | ------------------------------------------------------ |  | ------------------------------------
|                       |  | Multi-Fineline Electronix, Inc. a Delaware Corporation
|                       |  |                                                       
|Date: December 6, 2004 |  | By:                                                    |  | /s/    PHILIP A.
HARDING            
|                       |  |                                                        |  | Philip A. Harding                   
|                       |  |                                                        |  | Chairman and Chief Executive Officer



POWER OF ATTORNEY



KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Philip A. Harding and Craig Riedel, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue hereof.



Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                                |  |                                                                                              |  |                  
|----------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | -----------------
|Name                                            |  | Title                                                                                        |  | Date             
|                                                |  |                                                                                             
|/S/    PHILIP A.
HARDINGPhilip A.
Harding       |  | Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) |  | November 30, 2004
|                                                |  |                                                                                             
|/S/    CRAIG
RIEDELCraig
Riedel                 |  | Chief Financial Officer (Principal Financial and Accounting Officer)                         |  | November 30, 2004
|                                                |  |                                                                                             
|/S/    RICHARD J.
DADAMORichard J.
Dadamo       |  | Director                                                                                     |  | November 30, 2004
|                                                |  |                                                                                             
|/S/    SANFORD L.
KANESanford L.
Kane           |  | Director                                                                                     |  | November 30, 2004
|                                                |  |                                                                                             
|/S/    KEVIN
LEWKevin Lew                       |  | Director                                                                                     |  | November 30, 2004
|                                                |  |                                                                                             
|/S/    HUAT-SENG LIM,
PH.D.Huat-Seng Lim,
Ph.D. |  | Director                                                                                     |  | November 30, 2004
|                                                |  |                                                                                             
|/S/    RONALD E.
RAGLANDRonald E.
Ragland       |  | Director                                                                                     |  | November 30, 2004
|                                                |  |                                                                                             
|/S/    SAM
YAUSam Yau                           |  | Director                                                                                     |  | November 30, 2004



66



---

##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                 
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                         
|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                                               
|              | 
|14.1          |  | Code of Ethics for Senior Officers                                                                                                                                              
|              | 
|14.2          |  | Code of Business Conduct                                                                                                                                                        
|              | 
|21.1*         |  | List of Subsidiaries of the Registrant                                                                                                                                          
|              | 
|23.1          |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                           
|              | 
|24.1          |  | Power of Attorney (see page 66 of this Annual Report)                                                                                                                           
|              | 
|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 (File No. 333-114510) declared effective by the Securities
and Exchange Commission on June 24, 2004.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



67