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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



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



For the fiscal year ended September 30, 2005



OR



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



For the transition period from
 to
.



Commission file number: 000-50812



MULTI-FINELINE ELECTRONIX, INC.

(Exact name of registrant as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 95-3947402                         
|(State or other jurisdictionof incorporation or organization) |  | (I.R.S. EmployerIdentification No.)



3140 East Coronado
Street

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



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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 x  No ̈



Indicate by check mark whether the registrant is a shell company (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 March 31, 2005) was $150,759,469.45. 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 5, 2005 was 24,216,930.



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 2006 Annual Meeting of Stockholders expected to be held on March 21, 2006.



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Multi-Fineline Electronix, Inc.



Index



|         |  |                                                                                                |  |   
|-------- |  | ---------------------------------------------------------------------------------------------- |  | --
|         |  | PART I                                                                                         |  |   
|         |  |                                                                                               
|Item 1.  |  | Business                                                                                       |  | 1 
|Item 2.  |  | Properties                                                                                     |  | 9 
|Item 3.  |  | Legal Proceedings                                                                              |  | 9 
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 10
|         |  |                                                                                               
|         |  | PART II                                                                                        |  |   
|         |  |                                                                                               
|Item 5.  |  | Market for Registrants Common Equity                                                          |  | 11
|Item 6.  |  | Selected Consolidated Financial Data                                                           |  | 11
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 13
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 33
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  | 34
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 59
|Item 9A. |  | Controls and Procedures                                                                        |  | 59
|         |  |                                                                                               
|         |  | PART III                                                                                       |  |   
|         |  |                                                                                               
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  | 60
|Item 11. |  | Executive Compensation                                                                         |  | 60
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 60
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  | 61
|Item 14. |  | Principal Accountant Fees and Services                                                         |  | 61
|         |  |                                                                                               
|         |  | PART IV                                                                                        |  |   
|         |  |                                                                                               
|Item 15. |  | Exhibits, Financial Statement Schedules                                                        |  | 61
|         |  | Signatures                                                                                     |  | 63



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Part I



|Item 1. | Business
|------- | --------



Overview



This
Annual Report on Form 10-K, or 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 regarding our revenues,
operating expenses, net income, sales and operations, gross margins, 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, trends in, and our focus on, flex circuitry and the complexity of assemblies, 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 and capabilities of our facilities, the impact of economic and industry conditions on our customers and our business, our diversification efforts,
current and upcoming programs and product mix and the material content of such programs, the release and sales of our camera cell phone modules and embedded magnetic technology, the development of and applications for new technology, customer
demand, our competitive position, critical accounting policies, expected tax rates, the results of our audits in China and the United States and the impact of recent accounting pronouncements. Additional forward-looking statements include, but are
not limited to, statements pertaining to other financial items, plans, strategies or objectives of management for future operations, our financial condition or prospects, and any other statement that is not historical fact, including any statement
which is preceded by the word may, might, will, intend, should, could, can, would, expect, believe, estimate,
predict, aim, potential, plan, or similar words. For all of the foregoing forward-looking statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Actual events or
results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, the impact of changes in
demand for our products and our success with new and current customers, our ability to develop and deliver new technologies, our ability to diversify our customer base, our effectiveness in managing manufacturing processes and costs and expansion of
our operations, the degree to which we are able to utilize available manufacturing capacity, enter into new markets and execute our strategic plans, 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, smart mobile devices, portable bar code scanners, personal digital assistants, data storage devices, power supplies and consumable medical sensors. We provide
our solutions to original equipment manufacturers, or OEMs, such as Motorola, Inc., Symbol Technologies, Inc. and International Business Machines Corporation; to electronic manufacturing services, or EMS, providers such as Foxconn Electronics, Inc.
and Flextronics International Ltd.; and to display manufacturers such as Hosiden F.D. Corporation and Optrex Corporation Japan. In 2005, we acquired the assets of an optical and photonic imaging solution company as part of our strategy to capture a
substantial portion of the expanding camera cell phone market. We now operate this business as Aurora Optical, Inc., or Aurora Optical, as a wholly owned subsidiary of M-Flex. We also entered into development and manufacturing agreements with
Mobility Electronics, Inc., or Mobility, in 2005, aimed at utilizing our component assembly capabilities and embedded magnetic technology in Mobilitys charger products.



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; Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd., or MFC2; and Aurora Optical, except where it is made clear that the term means only the parent company.



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



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outsourcing by OEMs of their manufacturing needs and the shifting of manufacturing facilities from 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, or 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, reduces the 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 and provide higher signal integrity interconnection. They also 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 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, minimize logistical problems and focus on their core competencies.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 we believe that 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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| |  |  | 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 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, expansion of our manufacturing facilities and the capital
equipment addition at our second manufacturing facility in China, or MFC2, which we expect to be completed in October 2006, 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 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 upward 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 yearly sequential net sales growth.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our Management Experience and Expertise. All of our executive officers have been with us for between 11 and 19 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



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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 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, including the camera cell
phone and charger markets, 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, including markets where embedded magnetic applications are used, such as in chargers, and in the medical market.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 facility expansion at MFC2 is complete, we will increase substantially our manufacturing capacity. 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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, smart mobile devices, portable bar code scanners, personal digital assistants, data storage devices, 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                     
|                                            |  |                                      
|International Business Machines Corporation |  | Computer-storage                      |  | Flexible printed circuit in data storage device                                
|                                            |  |                                      
|GE Healthcare                               |  | Medical applications                  |  | Flexible printed circuit in diagnostic equipment                               
|                                            |  |                                      
|Masimo Corporation                          |  | Blood oxygen sensor                   |  | Disposable flexible printed circuit contained in bandage                       



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, smart mobile devices, portable bar code scanners, personal digital assistants, data storage devices, power supplies and consumable medical sensors. Our
expertise in flexible printed circuit



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design and component assembly enables us to assist our customers in resolving their design challenges through our design and assembly techniques, which
frequently results 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 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 that we sell to include Foxconn
and Flextronics. Our relationships with EMS providers and display manufacturers normally are directed by the OEMs; therefore, it is typically 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, 2005, 2004 and 2003, we sold products to be incorporated into
Motorolas products to 45, 40 and 35 Motorola subcontractors, which aggregated 81%, 80% and 71% of our net sales (including direct sales to Motorola).



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 fiscal 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, 2005, we derived 12% of our net sales in the United States and 88% of our net sales outside the United States. For the fiscal year ended September 30, 2004, we derived 17% of our net sales in the United
States and 83% of our net sales outside the United States. For the fiscal year ended September 30, 2003, we derived 12% of our net sales in the United States and 88% of our net sales outside the United States.



For the fiscal year ended September 30, 2005, 13% of our net sales were
attributable to Hong Kong, 65% of our net sales were attributable to China, and 13% of our net sales were attributable to North America. 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 years ended September 30, 2005, 2004 and 2003, we had long-lived assets of $22.7 million, $17.9 million and $17.9 million,
respectively, in the United States; and $59.4 million, $46 million and $30.3 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 19 non-exclusive sales representatives to interact
with customers and potential customers on our behalf. Fifteen of these sales representatives are located throughout the United States. We also have one sales representative in each of Canada, Europe, 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, 2005, our backlog, which constitutes
customer orders placed with us that we believe to be firm but that have not yet shipped, was $149.6 million. We expect to ship this entire backlog during fiscal year 2006. We cannot guarantee that our customers will not cancel any or all of the
orders in our backlog. Our current backlog also is not indicative



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of our future operating results. As of September 30, 2004, our backlog was $90.9 million. As of September 30, 2003, our backlog 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 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, attaching components and embedded magnetics for chargers. 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.



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., Supertex, Inc and ITT, Inc. For



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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., as well as a growing number of flexible printed circuit assembly producers in Taiwan, South Korea and China, and with domestic
providers. 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 beneficially owns 61% of our outstanding common stock as of September 30, 2005.



We believe that our technology leadership and capabilities in designing and
manufacturing flexible printed circuits and component assemblies have enabled us to build strong partnerships and customer relationships with many companies. We believe that customers typically rely upon a limited number of 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, 2005, we
employed approximately 9,367 full-time employees and 823 contract employees, including 583 full-time employees and 40 contract employees in the United States, and 8,784 full-time employees and 783 contract employees in China. We have never had a
work stoppage. We consider our employee relations to be good.



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 any of our other employees at any of our facilities in China. 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, 2005 and 2004, we reserved $125,000 and $122,000 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.



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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 designed to minimize the negative
impacts and reduce 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 year 2006.



|Item 2. | Properties
|------- | ----------



Our corporate headquarters are located in Anaheim, California and our manufacturing facilities are located in Anaheim, California and Suzhou, China. We
also have a facility located in Tucson, Arizona related to Aurora Optical. Following is a summary of our properties:



|                                                                    |  |                     |  |                                    |  |                                   
|------------------------------------------------------------------- |  | ------------------- |  | ---------------------------------- |  | ----------------------------------
|Function                                                            |  | Location            |  | Square Feet                        |  | Lease Expiration Dates            
|Executive offices, engineering and circuit fabrication and assembly |  | Anaheim, California |  | Owned105,000 Leased52,771*       |  | N/A January 2006 toAugust 2008    
|Aurora Optical, Inc.Engineering, lens assembly and manufacturing   |  | Tucson, Arizona     |  | Leased47,000**                    |  | June 2015                         
|MFC1Engineering, circuit fabrication and assembly                  |  | Suzhou, China       |  | 118,893 105,600                    |  | March 2006 to January 2008 2043***
|MFC2Engineering, circuit fabrication and assembly                  |  | Suzhou, China       |  | 285,000**** Temporary lease32,300 |  | 2052 September 2006               

---

|* | We have 15 leases relating to this space, which range in terms from one to three years and range in size from approximately 2,000 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.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|** | Pursuant to the terms of this lease, we and the landlord have agreed to negotiate in good faith for us to purchase this property by June 13, 2006.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------



|*** | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|**** | Our long-term land lease for MFC2 includes an additional 65,000 square feet of land on which we are currently expanding 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.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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. We are currently not a party to any material legal proceeding.



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|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, 2005:



|                  |  |     |  |                                                               
|----------------- |  | --- |  | --------------------------------------------------------------
|Name              |  | Age |  | Position(s)                                                   
|Philip A. Harding |  | 73  |  | Chief Executive Officer and Chairman of the Board of Directors
|Reza Meshgin      |  | 42  |  | President and Chief Operating Officer                         
|Craig Riedel      |  | 49  |  | Chief Financial Officer                                       
|Thomas Lee        |  | 46  |  | Vice President of Operations                                  
|Charles Tapscott  |  | 63  |  | Vice President and Chief Technology Officer                   



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 our Engineering Supervisor, Application Engineering Manager,
Director of Engineering and Telecommunications Division Manager. Prior to assuming his current position as our President and Chief Operating Officer in January 2004, Mr. Meshgin served as our 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.



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 received his Certified Public Accounting certificate in 1980. 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 our 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 our Director of Business Development and served as our Vice President
of Sales and Marketing from January 2002 to 2005. In 2005, Mr. Tapscott was named our Vice President and Chief Technology Officer. 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.



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Part II



|Item 5. | Market for Registrants Common Equity
|------- | -------------------------------------



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



|               |  |             |       |             |   |       |  |     |       |  |   |      
|-------------- |  | ----------- | ----- | ----------- | - | ----- |  | --- | ----- |  | - | -----
|               |  | Fiscal 2005 |       | Fiscal 2004
|               |  | High        |       | Low         |   | High  |  | Low
|First Quarter  |  | $           | 21.93 |             | $ | 9.30  |  |     | N/A   |  |   | N/A  
|Second Quarter |  |             | 23.27 |             |   | 14.97 |  |     | N/A   |  |   | N/A  
|Third Quarter  |  |             | 20.25 |             |   | 14.54 |  | $   | 10.04 |  | $ | 10.00
|Fourth Quarter |  |             | 29.27 |             |   | 18.08 |  |     | 10.50 |  |   | 6.90 



Stockholders of record
on October 31, 2005 numbered approximately 24. 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. 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.



|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 included as Item 7 of this Annual Report and the Consolidated Financial Statements and related notes included in Item 8 of this Annual Report. The selected
consolidated statements of income data for the years ended September 30, 2005, 2004 and 2003 and selected consolidated balance sheet data as of September 30, 2005 and 2004 are derived from audited consolidated financial statements included
elsewhere in this Annual Report. The selected consolidated statements of income data as of September 30, 2002 and 2001 and selected consolidated balance sheet data for the years ended September 30, 2003, 2002 and 2001 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,                                |           
|                                               |  | 2005                                                    |            |   | 2004 |   |            | 2003 |  |   | 2002       |   |  | 2001 |           
|                                               |  | (in thousands, except share, per share data and ratios) |           
|Net sales                                      |  | $                                                       | 357,090    |   |      | $ | 253,049    |      |  | $ | 129,415    |   |  | $    | 110,537    |   |  | $ | 84,640     |  
|Cost of sales                                  |  |                                                         | 277,202    |   |      |   | 197,412    |      |  |   | 107,418    |   |  |      | 90,553     |   |  |   | 66,024     |  
|                                               |  |                                                         |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Gross profit                                   |  |                                                         | 79,888     |   |      |   | 55,637     |      |  |   | 21,997     |   |  |      | 19,984     |   |  |   | 18,616     |  
|Operating expenses                             |  |                                                         |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Sales and marketing                            |  |                                                         | 8,783      |   |      |   | 7,649      |      |  |   | 5,621      |   |  |      | 4,880      |   |  |   | 4,895      |  
|General and administrative                     |  |                                                         | 18,470     |   |      |   | 11,569     |      |  |   | 8,669      |   |  |      | 7,254      |   |  |   | 6,429      |  
|                                               |  |                                                         |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Total operating expenses                       |  |                                                         | 27,253     |   |      |   | 19,218     |      |  |   | 14,290     |   |  |      | 12,134     |   |  |   | 11,324     |  
|                                               |  |                                                         |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Operating income                               |  |                                                         | 52,635     |   |      |   | 36,419     |      |  |   | 7,707      |   |  |      | 7,850      |   |  |   | 7,292      |  
|Other (income) expense, net                    |  |                                                         |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Interest (income) expense, net                 |  |                                                         | (514       | ) |      |   | 468        |      |  |   | 310        |   |  |      | 100        |   |  |   | 254        |  
|Other (income) expense, net                    |  |                                                         | (378       | ) |      |   | 100        |      |  |   | 525        |   |  |      | 189        |   |  |   | 41         |  
|                                               |  |                                                         |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Income before provision for income taxes       |  |                                                         | 53,527     |   |      |   | 35,851     |      |  |   | 6,872      |   |  |      | 7,561      |   |  |   | 6,997      |  
|Provision for income taxes                     |  |                                                         | (16,361    | ) |      |   | (10,145    | )    |  |   | (2,295     | ) |  |      | (2,594     | ) |  |   | (2,221     | )
|                                               |  |                                                         |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net income                                     |  | $                                                       | 37,166     |   |      | $ | 25,706     |      |  | $ | 4,577      |   |  | $    | 4,967      |   |  | $ | 4,776      |  
|                                               |  |                                                         |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Earnings per share:                            |  |                                                         |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Basic                                          |  | $                                                       | 1.57       |   |      | $ | 1.33       |      |  | $ | 0.39       |   |  | $    | 0.42       |   |  | $ | 0.41       |  
|                                               |  |                                                         |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Diluted                                        |  | $                                                       | 1.51       |   |      | $ | 1.27       |      |  | $ | 0.38       |   |  | $    | 0.42       |   |  | $ | 0.41       |  
|                                               |  |                                                         |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Shares used in calculating earnings per share: |  |                                                         |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Basic                                          |  |                                                         | 23,603,935 |   |      |   | 19,310,044 |      |  |   | 11,720,295 |   |  |      | 11,720,295 |   |  |   | 11,720,295 |  
|Diluted                                        |  |                                                         | 24,593,998 |   |      |   | 20,306,842 |      |  |   | 11,978,610 |   |  |      | 11,763,885 |   |  |   | 11,763,885 |  
|Working capital                                |  | $                                                       | 108,126    |   |      | $ | 78,961     |      |  | $ | 17,656     |   |  | $    | 17,268     |   |  | $ | 12,963     |  
|Current ratio                                  |  |                                                         | 2.6        |   |      |   | 2.7        |      |  |   | 1.5        |   |  |      | 1.9        |   |  |   | 1.6        |  
|Total assets                                   |  | $                                                       | 259,600    |   |      | $ | 189,998    |      |  | $ | 98,729     |   |  | $    | 59,783     |   |  | $ | 51,966     |  
|Cash and cash equivalents                      |  | $                                                       | 38,253     |   |      | $ | 38,196     |      |  | $ | 5,211      |   |  | $    | 4,349      |   |  | $ | 1,336      |  
|Long-term debt                                 |  |                                                         |           |   |      |   |           |      |  | $ | 4,358      |   |  | $    |           |   |  | $ |           |  
|Stockholders equity                            |  | $                                                       | 189,041    |   |      | $ | 141,084    |      |  | $ | 45,486     |   |  | $    | 40,791     |   |  | $ | 35,589     |  



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|                                         |  |                                                     |         |   |              |   |        |               |  |   |                  |   |  |                   |        |   |              |   |        |               |  |   |                  |   |  |   |        |   |  |   |        |  
|---------------------------------------- |  | --------------------------------------------------- | ------- | - | ------------ | - | ------ | ------------- |  | - | ---------------- | - |  | ----------------- | ------ | - | ------------ | - | ------ | ------------- |  | - | ---------------- | - |  | - | ------ | - |  | - | ------ | -
|                                         |  | For the Quarter Ended(Unaudited)                    |        
|                                         |  | September 30,2005                                   |         |   | June 30,2005 |   |        | March 31,2005 |  |   | December 31,2004 |   |  | September 30,2004 |        |   | June 30,2004 |   |        | March 31,2004 |  |   | December 31,2003 |  
|                                         |  | (in thousands, except for share and per share data) |        
|Net sales                                |  | $                                                   | 110,890 |   |              | $ | 84,396 |               |  | $ | 77,392           |   |  | $                 | 84,412 |   |              | $ | 71,586 |               |  | $ | 71,497           |   |  | $ | 56,516 |   |  | $ | 53,450 |  
|Cost of sales                            |  |                                                     | 87,100  |   |              |   | 66,660 |               |  |   | 58,873           |   |  |                   | 64,569 |   |              |   | 54,610 |               |  |   | 54,108           |   |  |   | 42,933 |   |  |   | 45,761 |  
|                                         |  |                                                     |         |   |              |   |        |               |  |   |                  |   |  |                   |        |   |              |   |        |               |  |   |                  |   |  |   |        |   |  |   |        |  
|Gross profit                             |  |                                                     | 23,790  |   |              |   | 17,736 |               |  |   | 18,519           |   |  |                   | 19,843 |   |              |   | 16,976 |               |  |   | 17,389           |   |  |   | 13,583 |   |  |   | 7,689  |  
|Operating expenses                       |  |                                                     |         |   |              |   |        |               |  |   |                  |   |  |                   |        |   |              |   |        |               |  |   |                  |   |  |   |        |   |  |   |        |  
|Sales and marketing                      |  |                                                     | 2,335   |   |              |   | 2,019  |               |  |   | 2,263            |   |  |                   | 2,166  |   |              |   | 1,897  |               |  |   | 1,974            |   |  |   | 1,998  |   |  |   | 1,780  |  
|General and administrative               |  |                                                     | 5,918   |   |              |   | 4,536  |               |  |   | 4,185            |   |  |                   | 3,831  |   |              |   | 2,514  |               |  |   | 3,382            |   |  |   | 3,152  |   |  |   | 2,521  |  
|                                         |  |                                                     |         |   |              |   |        |               |  |   |                  |   |  |                   |        |   |              |   |        |               |  |   |                  |   |  |   |        |   |  |   |        |  
|Total operating expenses                 |  |                                                     | 8,253   |   |              |   | 6,555  |               |  |   | 6,448            |   |  |                   | 5,997  |   |              |   | 4,411  |               |  |   | 5,356            |   |  |   | 5,150  |   |  |   | 4,301  |  
|                                         |  |                                                     |         |   |              |   |        |               |  |   |                  |   |  |                   |        |   |              |   |        |               |  |   |                  |   |  |   |        |   |  |   |        |  
|Operating income                         |  |                                                     | 15,537  |   |              |   | 11,181 |               |  |   | 12,071           |   |  |                   | 13,846 |   |              |   | 12,565 |               |  |   | 12,033           |   |  |   | 8,433  |   |  |   | 3,388  |  
|Other (income) expense, net              |  |                                                     |         |   |              |   |        |               |  |   |                  |   |  |                   |        |   |              |   |        |               |  |   |                  |   |  |   |        |   |  |   |        |  
|Interest (income) expense, net           |  |                                                     | (210    | ) |              |   | (131   | )             |  |   | (103             | ) |  |                   | (70    | ) |              |   | (20    | )             |  |   | 109              |   |  |   | 260    |   |  |   | 119    |  
|Other (income) expense, net              |  |                                                     | (163    | ) |              |   | (153   | )             |  |   | (91              | ) |  |                   | 29     |   |              |   | (62    | )             |  |   | (97              | ) |  |   | 99     |   |  |   | 160    |  
|                                         |  |                                                     |         |   |              |   |        |               |  |   |                  |   |  |                   |        |   |              |   |        |               |  |   |                  |   |  |   |        |   |  |   |        |  
|Income before provision for income taxes |  |                                                     | 15,910  |   |              |   | 11,465 |               |  |   | 12,265           |   |  |                   | 13,887 |   |              |   | 12,647 |               |  |   | 12,021           |   |  |   | 8,074  |   |  |   | 3,109  |  
|Provision for income taxes               |  |                                                     | (4,901  | ) |              |   | (2,673 | )             |  |   | (4,370           | ) |  |                   | (4,417 | ) |              |   | (3,578 | )             |  |   | (3,286           | ) |  |   | (2,317 | ) |  |   | (964   | )
|                                         |  |                                                     |         |   |              |   |        |               |  |   |                  |   |  |                   |        |   |              |   |        |               |  |   |                  |   |  |   |        |   |  |   |        |  
|Net income                               |  | $                                                   | 11,009  |   |              | $ | 8,792  |               |  | $ | 7,895            |   |  | $                 | 9,470  |   |              | $ | 9,069  |               |  | $ | 8,735            |   |  | $ | 5,757  |   |  | $ | 2,145  |  
|                                         |  |                                                     |         |   |              |   |        |               |  |   |                  |   |  |                   |        |   |              |   |        |               |  |   |                  |   |  |   |        |   |  |   |        |  
|Net income per share                     |  |                                                     |         |   |              |   |        |               |  |   |                  |   |  |                   |        |   |              |   |        |               |  |   |                  |   |  |   |        |   |  |   |        |  
|Basic                                    |  | $                                                   | 0.46    |   |              | $ | 0.37   |               |  | $ | 0.34             |   |  | $                 | 0.41   |   |              | $ | 0.39   |               |  | $ | 0.47             |   |  | $ | 0.32   |   |  | $ | 0.12   |  
|                                         |  |                                                     |         |   |              |   |        |               |  |   |                  |   |  |                   |        |   |              |   |        |               |  |   |                  |   |  |   |        |   |  |   |        |  
|Diluted                                  |  | $                                                   | 0.44    |   |              | $ | 0.35   |               |  | $ | 0.32             |   |  | $                 | 038    |   |              | $ | 0.37   |               |  | $ | 0.44             |   |  | $ | 0.30   |   |  | $ | 0.12   |  
|                                         |  |                                                     |         |   |              |   |        |               |  |   |                  |   |  |                   |        |   |              |   |        |               |  |   |                  |   |  |   |        |   |  |   |        |  



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|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, smart mobile devices, portable bar code scanners,
personal digital assistants, data storage devices, power supplies and consumable medical sensors.



From our 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. In fiscal 2005, we acquired the assets of Applied Optics, Inc., a company
which designed and manufactured optical and photonic imaging solutions, and now operate this business as Aurora Optical, Inc., a subsidiary of M-Flex.



Net Sales



We design and manufacture our products to customer specifications. We engage the services of 19 non-exclusive sales representatives to provide customer
contacts and market our products directly to our global customer base. Fifteen of these sales representatives are located throughout the United States. We also have one sales representative in each of Canada, Europe, 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 promotional and marketing brochures.



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



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additional personnel and incur costs related to the anticipated growth of our company and our operations as a public company.



Interest (Income) Expense, Net



Interest income and 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, Net



Other income and expense, net, consists primarily of income generated from the sale of scrap inventory in China as well as 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 in which we do business, subject to any tax holiday periods granted by the respective governmental authorities. The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards, or
SFAS, No. 109, Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax
returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences
are expected to reverse.



The American Job Creation Act of
2004, or the Job Creation 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 currently determining the impact this change could have on our financial statements. The Job Creation 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 calendar year 2005, at an effective United States tax rate of 5.25%. We are currently evaluating whether to take advantage of this opportunity and the potential impact any remitted foreign
earnings would have on our financial statements. The income tax effect of repatriation of foreign earnings cannot be reasonably estimated at this time.



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.



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, 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
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 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 365-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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Goodwill. We evaluate the carrying value of goodwill as of June 30 of each year and between annual evaluations if events occur or circumstances change that would more
likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (i) a significant adverse change in legal factors or in business climate, (ii) unanticipated
competition, or (iii) an adverse action or assessment by a regulator. In performing the impairment review, we determine the carrying amount of each reporting unit by assigning assets and liabilities, including the existing goodwill, to those
reporting units. A reporting unit is defined as an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is deemed a reporting unit if the component constitutes a business for
which discrete financial information is available and management regularly reviews the operating results of that component. To evaluate whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned
to the reporting units carrying amount, including goodwill. We determine the fair value of each reporting unit using the present value of expected future cash flows for that reporting unit. If the carrying amount of a reporting unit exceeds
its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of
reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other
assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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, |  
|                                   |  | 2005                     |   |  | 2004  |   |  | 2003  |  
|Net sales                          |  | 100.0                    | % |  | 100.0 | % |  | 100.0 | %
|Cost of sales                      |  | 77.6                     |   |  | 78.0  |   |  | 83.0  |  
|                                   |  |                          |   |  |       |   |  |       |  
|Gross profit                       |  | 22.4                     |   |  | 22.0  |   |  | 17.0  |  
|Sales and marketing expense        |  | 2.5                      |   |  | 3.0   |   |  | 4.3   |  
|General and administrative expense |  | 5.2                      |   |  | 4.6   |   |  | 6.7   |  
|                                   |  |                          |   |  |       |   |  |       |  
|Operating income                   |  | 14.7                     |   |  | 14.4  |   |  | 6.0   |  
|Interest (income) expense, net     |  | (0.1                     | ) |  | 0.2   |   |  | 0.3   |  
|Other (income) expense, net        |  | (0.1                     | ) |  | 0.0   |   |  | 0.4   |  
|                                   |  |                          |   |  |       |   |  |       |  
|Income before income taxes         |  | 14.9                     |   |  | 14.2  |   |  | 5.3   |  
|Provision for income taxes         |  | (4.6                     | ) |  | (4.0  | ) |  | (1.8  | )
|                                   |  |                          |   |  |       |   |  |       |  
|Net income                         |  | 10.3                     | % |  | 10.2  | % |  | 3.5   | %
|                                   |  |                          |   |  |       |   |  |       |  



Year Ended September 30, 2005
Compared to Year Ended September 30, 2004



Net
Sales. The increase of $104.0 million from fiscal 2004 to fiscal 2005 was attributable primarily to $91.0 million of increased net sales to the wireless telecommunications sector, which accounted for approximately 84% of total net sales in
fiscal year 2005 versus 83% in fiscal 2004. 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. In fiscal 2005, industrial customers net sales of $27.2 million, our second largest sector, increased by $0.6 million or 2% as compared to fiscal 2004,
primarily due to an increase in volume of bar code scanners. In addition, compared to the prior fiscal year, personal digital assistant sales increased by $6.1 million or 105% during fiscal 2005 and sales to the medical industry increased by $4.0
million or 167% during fiscal 2005. Network telecommunications sales also increased by $1 million or 67% compared to the prior fiscal year during fiscal 2005 and power supply sales decreased by $1.2 million or 61% during fiscal 2005.



Cost of Sales and Gross Profit. Cost of sales as a percentage of
net sales remained relatively unchanged at 77.6% for fiscal 2005 versus 78% for fiscal 2004. Increases in the material cost percentage of sales in fiscal 2005 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 the value-added assembly portion of our business, which carries a higher material cost content,
partially offset by improvements in production yields.



Gross
profit increased to $79.9 million in fiscal 2005 from $55.6 million in fiscal 2004. As a percentage of net sales, gross profit for the year ended September 30, 2005 remained relatively constant at 22.4% versus 22% for the prior year. The
relatively consistent gross margins were primarily due to the continued 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, which were offset by increased material costs per unit during fiscal 2005. Our gross profit for the year ended September 30, 2005 included a $1.3 million
accrual for additional value added tax, duty and penalties in China. We believe gross profits as a percentage of net sales may be at the higher end of our sustainable range.



Sales and Marketing Expense. Sales representatives commissions and other sales related expense decreased
to $3.9 million for fiscal 2005 from $4.1 million in fiscal 2004, a decrease of 5%, primarily due to lower average commission rates paid on high volume programs. As a percentage of net sales, commissions decreased from 1.6% in fiscal 2004 to 1.1% in
fiscal 2005. Compensation and benefit expense increased to $4.9 million in fiscal 2005 from $3.5 million in fiscal 2004, an increase of 40%, primarily as the result of headcount increases in China to support the increased business volumes, increased
wages and the acquisition of Aurora Optical in June 2005. As a percentage of net sales, compensation and benefit expense for fiscal 2005 remained relatively unchanged at 1.3% as compared to fiscal 2004. Even with our focus to continually decrease
operating expenses as a percentage of net sales, we believe this may be at the lower end of our sustainable range.



General and Administrative Expense.As a percentage of net sales, general and administrative expense increased slightly from 4.6% in fiscal
2004 to 5.2% in fiscal 2005. The increase in general and administrative expense was primarily attributable to increased public company expenses, including Sarbanes Oxley Act of 2002, or SOX, Section 404 compliance, audit costs and directors and
officers insurance. This was offset by the leveraging of a small increase in the compensation



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and benefits expense, due to increased headcount, over a much larger increase in net sales. We believe general and administrative expense as a percentage of
net sales may be at the lower end of our sustainable range, as we expect savings from anticipated decreases in SOX 404 expenses to be offset by increases in compensation expense from (i) compliance with FAS 123R, which we expect will reduce net
income by approximately $800,000 to $1.0 million in fiscal 2006 based on options outstanding as of September 30, 2005, (ii) the hiring of additional personnel and (iii) costs related to the anticipated growth of our company.



Interest (Income) Expense, Net.Net interest
expense changed to income of $514,000 for fiscal 2005 from expense of $468,000 for fiscal 2004, an increase of 210%. The increase in net interest income was primarily due to interest earned on short-term investments as well as the reduction of our
outstanding debt balance during fiscal 2005.



Other (Income)
Expense, Net.The other income in fiscal 2005 of $378,000 and other expense in fiscal 2004 of $100,000 was generated in large part by the sale of scrap inventory in China. A principal component of the other expense for fiscal 2005 and
fiscal 2004 was a $40,000 and $250,000, respectively, loss from our investment in Mind Wurx.



Income Taxes.The effective tax rate for fiscal 2005 was 31% compared to 28% for fiscal 2004. The higher effective tax rate is due primarily to the increase in the MFC1 tax rate from 0% to 12% on
January 1, 2005. In addition, the higher effective tax rate is due to the recording of additional tax contingency reserves in connection with our domestic and foreign operations as well as the recording of a valuation allowance relating to the
deferred tax benefits from capital loss carryforwards and losses from our investment in Mind Wurx. We believe that it is more likely than not, that we will not receive the future benefits of these losses.



The effective tax rate of 31% for the fiscal year ended September 30,
2005 does not reflect the impact of any potential repatriation of cash under the Jobs Creation Act. We are currently evaluating whether any foreign earnings will be repatriated, and to what extent, foreign earnings that have not yet been remitted to
the United States might be repatriated.



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.



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.



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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 capital 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.



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.



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 certain other operating
measures:



|                                                     |  |                                                 |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------- |  | ----------------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                     |  | Years Ended September 30,(dollars in thousands) |        
|                                                     |  | 2005                                            |         |   | 2004 |   |         | 2003 | 
|Cash flow provided by operating activities           |  | $                                               | 43,969  |   |      | $ | 5,116   |      |  | $ | 5,879   |  
|Cash flow used in investing activities               |  | $                                               | (23,311 | ) |      | $ | (42,247 | )    |  | $ | (29,201 | )
|Cash flow (used in) provided by financing activities |  | $                                               | (373    | ) |      | $ | 48,481  |      |  | $ | 24,196  |  
|Cash and cash equivalents at year end                |  | $                                               | 38,253  |   |      | $ | 16,631  |      |  | $ | 5,211   |  
|Days sales outstanding                               |  |                                                 | 58.4    |   |      |   | 46.5    |      |  |   | 54      |  
|Inventory turnover                                   |  |                                                 | 6.6     |   |      |   | 6.5     |      |  |   | 6.3     |  



Net cash generated
from operations during fiscal 2005 was $44 million. During fiscal 2005, net income of $37.2 million, adjusted for depreciation, deferred taxes, loss on equipment disposal and loss on equity investment generated $56.3 million of operating cash,
offset by $12.3 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 2005 fiscal
year were as follows:



| |  |  | Our net accounts receivable increased to $71.5 million at September 30, 2005 from $44.4 million for the prior year, an increase of 61%. The increase in outstanding accounts
receivable was attributable to the higher average monthly sales in fiscal 2005 versus the prior year. Our net inventory balances increased to $45 million at September 30, 2005 from $39.2 million for the prior year, an increase of 15%. 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 $58 million at
September 30, 2005 from $26.1 million for the prior year, an increase of 122%, as a result of increased purchases in support of the higher business volumes. Depreciation and amortization expense was $11.4 million for fiscal 2005 versus $6.7
million in the prior year due to the increased fixed asset base, mainly at MFC2.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our principal investing and financing activities in our 2005 fiscal year were as follows:



| |  |  | Net cash used in investing activities was $23.3 million for fiscal 2005. Capital expenditures included $22.9 million of capital equipment and other assets,
including a $1.5 million reduction in deposits for fixed asset purchases, which were related to the construction of MFC2 and the purchase of machinery and equipment for our
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | new China operations. As of September 30, 2005 and 2004, we had outstanding purchase commitments related to MFC2 capital projects which totaled $4.6
million and $18 million, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net cash used in financing activities was $373,000 for fiscal 2005 and consisted of $3 million of proceeds from the exercise of stock options and $3.4 million of net payments on our
line of credit and notes payable. Our loans payable and borrowings outstanding against credit facilities decreased to $0 at September 30, 2005 from $3.4 million at September 30, 2004. The decrease in outstanding loan amounts was due to the
pay down in debt from cash generated by operating activities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



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 $42.3 million for fiscal 2004. Purchases of short-term investments from the proceeds of our initial public offering, or IPO, were $21.6
million. 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 MFC2 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 our IPO.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Capital Commitments



As of September 30,
2005, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commissions, or SECs, Regulation S-K. The following summarizes our contractual obligations at September 30, 2005 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         |  | $                      |       |                 | $ |            |  | $           |      |                  | $ |    |  | $ |     
|Long-term debt                |  |                        |       |                 |   |            |  |             |      |                  |   |    |  |   |     
|Operating leases (facilities) |  |                        | 5,595  |                 |   | 991         |  |             | 1,552 |                  |   | 958 |  |   | 2,094
|Capital lease obligations     |  |                        | 332    |                 |   | 137         |  |             | 195   |                  |   |    |  |   |     
|Purchase obligations (MFC2)   |  |                        | 4,574  |                 |   | 4,574       |  |             |      |                  |   |    |  |   |     
|                              |  |                        |        |                 |   |             |  |             |       |                  |   |     |  |   |      
|Total contractual obligations |  | $                      | 10,501 |                 | $ | 5,702       |  | $           | 1,747 |                  | $ | 958 |  | $ | 2,094
|                              |  |                        |        |                 |   |             |  |             |       |                  |   |     |  |   |      



We have 15 leases
relating to space at our California facilities, which range in terms from month-to-month to three years, and range in size from approximately 2,000 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 one lease for the engineering, lens assembly and manufacturing space for Aurora Optical in Tucson, Arizona, for 47,000 square feet which expires in 2015.
According to the terms of this lease, we and the landlord have agreed to negotiate in good



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faith for us to purchase this property by June 13, 2006. We have several parcels at MFC1 that have long-term land leases expiring beyond 2043. Under the
terms of the leases, we paid an upfront fee for use of the parcel through expiration of the lease. We have no other financial obligations on the long-term land leases at MFC1 other than payments of real estate taxes. Our long-term land lease for
MFC2 includes an additional 65,000 square feet of land on which we are currently expanding 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 under the MFC2 long-term land lease other than payments of real estate taxes.



During fiscal 2005 our Board of Directors approved an additional expansion at MFC2, which is expected to be completed during the first quarter of fiscal
2007. As of September 30, 2005, we had purchase obligations of $4.6 million related to this expansion, and we expect additional expenditures for the plants equipment to be approximately $21.0 million, with these equipment purchases to
begin in the spring of 2006.



Recent Accounting Pronouncements



In May 2005, the Financial Accounting Standards Board, or
FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 154, Accounting Changes and Error Corrections, A Replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 requires retrospective
application to prior periods financial statements for changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that
retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an
accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date SFAS 154 was is issued. We are required to adopt the provisions of SFAS 154, as applicable, beginning in fiscal 2007.



In December 2004, the FASB issued SFAS No. 123R, Share Based Payment: An Amendment of FASB Statements
No. 123 and 95. This statement requires that the cost resulting from all share-based payment transactions be recognized in the consolidated financial statements of the company. In March 2005, the SEC released SEC Staff Accounting Bulletin
No. 107, Share-Based Payment, or SAB No. 107. SAB No. 107 provides the SEC staffs position regarding the application of SFAS 123R and certain SEC rules and regulations, and also provides the staffs views
regarding the valuation of share-based payment arrangements for public companies. We adopted SFAS 123R, utilizing the modified prospective method, in the first quarter of fiscal 2006 and will continue to evaluate the impact of SFAS 123R on our
operating results and financial condition. Our assessment of the estimated compensation charges is affected by our stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impact. These variables
include, but are not limited to, our stock price volatility and employee stock option exercise behaviors. During fiscal 2006, we expect to reduce net income related to options outstanding under the 1994 and 2004 Stock Option Plans as of
September 30, 2005 (See Note 12 of our financial statements included in Item 7 of this Annual Report) by approximately $800,000 to $1.0 million as a result of the adoption of SFAS 123R.



In November 2004, the FASB issued SFAS No. 153, Exchanges of
Non-monetary AssetsAn Amendment of APB No. 29. The provisions of this statement are effective for asset exchanges occurring in fiscal periods beginning after June 15, 2005. This statement eliminates the exception to fair value
for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance  that is, transactions that are not expected to result in significant changes in the cash flows
of the reporting entity. We do not believe that the adoption of SFAS 153 will have a significant effect on our future consolidated financial statements.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS 151 amends
ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as current period charges. In addition, SFAS 151 requires that
allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities. The provision of SFAS 151 became effective for us beginning on October 1, 2004. We do not believe this
statement will have a material impact on our consolidated financial statements.



In September 2004, the Emerging Issues Task Force, or EITF, reached a consensus on Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share. EITF 04-8 requires
that all issued securities that have embedded conversion features that are contingently exercisable upon the occurrence of a market-price condition should be in



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the calculation of diluted earnings per share, or EPS, regardless of whether the market price trigger has been met. We adopted EITF 04-8 on
December 30, 2004. The adoption of EITF 04-8 did not have an impact on our calculation of diluted EPS.



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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, 2005 and 2004, 81% and 80%, respectively, of our net sales were to Motorola and 45 and 40 of its subcontractors, respectively. Several subcontractors of Motorola also constitute significant customers of ours. For the years ended
September 30, 2005, 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 4%, 2% and 1%, 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 problem collecting accounts receivable from them would reduce our net income.



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



For the years
ended September 30, 2005 and 2004, 84% and 83%, 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 net sales will be harmed if we are unable
to obtain and ship a sufficient number of orders from customers in each quarter. In addition, our customers may cancel, change or delay product purchase orders 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 net sales. As a result of the foregoing
factors, we are not able always to forecast with certainty the net 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 net sales and production capacity:



| |  |  | changes in the specific products or quantities our customers order;
| | - |  | -------------------------------------------------------------------



| |  |  | variability in our manufacturing yields;
| | - |  | ----------------------------------------



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| |  |  | long lead times and advance financial commitments for our plant and equipment expenditures;
| | - |  | -------------------------------------------------------------------------------------------



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



| |  |  | price reductions due to competitive pressure.
| | - |  | ---------------------------------------------



Delayed, reduced or canceled 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. In addition, delayed, reduced or canceled orders may result in 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, if our customers product offerings are not commercially successful, or if we do not timely
execute our operational and strategic plans.



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



We cannot be certain that our current products will continue to be selected
for design into our customers products or that our customers will not also qualify additional vendors for their products. In addition, our long term strategy relies in part on new technologies and products. We cannot be certain that our new
technology and products will be selected by customers, especially if we are unable to obtain certain industry approval, including Underwriters Laboratory approval for our charger products, on a timely basis. If we are unable to obtain additional
customer qualifications, if we cannot qualify our products for high-volume production quantities, if we do not execute our operational and strategic plans for new products in a timely manner or if our customers increase their reliance on additional
sources for their production, our net sales may decrease.



WBL Corporation
beneficially owns 61% of our outstanding common stock and is able to exert influence over us and our major corporate decisions.



WBL Corporation beneficially owns 61% 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. In addition, for so long as WBL Corporation effectively owns at least one-third of our voting stock, it has the ability, through a stockholders
agreement with us, to approve the appointment of any new chief executive officer or the issuance of securities that would reduce WBL Corporations effective ownership of us to a level that is below a majority of the outstanding shares of common
stock. Under generally accepted accounting principles in Singapore, WBL Corporation is deemed to effectively own approximately 56% of our current outstanding stock.



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



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



WBL Corporation and its designees on our board of
directors may have interests that conflict with, or are different from, the interests of our other stockholders. For example, MFS Technology Limited, or MFS, a subsidiary of WBL Corporation that is located in Singapore, competes with us in many
markets, including telecommunications. 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. If any conflict of
interest is not resolved in a manner favorable to our stockholders, our stockholders interests may be substantially harmed.



Except as specified below, WBL Corporation does not have the ability to prevent us from making operational decisions that do not require stockholder
approval; however, WBL Corporation does have the ability to control who is elected to our board of directors each year and therefore can influence decisions that require board approval. In addition, pursuant to our Stockholders Agreement with WBL
Corporation, for so long as WBL Corporation effectively owns at least one-third of our voting stock, it has the ability to approve the appointment of any new chief executive officer or the issuance of securities that would reduce WBL
Corporations effective ownership of us to a level that is below a majority of the outstanding shares of common stock.



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, 2005, 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. We expect to continue to be a principal subsidiary of
WBL Corporation for the foreseeable future.



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



| |  |  | an amendment of our certificate of incorporation;
| | - |  | -------------------------------------------------



| |  |  | a sale of all or substantially all of our assets;
| | - |  | -------------------------------------------------



| |  |  | a merger or reorganization transaction; and
| | - |  | -------------------------------------------



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



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



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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 attract or retain personnel necessary to operate our business, our ability to develop and market our products successfully could be harmed.



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



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. In addition, any new product we introduce may have competing technologies available from which we may have to choose. If we choose technology or a standard that does not become the
industry standard, we may be unable to sell those products or we may be unable to obtain a supplier for the raw materials for such products.



We also expect future flexible printed circuits and component assembly solutions to require higher performance specifications, including, for example,
higher density circuitry than we have historically produced, 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 adversely affect 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



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more favorable pricing to potential or existing customers. In addition, we believe more companies are now producing flexible printed circuit boards than
before. Such competition could increase pressure on us to lower our prices, which, in turn, would harm our margins and operating results.



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



Our products and their terms of sale are subject to various pressures from
our customers and our competitors, any of which could harm our gross profit.



We deal with a limited number of large customers who are able to exert significant pressure on us, both in terms of pricing and contract terms. We enter into price reduction negotiations with these customers on an
annual, semi-annual or quarterly basis. We also renegotiate the terms of our contracts, which specify, among other items, quality requirements, liability and indemnification thresholds and payment terms, with many of our customers on an annual
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 us and the extension of payment terms for our customers could negatively
affect our cash flow. 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. In addition, from
time to time we may elect to reduce the price of certain programs we produce in order to gain additional orders on those programs. A typical life cycle for one of our products begins with higher prices when the product is introduced and decreasing
prices as it matures. To offset price decreases during a products life cycle, we rely primarily on higher sales volume and improving our manufacturing yield and productivity to reduce a products cost. If we cannot reduce our
manufacturing costs as prices decline during a products life cycle, or if we are required to pay liquidated damages to a customer due to a breach of contract claim, including due to quality or delivery issues, our cost of sales may increase,
which would result in decreased gross profit or increased gross loss in a period in which we do not have gross profit.



Significant product failures could harm our reputation and our business.



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



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



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



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



At times, there are worldwide shortages of the raw materials and components used in the fabrication of flexible printed
circuits and imaging solutions. 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. In addition, suppliers of certain of our raw materials and components may consider us too small of a customer to sell to directly, which could require us to buy through
distributors, which could increase the cost of such raw materials and components. 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



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provide these raw materials and components in a timely fashion and on commercially reasonable terms. Our operations would be negatively impacted if we are
unable to receive raw materials or components on a timely or cost-effective basis.



Given the rapid increase in demand for flexible printed circuits and imaging solutions, a worldwide shortage for these materials may exist from time to time. In the past, a similar shortage for flexible printed
circuit materials 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., or Dupont, and Rogers Corporation, or Rogers. In the fiscal years 2005, 2004 and 2003, we purchased approximately 84%, 77% and 87% of these materials from Dupont and approximately
16%, 23% and 13% from Rogers. Currently, Molex Inc., Supertex, Inc., Panasonic and ITT, Inc. are our largest component suppliers. In the fiscal year 2005, we purchased 12%, 3%, 4% and 13% of our components from Molex, Supertex, Panasonic and ITT. In
the fiscal year 2004, we purchased 10%, 2% 13% and 13% of our components from Molex, Supertex, Panasonic and ITT. In the fiscal year 2003, we purchased 11%, 8%, 5% and 8% of our components from Molex, Supertex, Panasonic and ITT.



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 and we also have operations in Arizona, 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the need to successfully migrate our foreign locations to the financial reporting system used by us in the United States;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 or increase our cost of doing business, specifically the Chinese RMB;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.



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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 several 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, the cost of diesel fuel to
run our back-up generations 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, and affect our
manufacturing costs. Any such shortages could result in delays in our shipments to our customers and, potentially, the loss of customer orders and penalties from such customers for the delay.



Our two primary manufacturing facilities are both located in Suzhou, China.
Natural disasters or other catastrophic events, including wildfires and other fires, earthquakes, excessive rain, terrorist attacks and wars, could disrupt our manufacturing ability, which could harm our operations and financial results.



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 acquisition.



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



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



| |  |  | problems maintaining uniform standards, procedures, controls and policies;
| | - |  | --------------------------------------------------------------------------



| |  |  | unanticipated costs associated with the acquisition;
| | - |  | ----------------------------------------------------



| |  |  | start-up costs associated with a new line of business acquired in any acquisition;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | diversion of managements attention from our core business;
| | - |  | -----------------------------------------------------------



| |  |  | adverse effects on existing business relationships with suppliers and customers;
| | - |  | --------------------------------------------------------------------------------



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



| |  |  | potential loss of key employees of acquired businesses;
| | - |  | -------------------------------------------------------



| |  |  | the need to acquire a new supplier base for the materials and components associated with a new line of business;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | the need to hire additional employees to operate effectively the acquired business, including employees with specialized knowledge; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increased legal and accounting costs as a result of the Sarbanes-Oxley Act.
| | - |  | ---------------------------------------------------------------------------



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If we fail to evaluate and execute acquisitions and strategic investments properly, 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 manufacturing facilities, 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:



| |  |  | the ability of our management to predict accurately increases or decreases in demand for our products and manage our manufacturing capacity appropriately;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | managing operations in multiple locations and multiple time zones;
| | - |  | ------------------------------------------------------------------



| |  |  | the ability to timely and in a cost-effective manner increase our manufacturing capacity and build new manufacturing facilities in order to meet customer demands; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability to acquire customers in a new line of business.
| | - |  | -----------------------------------------------------------



The Sarbanes-Oxley Act and other rules and regulations may increase the time and costs of certain activities.



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



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



To remain
competitive, we must continue to make significant investments in capital equipment, facilities and technological improvements. We expect that substantial capital will be required to expand our manufacturing capacity and fund working capital for
anticipated growth. We may need to raise additional funds through further debt or equity financings. We may not be able to raise additional capital on reasonable terms, or at all. In addition, under the terms of our Stockholders Agreement, WBL
Corporations approval is required for the issuance of securities that would reduce its effective ownership of us to a level that is below a majority of the outstanding shares of common stock. If WBL Corporations approval is required, it
is possible that WBL Corporation may not approve of any transaction we may seek to complete, which could affect whether we are able to complete such a transaction. 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 capital on favorable terms, or at all:



| |  |  | our results of operations;
| | - |  | --------------------------



| |  |  | general economic conditions and conditions in the electronics industry;
| | - |  | -----------------------------------------------------------------------



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| |  |  | the perception of our business in the capital markets;
| | - |  | ------------------------------------------------------



| |  |  | our ratio of debt to equity;
| | - |  | ----------------------------



| |  |  | our financial condition;
| | - |  | ------------------------



| |  |  | our business prospects;
| | - |  | -----------------------



| |  |  | WBL Corporations approval, if required;
| | - |  | ----------------------------------------



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



| |  |  | interest rates.
| | - |  | ---------------



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



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



We currently enjoy tax holidays and other tax incentives for our
operations in China. The tax holiday rate of 12% for our first manufacturing facility in China, MFC1, will expire on December 31, 2007. After this time, MFC1 will be subject to an income tax rate of 27%. For the fiscal years ended
September 30, 2005 and 2004 we realized tax savings of $3.5 million and $2.8 million respectively, for our operations in China related to MFC1.



We also have obtained a tax holiday for our new manufacturing facility in China, MFC2, that allows for tax-free operation for the first two years
(beginning in the first year of profitability) followed by three years of operation at a reduced rate of income tax equal to 12%. Beginning on January 1, 2006, MFC2 will be subject to a tax holiday rate of 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 value added tax and
duty, plus interest and penalties, due to shortages in, and/or excess stock of, these raw and component materials. We estimate that the net impact of the value added tax, duty, interest and penalties as a result of this audit will be $1.3 million,
which has been accrued as of September 30, 2005; however, this estimate may not be correct and we may be required to pay more or less, as a result of such review.



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



Our failure to comply with restrictive covenants in our bank facilities could result in an event of default which, if not satisfied or waived, could
preclude us from borrowing money under one or more of these facilities or may result in us being required to repay any borrowings we may have under our facilities from time to time. In addition, our facility with Norddeutsche Landesbank
Girozentrale, or NLG, provides that NLG can refuse to honor a draw request from us for any reason, even if we are in full compliance with the terms of the facility. 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.



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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 net sales or increase our costs.



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



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



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



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



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



Environmental laws require us to maintain and comply with a number of permits, authorizations and approvals and to maintain
and update training programs and safety data for materials used in our manufacturing processes. We reserved $125,000 and $122,000 of restricted cash for the fiscal years ended September 30, 2005 and 2004, 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 report and elsewhere in our SEC filings. For example, during
the 12 months ended September 30, 2005, our stock traded between $9.26 and $29.30 per share. 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.



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



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



In preparation for the annual report of management regarding our evaluation of our internal controls that is required to be included in the annual report for the year ended September 30, 2006 by Section 404 of the Sarbanes-Oxley
Act , or Section 404, we are adopting a project work plan to assess the adequacy of our internal controls, remediate any deficiency that we may identify, validate that controls are functioning as documented and implement a continuous reporting
and improvement process for internal controls. As part of this continuous process, 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.



Although we have a timeline and schedule that we believe are appropriate to comply with the requirements of Section 404, if any found deficiency is not adequately addressed, or if we are unable to complete all of
our testing and any remediation in time for compliance with the requirements of Section 404 and the SEC rules thereunder, we would be unable to conclude that our internal controls over financial reporting are designed and operating effectively,
which could adversely affect 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 unqualified Independent Registered Public Accounting Firms report, and our business and stock price may be adversely affected.



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



Our
operating results fluctuate from quarter to quarter as a result of changes in demand for our products, our effectiveness in managing manufacturing processes and costs and the degree to which we are able to utilize our available manufacturing
capacity. Historically, we have experienced a strong first fiscal quarter, followed by reduced net sales in the second fiscal quarter, as a result of partial seasonality of our major customers and the markets that we serve. We anticipate 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 our expectations
or 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 December 5, 2005 we had 24,216,930 shares of common stock outstanding and 1,158,423 shares subject to unexercised options that are fully vested. All of these shares are eligible for resale, subject to
certain volume limitations. To the extent any major stockholder sells its shares into the market, the market price of our common stock could decline.



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



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



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



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| |  |  | a majority of our directors are required to be independent;
| | - |  | -----------------------------------------------------------



| |  |  | the ability of our board of directors to increase or decrease the size of our board of directors without stockholder approval;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



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



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



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



| |  |  | the ability of our board of directors to alter our bylaws without obtaining stockholder approval;
| | - |  | -------------------------------------------------------------------------------------------------



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



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



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



In addition, because we are incorporated 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, 2005, no amounts
were outstanding under our loan agreements with NLG, Shanghai Pudong Development Bank and Bank of China. 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 $298.3 million, or
95%, of total shipments to these foreign manufacturers for fiscal 2005 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 an average of 8.2
RMB per U.S. Dollar for the fiscal year ended September 30, 2005. Transactions in RMB represent approximately 5% of total net sales from foreign customers for the fiscal year ended September 30, 2005. In July 2005, the Peoples
Bank of China, or PBOC, terminated the fixed exchange rate between the RMB and the U.S. Dollar and adjusted the exchange rate from 8.3 to 8.1. A 0.3% maximum daily appreciation against the U.S. Dollar limit was established by the PBOC. We
generally do not consider it necessary to hedge against currency risk, as a significant portion of our material cost of sales is denominated in U.S. Dollars, eliminating much of the need to hedge; however, we continue to be vulnerable to
appreciation or depreciation of foreign currencies against the U.S. Dollar.



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|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------



MULTI-FINELINE ELECTRONIX, INC.



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                              |  |     
|----------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                              |  | Page
|Report of Independent Registered Public Accounting Firm                                                                       |  | 35  
|Consolidated Balance Sheets as of September 30, 2004 and 2003                                                                 |  | 37  
|Consolidated Statements of Income for the Years Ended September 30, 2004, 2003 and 2002                                       |  | 38  
|Consolidated Statements of Stockholders Equity for the Years Ended September 30, 2004, 2003 and 2002                         |  | 39  
|Consolidated Statements of Cash Flows for the Years Ended September 30, 2004, 2003 and 2002                                   |  | 40  
|Notes to Consolidated Financial Statements                                                                                    |  | 41  
|Schedule IIConsolidated Valuation and Qualifying Accounts and Reserves for the Years Ended September 30, 2004, 2003 and 2002 |  | 58  



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Report of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders of Multi-Fineline Electronix, Inc.:



We have completed an integrated audit of Multi-Fineline Electronix, Inc.s 2005 consolidated financial statements and of its internal control over financial reporting as of September 30, 2005 and audits of
its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.



Consolidated financial statements and financial statement schedule



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 its subsidiaries at September 30, 2005 and 2004, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 2005 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 of financial statements
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.



Internal control over financial reporting



Also, in our opinion, managements assessment, included in Managements Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial
reporting as of September 30, 2005 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2005, based on criteria established in Internal
Control-Integrated Framework issued by the COSO. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on managements assessment and on the effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit of internal control over
financial reporting 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 effective internal control
over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.



A companys internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys
internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become



35



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inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/ PRICEWATERHOUSECOOPERS LLP



PricewaterhouseCoopers LLP

Orange County, California

December 5, 2005



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MULTI-FINELINE ELECTRONIX, INC.



CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Per Share and Share Data)



|                                                                                                                                        |  |               |         |      |   |        
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ---- | - | -------
|                                                                                                                                        |  | September 30,
|                                                                                                                                        |  | 2005          |         | 2004
|ASSETS                                                                                                                                  |  |               |         |      |   |        
|Cash and cash equivalents                                                                                                               |  | $             | 38,253  |      | $ | 16,631 
|Short term investments                                                                                                                  |  |               | 16,090  |      |   | 21,565 
|Restricted cash                                                                                                                         |  |               | 2,008   |      |   | 181    
|Accounts receivable, net of allowances of $601 and $250                                                                                 |  |               | 71,488  |      |   | 44,382 
|Inventories                                                                                                                             |  |               | 44,975  |      |   | 39,217 
|Due from affiliates                                                                                                                     |  |               | 421     |      |   | 43     
|Deferred taxes                                                                                                                          |  |               | 3,168   |      |   | 3,343  
|Income taxes receivable                                                                                                                 |  |               | 254     |      |   |       
|Other current assets                                                                                                                    |  |               | 925     |      |   | 807    
|                                                                                                                                        |  |               |         |      |   |        
|Total current assets                                                                                                                    |  |               | 177,582 |      |   | 126,169
|Property, plant and equipment, net                                                                                                      |  |               | 73,652  |      |   | 59,914 
|Restricted cash                                                                                                                         |  |               | 125     |      |   | 122    
|Deferred taxes                                                                                                                          |  |               | 661     |      |   | 1,790  
|Goodwill                                                                                                                                |  |               | 3,686   |      |   | 57     
|Other assets                                                                                                                            |  |               | 3,894   |      |   | 1,946  
|                                                                                                                                        |  |               |         |      |   |        
|Total assets                                                                                                                            |  | $             | 259,600 |      | $ | 189,998
|                                                                                                                                        |  |               |         |      |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                    |  |               |         |      |   |        
|Accounts payable                                                                                                                        |  | $             | 57,970  |      | $ | 26,079 
|Accrued liabilities                                                                                                                     |  |               | 11,022  |      |   | 5,990  
|Due to affiliates                                                                                                                       |  |               | 334     |      |   | 5,471  
|Lines of credit                                                                                                                         |  |               |        |      |   | 3,369  
|Other current liabilities                                                                                                               |  |               | 130     |      |   |       
|Income taxes payable                                                                                                                    |  |               |        |      |   | 6,299  
|                                                                                                                                        |  |               |         |      |   |        
|Total current liabilities                                                                                                               |  |               | 69,456  |      |   | 47,208 
|Other liabilities                                                                                                                       |  |               | 384     |      |   | 361    
|Deferred taxes                                                                                                                          |  |               | 719     |      |   | 1,345  
|                                                                                                                                        |  |               |         |      |   |        
|Total liabilities                                                                                                                       |  |               | 70,559  |      |   | 48,914 
|                                                                                                                                        |  |               |         |      |   |        
|Commitments and contingencies (Note 10)                                                                                                 |  |               |         |      |   |        
|Stockholders equity                                                                                                                    |  |               |         |      |   |        
|Preferred stock, $0.0001 par value, 5,000,000 and 5,000,000 shares authorized; none issued or outstanding                               |  |               |        |      |   |       
|Common stock, $0.0001 par value; 100,000,000 and 100,000,000 shares authorized; 24,179,884 and 23,264,835 shares issued and
outstanding |  |               | 2       |      |   | 2      
|Additional paid-in capital                                                                                                              |  |               | 98,564  |      |   | 89,110 
|Retained earnings                                                                                                                       |  |               | 89,137  |      |   | 51,971 
|Accumulated other comprehensive income                                                                                                  |  |               | 1,338   |      |   | 1      
|                                                                                                                                        |  |               |         |      |   |        
|Total stockholders equity                                                                                                              |  |               | 189,041 |      |   | 141,084
|                                                                                                                                        |  |               |         |      |   |        
|Total liabilities and stockholders equity                                                                                              |  | $             | 259,600 |      | $ | 189,998
|                                                                                                                                        |  |               |         |      |   |        



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



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MULTI-FINELINE ELECTRONIX, INC.



CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Share Data)



|                                                                                                          |  |                           |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                          |  | Years Ended September 30, |           
|                                                                                                          |  | 2005                      |            |   | 2004 |   |            | 2003 | 
|Net sales                                                                                                 |  | $                         | 357,090    |   |      | $ | 253,049    |      |  | $ | 129,415    |  
|Cost of sales                                                                                             |  |                           | 277,202    |   |      |   | 197,412    |      |  |   | 107,418    |  
|                                                                                                          |  |                           |            |   |      |   |            |      |  |   |            |  
|Gross profit                                                                                              |  |                           | 79,888     |   |      |   | 55,637     |      |  |   | 21,997     |  
|                                                                                                          |  |                           |            |   |      |   |            |      |  |   |            |  
|Operating expenses                                                                                        |  |                           |            |   |      |   |            |      |  |   |            |  
|Sales and marketing                                                                                       |  |                           | 8,783      |   |      |   | 7,649      |      |  |   | 5,621      |  
|General and administrative (includes stock-based compensation expense of $99, $14 and $130, respectively) |  |                           | 18,470     |   |      |   | 11,569     |      |  |   | 8,669      |  
|                                                                                                          |  |                           |            |   |      |   |            |      |  |   |            |  
|Total operating expenses                                                                                  |  |                           | 27,253     |   |      |   | 19,218     |      |  |   | 14,290     |  
|                                                                                                          |  |                           |            |   |      |   |            |      |  |   |            |  
|Operating income                                                                                          |  |                           | 52,635     |   |      |   | 36,419     |      |  |   | 7,707      |  
|Other (income) expense, net                                                                               |  |                           |            |   |      |   |            |      |  |   |            |  
|Interest expense                                                                                          |  |                           | 174        |   |      |   | 614        |      |  |   | 321        |  
|Interest income                                                                                           |  |                           | (688       | ) |      |   | (146       | )    |  |   | (11        | )
|Other (income) expense, net                                                                               |  |                           | (378       | ) |      |   | 100        |      |  |   | 525        |  
|                                                                                                          |  |                           |            |   |      |   |            |      |  |   |            |  
|Income before provision for income taxes                                                                  |  |                           | 53,527     |   |      |   | 35,851     |      |  |   | 6,872      |  
|Provision for income taxes                                                                                |  |                           | (16,361    | ) |      |   | (10,145    | )    |  |   | (2,295     | )
|                                                                                                          |  |                           |            |   |      |   |            |      |  |   |            |  
|Net income                                                                                                |  | $                         | 37,166     |   |      | $ | 25,706     |      |  | $ | 4,577      |  
|                                                                                                          |  |                           |            |   |      |   |            |      |  |   |            |  
|Net income per share                                                                                      |  |                           |            |   |      |   |            |      |  |   |            |  
|Basic                                                                                                     |  | $                         | 1.57       |   |      | $ | 1.33       |      |  | $ | 0.39       |  
|Diluted                                                                                                   |  | $                         | 1.51       |   |      | $ | 1.27       |      |  | $ | 0.38       |  
|Shares used in computing net income per share                                                             |  |                           |            |   |      |   |            |      |  |   |            |  
|Basic                                                                                                     |  |                           | 23,603,935 |   |      |   | 19,310,044 |      |  |   | 11,720,295 |  
|Diluted                                                                                                   |  |                           | 24,593,998 |   |      |   | 20,306,842 |      |  |   | 11,978,610 |  



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



38



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MULTI-FINELINE ELECTRONIX, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(In Thousands, Except Share Data)



|                                                                                               |        |              |        |                           |   |                                |   |        |                  |   |     |                                     |  |   |                          |   |  |                     |       |   |  |   |         |   |  |   |        |  
|---------------------------------------------------------------------------------------------- | ------ | ------------ | ------ | ------------------------- | - | ------------------------------ | - | ------ | ---------------- | - | --- | ----------------------------------- |  | - | ------------------------ | - |  | ------------------- | ----- | - |  | - | ------- | - |  | - | ------ | -
|                                                                                               |        | Common Stock |        | AdditionalPaid-in Capital |   | Unearned Deferred Compensation |   |        | RetainedEarnings |   |     | AccumulatedOtherComprehensiveIncome |  |   | TotalStockholdersEquity |   |  | ComprehensiveIncome |      
|                                                                                               | Shares |              | Amount |                           |   |                                |   |        |                 
|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 |  
|                                                                                               |        |              |        |                           |   |                                |   |        |                  |   |     |                                     |  |   |                          |   |  |                     |       |   |  |   |         |   |  |   |        |  
|Exercise of stock options                                                                      |        | 915,049      |        |                           |  |                                |   | 2,996  |                  |   |    |                                     |  |   |                         |   |  |                     |       |   |  |   | 2,996   |   |  |   |        |  
|Compensation relating to the modification of stock options                                     |        |             |        |                           |  |                                |   | 99     |                  |   |    |                                     |  |   |                         |   |  |                     |       |   |  |   | 99      |   |  |   |        |  
|Stock based compensation income tax benefits                                                   |        |             |        |                           |  |                                |   | 6,359  |                  |   |    |                                     |  |   |                         |   |  |                     |       |   |  |   | 6,359   |   |  |   |        |  
|Net Income                                                                                     |        |             |        |                           |  |                                |   |        |                  |   |    |                                     |  |   | 37,166                   |   |  |                     |       |   |  |   | 37,166  |   |  | $ | 37,166 |  
|Translation adjustment                                                                         |        |             |        |                           |  |                                |   |       |                  |   |    |                                     |  |   |                         |   |  |                     | 1,337 |   |  |   | 1,337   |   |  |   | 1,337  |  
|                                                                                               |        |              |        |                           |   |                                |   |        |                  |   |     |                                     |  |   |                          |   |  |                     |       |   |  |   |         |   |  |   |        |  
|Balance at September 30, 2005                                                                  |        | 24,179,884   |        | $                         | 2 |                                | $ | 98,564 |                  | $ |    |                                     |  | $ | 89,137                   |   |  | $                   | 1,338 |   |  | $ | 189,041 |   |  | $ | 38,503 |  
|                                                                                               |        |              |        |                           |   |                                |   |        |                  |   |     |                                     |  |   |                          |   |  |                     |       |   |  |   |         |   |  |   |        |  



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



39



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##### Table of Contents



MULTI-FINELINE ELECTRONIX, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)



|                                                                                 |  |                           |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                 |  | Years Ended September 30, |        
|                                                                                 |  | 2005                      |         |   | 2004 |   |         | 2003 | 
|Cash flows from operating activities                                             |  |                           |         |   |      |   |         |      |  |   |         |  
|Net income                                                                       |  | $                         | 37,166  |   |      | $ | 25,706  |      |  | $ | 4,577   |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                           |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                    |  |                           | 11,434  |   |      |   | 6,704   |      |  |   | 4,378   |  
|Loss from equity method investee                                                 |  |                           | 40      |   |      |   | 250     |      |  |   | 441     |  
|Provision for doubtful accounts                                                  |  |                           | 351     |   |      |   | 26      |      |  |   | 112     |  
|Income tax benefit related to stock option exercise                              |  |                           | 6,359   |   |      |   |        |      |  |   |        |  
|Deferred income taxes                                                            |  |                           | 678     |   |      |   | (2,945  | )    |  |   | (205    | )
|Stock-based compensation expense                                                 |  |                           | 99      |   |      |   | 14      |      |  |   | 130     |  
|Loss on disposal of equipment                                                    |  |                           | 136     |   |      |   | 60      |      |  |   | 125     |  
|Changes in operating assets and liabilities                                      |  |                           |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                              |  |                           | (27,158 | ) |      |   | (23,421 | )    |  |   | (3,325  | )
|Inventories                                                                      |  |                           | (5,665  | ) |      |   | (17,288 | )    |  |   | (9,565  | )
|Due to/from affiliates, net                                                      |  |                           | (5,515  | ) |      |   | 4,095   |      |  |   | 1,007   |  
|Other current assets                                                             |  |                           | (81     | ) |      |   | (414    | )    |  |   | (203    | )
|Other assets                                                                     |  |                           | (3,831  | ) |      |   | (171    | )    |  |   | (142    | )
|Accounts payable                                                                 |  |                           | 31,585  |   |      |   | 5,064   |      |  |   | 9,675   |  
|Accrued liabilities                                                              |  |                           | 4,901   |   |      |   | 1,153   |      |  |   | (86     | )
|Income tax payable                                                               |  |                           | (6,553  | ) |      |   | 6,000   |      |  |   | (344    | )
|Other liabilities                                                                |  |                           | 23      |   |      |   | 283     |      |  |   | (696    | )
|                                                                                 |  |                           |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                        |  |                           | 43,969  |   |      |   | 5,116   |      |  |   | 5,879   |  
|                                                                                 |  |                           |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities                                             |  |                           |         |   |      |   |         |      |  |   |         |  
|Proceeds from sales of short term investments                                    |  |                           | 5,475   |   |      |   |        |      |  |   |        |  
|Purchases of short term investments                                              |  |                           |        |   |      |   | (21,565 | )    |  |   |         |  
|Cash paid for property and equipment                                             |  |                           | (24,417 | ) |      |   | (20,042 | )    |  |   | (23,809 | )
|Purchases of software and capitalized internal-use software                      |  |                           | (110    | ) |      |   | (563    | )    |  |   | (652    | )
|Deposits on property and equipment                                               |  |                           | 1,523   |   |      |   | (321    | )    |  |   | (4,207  | )
|Cash advances to equity investees                                                |  |                           |        |   |      |   | (242    | )    |  |   | (522    | )
|Proceeds from sale of equipment                                                  |  |                           | 2,454   |   |      |   | 535     |      |  |   | 125     |  
|Increase in restricted cash, net                                                 |  |                           | (1,830  | ) |      |   | (49     | )    |  |   | (136    | )
|Cash paid for acquisition                                                        |  |                           | (6,406  | ) |      |   |        |      |  |   |        |  
|                                                                                 |  |                           |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                            |  |                           | (23,311 | ) |      |   | (42,247 | )    |  |   | (29,201 | )
|                                                                                 |  |                           |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities                                             |  |                           |         |   |      |   |         |      |  |   |         |  
|Borrowings on line of credit                                                     |  |                           | 4,950   |   |      |   | 30,972  |      |  |   | 9,085   |  
|Payments on line of credit                                                       |  |                           | (8,319  | ) |      |   | (32,688 | )    |  |   | (4,500  | )
|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                                                |  |                           | 2,996   |   |      |   | 26      |      |  |   |        |  
|Proceeds from issuance of common stock, net of issuance costs of $5,488          |  |                           |        |   |      |   | 54,782  |      |  |   |        |  
|                                                                                 |  |                           |         |   |      |   |         |      |  |   |         |  
|Net cash (used in) provided by financing activities                              |  |                           | (373    | ) |      |   | 48,481  |      |  |   | 24,196  |  
|                                                                                 |  |                           |         |   |      |   |         |      |  |   |         |  
|Effect of exchange rate changes on cash                                          |  |                           | 1,337   |   |      |   | 70      |      |  |   | (12     | )
|                                                                                 |  |                           |         |   |      |   |         |      |  |   |         |  
|Net increase in cash                                                             |  |                           | 21,622  |   |      |   | 11,420  |      |  |   | 862     |  
|Cash and cash equivalents at beginning of year                                   |  |                           | 16,631  |   |      |   | 5,211   |      |  |   | 4,349   |  
|                                                                                 |  |                           |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                         |  | $                         | 38,253  |   |      | $ | 16,631  |      |  | $ | 5,211   |  
|                                                                                 |  |                           |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosure                                                          |  |                           |         |   |      |   |         |      |  |   |         |  
|Interest paid                                                                    |  | $                         | 187     |   |      | $ | 590     |      |  | $ | 281     |  
|Income taxes paid                                                                |  |                           | 9,852   |   |      |   | 7,089   |      |  |   | 3,249   |  
|Noncash financing activities                                                     |  |                           |         |   |      |   |         |      |  |   |         |  
|Issuance of common stock to Wearnes                                              |  | $                         |        |   |      | $ | 15,000  |      |  | $ |        |  



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



40



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##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Per Share and Share Data)



|1. | Basis of Presentation and Significant Accounting Policies
|-- | ---------------------------------------------------------



Description of the Company



Multi-Fineline Electronix, Inc. (the Company) was incorporated in 1984 in the State of California and reincorporated in the State of Delaware
in June 2004. The Company is primarily engaged in the engineering, design and manufacture of flexible printed circuit boards along with related component assemblies.



In connection with the reincorporation, the Company effected a 15 for 1 forward stock split, the authorized number of shares
of common stock was decreased to 100,000,000, and 5,000,000 shares of preferred stock, par value $0.0001, were authorized. The reincorporation and the stock split have been given retroactive effect in the accompanying consolidated financial
statements. On June 30, 2004, the Company closed an underwritten public offering of 5,000,000 shares at a price of $10 per share. Proceeds, net of commissions of $3,500 and offering expenses of $1,890, totaled $44,610.



Affiliates and subsidiaries of WBL Corporation Limited (collectively
Wearnes), a Singapore company, owned approximately 61%, 64% and 72% of the Companys outstanding common stock as of September 30, 2005, 2004 and 2003, respectively, allowing Wearnes to exercise operating control over the
Company.



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); and
one located in Arizona, Aurora Optical, Inc. (Aurora Optical). 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, 2005 and 2004 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.



Short-Term Investments



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



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 lines of credit approximates fair value based on borrowing rates
currently available to the Company.



41



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##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



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.



Accounts Receivable



The Company invoices customers at shipment for the value of the related products delivered. Accounts receivable are recorded at the invoiced amount, net of any amount that is in deferred revenue that is not yet due based on the payment
terms and do not bear interest. The allowance for doubtful accounts is the Companys best estimate of the amount of probable credit losses in existing accounts receivable. The Company determines the allowance based on historical write-off
experience as well as specific identification of credit issues with invoices. The Company reviews the allowance for doubtful accounts quarterly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility.
All other balances are reviewed on an aggregate basis. Account balances are charged off against the allowance when the Company determines it is probable the receivable will not be collected. The Company does not have any off-balance sheet credit
exposure related to its customers.



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.



Goodwill



Goodwill represents the excess of purchase price over the fair value of the
identifiable net assets acquired in an acquisition accounted for using the purchase method. Effective the first quarter of 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. SFAS 142 eliminates the amortization of goodwill.



42



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##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



The Company records the assets acquired and liabilities assumed in business combinations at their
respective fair values at the date of acquisition, with any excess purchase price recorded as goodwill. Because of the expertise required to value intangible assets, the Company engaged a valuation specialist to assist in determining those values.
Valuation of intangible assets entails significant estimates and assumptions including, but not limited to, determining the timing and expected costs to complete development projects, estimating future cash flows from product sales, developing
appropriate discount rates, estimating probability rates for the successful completion of development projects, continuation of customer relationships and renewal of customer contracts, and approximating the useful lives of the intangible assets
acquired.



The Company reviews the recoverability of the
carrying value of goodwill on an annual basis or more frequently when an event occurs or circumstances change to indicate that an impairment of goodwill has possibly occurred. The determination of whether any potential impairment of goodwill exists
is based upon a comparison of the fair value of the reporting unit to the accounting value of the underlying net assets of such reporting unit. If the fair value of the reporting unit is less than the accounting value of the underlying net assets,
goodwill is deemed impaired and an impairment loss is recorded to the extent that the carrying value of goodwill exceeds the difference between the fair value of the reporting unit and the fair value of all its underlying identifiable assets and
liabilities. The Company has one reporting unit for evaluating its goodwill for impairment. As of September 30, 2005 and 2004, there were no such impairments of goodwill, intangible assets or other long-lived assets.



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, 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.



Product Warranty Accrual



The Company warrants its products from 60 to 365 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, 2005, 2004 and 2003 was as follows:



|     |  |                                       |       |                      |   |        |                                     |  |                                       |       |  |   |      
|---- |  | ------------------------------------- | ----- | -------------------- | - | ------ | ----------------------------------- |  | ------------------------------------- | ----- |  | - | -----
|     |  | WarrantyAccrualBalance atSeptember 30 |       | WarrantyExpenditures |   |        | Provision forEstimatedWarranty Cost |  | WarrantyAccrualBalance atSeptember 30
|2005 |  | $                                     | 1,549 |                      | $ | (2,892 | )                                   |  | $                                     | 2,782 |  | $ | 1,439
|2004 |  |                                       | 337   |                      |   | (1,918 | )                                   |  |                                       | 3,130 |  |   | 1,549
|2003 |  |                                       | 445   |                      |   | (1,816 | )                                   |  |                                       | 1,708 |  |   | 337  



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



43



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##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



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.



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, 2005, 2004 and 2003 was comprised entirely of the Companys foreign currency translation adjustment.



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, 2005, 2004 and 2003, foreign exchange transaction gains and losses were included in other expenses and were a net gain of $53 and losses of $10 and $58,
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.



Had compensation cost for the Companys stock option plans (Note 12) been determined based on the fair value at the grant dates for awards under the
plans consistent with the method promulgated by SFAS No. 123, the Companys net income for the years ended September 30, 2005, 2004 and 2003, would have decreased to the pro forma amounts below:



|                                                                                                         |  |                           |            |   |      |   |            |      |  |   |            |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                         |  | Years Ended September 30, |           
|                                                                                                         |  | 2005                      |            |   | 2004 |   |            | 2003 | 
|Net income, as reported                                                                                  |  | $                         | 37,166     |   |      | $ | 25,706     |      |  | $ | 4,577      |  
|Stock-based compensation, intrinsic value method, net of tax                                             |  |                           | 70         |   |      |   | 9          |      |  |   | 85         |  
|Total stock-based employee compensation expense determined under fair value-based method for all options |  |                           | (711       | ) |      |   | (284       | )    |  |   | (228       | )
|                                                                                                         |  |                           |            |   |      |   |            |      |  |   |            |  
|Pro forma net income                                                                                     |  | $                         | 36,525     |   |      | $ | 25,431     |      |  | $ | 4,434      |  
|                                                                                                         |  |                           |            |   |      |   |            |      |  |   |            |  
|Net income per share                                                                                     |  |                           |            |   |      |   |            |      |  |   |            |  
|Basic, as reported                                                                                       |  | $                         | 1.57       |   |      | $ | 1.33       |      |  | $ | 0.39       |  
|Basic, pro forma                                                                                         |  | $                         | 1.55       |   |      | $ | 1.32       |      |  | $ | 0.38       |  
|Diluted, as reported                                                                                     |  | $                         | 1.51       |   |      | $ | 1.27       |      |  | $ | 0.38       |  
|Diluted, pro forma                                                                                       |  | $                         | 1.49       |   |      | $ | 1.25       |      |  | $ | 0.37       |  
|Shares used in computing net income per share                                                            |  |                           |            |   |      |   |            |      |  |   |            |  
|Basic                                                                                                    |  |                           | 23,603,935 |   |      |   | 19,310,044 |      |  |   | 11,720,295 |  
|Diluted                                                                                                  |  |                           | 24,593,998 |   |      |   | 20,306,842 |      |  |   | 11,978,610 |  



44



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##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



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,
|                                                                                                                             |  | 2005                      |  | 2004       |  | 2003      
|Basic weighted-average number of common shares outstanding                                                                   |  | 23,603,935                |  | 19,310,044 |  | 11,720,295
|Dilutive effect of outstanding stock options                                                                                 |  | 990,063                   |  | 996,798    |  | 258,315   
|                                                                                                                             |  |                           |  |            |  |           
|Diluted weighted-average number of common and potential common shares outstanding                                            |  | 24,593,998                |  | 20,306,842 |  | 11,978,610
|                                                                                                                             |  |                           |  |            |  |           
|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 May 2005, the FASB
issued SFAS No. 154, Accounting Changes and Error Corrections, A Replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 requires retrospective application to prior periods financial statements for
changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited
to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting
change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date SFAS
No. 154 is issued. The Company is required to adopt the provisions of SFAS 154, as applicable, beginning in fiscal 2007.



In December 2004, the FASB issued SFAS No. 123R, Share Based Payment: An Amendment of FASB Statements No. 123 and 95. This
statement requires that the cost resulting from all share-based payment transactions be recognized in the Companys consolidated financial statements. In March 2005, the Securities and Exchange Commission (SEC) released SEC Staff
Accounting Bulletin No. 107, Share-Based Payment (SAB No. 107). SAB No. 107 provides the SECs staffs position regarding the application of SFAS 123R and certain SEC rules and
regulations, and also provides the staffs views regarding the valuation of share-based payment arrangements for public companies. The Company adopted SFAS 123R, utilizing the modified prospective method, in the first quarter of fiscal
2006 and will continue to evaluate the impact of SFAS 123R on its operating results and financial condition. The Companys assessment of the estimated compensation charges is affected by its stock price as well as assumptions
regarding a number of complex and subjective variables and the related tax impact. These variables include, but are not limited to, the Companys stock price volatility and employee stock option exercise behaviors. The Company expects to use
the Black Scholes model to calculate the fair value of the options. During fiscal 2006, the Company expects to reduce net income related to options outstanding under the 1994 and 2004 Stock Option Plans as of September 30, 2005 (Note 12) of
approximately $800 to $1,000 as a result of the adoption of SFAS 123R.



In November 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary AssetsAn Amendment of APB No. 29. The provisions of this statement are effective for asset exchanges occurring in fiscal periods beginning
after June 15, 2005. This statement eliminates the exception to fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance  that is,
transactions that are not expected to result in significant changes in the cash flows of the reporting entity. The Company does not believe that the adoption of SFAS 153 will have a significant effect on its future consolidated financial statements.



45



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##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS 151 amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage) should be recognized as current period charges. In addition, SFAS 151 requires that allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities. The provision of
SFAS 151 became effective for the Company beginning on October 1, 2004. The Company does not believe that the adoption of SFAS 151 will have a significant effect on its future consolidated financial statements.



In September 2004, the Emerging Issues Task Force (EITF) reached
a consensus on Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share. EITF 04-8 requires that all issued securities that have embedded conversion features that are contingently exercisable
upon the occurrence of a market-price condition should be in the calculation of diluted earnings per share (EPS), regardless of whether the market price trigger has been met. The Company adopted EITF 04-8 on December 30, 2004.
The adoption of EITF 04-8 did not have an impact on the Companys calculation of diluted EPS.



Reclassification



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



Although these securities are issued and rated as long-term bonds, they are priced and traded as short-term instruments because of the liquidity provided
through the interest rate reset. The Company had historically classified these instruments as cash equivalents if the period between interest rate resets was 90 days or less, which was based on the Companys ability to either liquidate its
holdings or roll the investment over to the next reset period. The Companys re-evaluation of the maturity dates and other provisions associated with the underlying bonds resulted in a reclassification from cash and equivalents to short-term
investments of $21,565 on the September 30, 2004 balance sheet. A corresponding adjustment has also been made to the Companys Consolidated Statements of Cash Flows for the year ended September 30, 2004, to reflect the gross purchases of
$21,565 and sales of $0 of these securities as investing activities rather than as a component of cash and cash equivalents. This change in classification does not affect previously reported cash flows from operating or financing activities in the
Companys previously reported Consolidated Statements of Cash Flows, or the Companys previously reported Consolidated Statements of Income for any period.



|2. | Restricted Cash
|-- | ---------------



Restricted cash consists of funds held in short-term deposits that are legally restricted as to withdrawal. Restricted cash of $2,008 and $181 as of
September 30, 2005 and 2004, respectively, was required in relation to the on-going value added tax audit in China and to secure a letter of credit at Shanghai Pudong Development Bank (SPDB).



The Company also had restricted cash of $125 and $122 as of
September 30, 2005 and 2004, 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, 2005, 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, 2005, 2004 and 2003, 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.; (c) Suzhou Wearnes-Xirlink Electric Co. Ltd., a subsidiary of Wearnes;
and (d) Wearnes. As discussed in Note 1, Wearnes owns 61% and 64% of the Companys common stock as of September 30, 2005 and 2004, respectively. MFS Technology Ltd. is a subsidiary of Wearnes



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



|                                         |  |               |     |      |   |   
|---------------------------------------- |  | ------------- | --- | ---- | - | --
|                                         |  | September 30,
|                                         |  | 2005          |     | 2004
|Due from affiliates                      |  |               |     |      |   |   
|MFS Technologies (M) Sdn. Bhd.           |  | $             | 346 |      | $ |  
|Wearnes Greatwall Circuits               |  |               |    |      |   | 1 
|Suzhou Wearnes-Xirlink Electric Co. Ltd. |  |               | 43  |      |   | 42
|Wearnes                                  |  |               | 32  |      |   |  
|                                         |  |               |     |      |   |   
|                                         |  | $             | 421 |      | $ | 43
|                                         |  |               |     |      |   |   



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##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



|                                         |  |               |     |      |   |      
|---------------------------------------- |  | ------------- | --- | ---- | - | -----
|                                         |  | September 30,
|                                         |  | 2005          |     | 2004
|Due to affiliates                        |  |               |     |      |   |      
|MFS Technology Ltd.                      |  | $             |    |      | $ | 5,063
|Wearnes                                  |  |               |    |      |   | 84   
|Suzhou Wearnes-Xirlink Electric Co. Ltd. |  |               | 10  |      |   |     
|Wearnes Hollingsworth Corporation        |  |               | 324 |      |   | 324  
|                                         |  |               |     |      |   |      
|                                         |  | $             | 334 |      | $ | 5,471
|                                         |  |               |     |      |   |      



Sales to and purchases
from affiliates comprise the following:



|                               |  |                           |       |      |   |       |  |   |      
|------------------------------ |  | ------------------------- | ----- | ---- | - | ----- |  | - | -----
|                               |  | Years Ended September 30,
|                               |  | 2005                      |       | 2004 |   | 2003 
|Sales to affiliates            |  |                           |       |      |   |       |  |   |      
|MFS Technology Ltd.            |  | $                         | 368   |      | $ | 517   |  | $ | 32   
|Wearnes Greatwall Circuits     |  |                           |      |      |   | 1     |  |   | 26   
|MFS Technologies (M) Sdn. Bhd. |  |                           |      |      |   | 2     |  |   | 4    
|                               |  |                           |       |      |   |       |  |   |      
|                               |  | $                         | 368   |      | $ | 520   |  | $ | 62   
|                               |  |                           |       |      |   |       |  |   |      
|Purchases from affiliates      |  |                           |       |      |   |       |  |   |      
|MFS Technology Ltd.            |  | $                         | 1,543 |      | $ | 9,577 |  | $ | 474  
|Wearnes Greatwall Circuits     |  |                           |      |      |   |      |  |   | 677  
|                               |  |                           |       |      |   |       |  |   |      
|                               |  | $                         | 1,543 |      | $ | 9,577 |  | $ | 1,151
|                               |  |                           |       |      |   |       |  |   |      



Management fees are
charged to the Company by Wearnes and are based on the amount of time spent on Company-related matters. Historically, these fees were determined at the discretion of Wearnes and totaled $0, $194 and $375 for the years ended September 30, 2005,
2004 and 2003, respectively. In June 2004, the Company formalized an agreement with Wearnes whereby the Company is billed for corporate services on a time and materials basis. For the year ended September 30, 2005, no services were provided
under this agreement. 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, 2005, 2004 and 2003 were $0, $0 and $15, respectively, as consideration for the storage of certain assets at the Companys facilities.



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, 2005, 2004 and 2003, the Company paid $0, $339 and $387, respectively to Wearnes Hollingsworth Corporation.



In connection with the Companys initial public offering in June 2004 (the IPO), the Company terminated a consulting relationship with an
independent director on the Companys board of directors, and entered into a consulting relationship with a former member of the Companys board of directors. Under the new consulting agreement, the Company agreed to pay the former board
member $9 per month until June 2006. The Company paid $0, $99 and $141 for consulting services during each of the years ended September 30, 2005, 2004 and 2003, respectively, to two separate individuals, who were, at the time of the payments,
members of the Companys board of directors.



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 $25,000 credit facility with
Norddeutsche Landesbank Girozentrale (NLG). In connection with the Companys IPO, the parties agreed to reduce the facility to $15,000 and to reduce WBL Corporations guarantee to an amount equal to the percentage of the
Companys outstanding stock owned by WBL Corporation, which was 64% as of the completion of the Companys IPO. However, at no time could 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). In fiscal 2005, the Company renegotiated the line of credit



47



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MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



with NLG, eliminating WBLs guarantee provision (Note 7). As of September 30, 2005, 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, |        
|                                                             |  | 2005          |         |   | 2004 |  
|Raw materials and supplies                                   |  | $             | 18,821  |   |      | $ | 23,796  |  
|Work-in-progress                                             |  |               | 12,323  |   |      |   | 9,788   |  
|Finished goods                                               |  |               | 13,831  |   |      |   | 5,633   |  
|                                                             |  |               |         |   |      |   |         |  
|                                                             |  | $             | 44,975  |   |      | $ | 39,217  |  
|                                                             |  |               |         |   |      |   |         |  
|                                                             |  |              
|Property, plant, and equipment, net, comprise the following: |  |               |         |   |      |   |         |  
|                                                             | 
|                                                             |  | September 30, |        
|                                                             |  | 2005          |         |   | 2004 |  
|Land                                                         |  | $             | 3,730   |   |      | $ | 3,730   |  
|Building                                                     |  |               | 18,187  |   |      |   | 17,347  |  
|Machinery and equipment                                      |  |               | 74,277  |   |      |   | 52,189  |  
|Furniture and fixtures                                       |  |               | 3,003   |   |      |   | 2,342   |  
|Leasehold improvements                                       |  |               | 2,805   |   |      |   | 2,783   |  
|                                                             |  |               |         |   |      |   |         |  
|                                                             |  |               | 102,002 |   |      |   | 78,391  |  
|Accumulated depreciation and amortization                    |  |               | (28,350 | ) |      |   | (18,477 | )
|                                                             |  |               |         |   |      |   |         |  
|                                                             |  | $             | 73,652  |   |      | $ | 59,914  |  
|                                                             |  |               |         |   |      |   |         |  



Depreciation expense
for the years ended September 30, 2005, 2004 and 2003, was $10,901, $6,372 and $4,232, respectively.



Included in other assets as of September 30, 2005 and 2004 is $617 and $984, respectively, of capitalized purchased software and internally developed
software costs, net of accumulated depreciation of $1,143 and $667, respectively. The Company capitalized $110, $563 and $652 of purchased software costs during the year ended September 30, 2005, 2004 and 2003. Amortization of software costs
for the years ended September 31, 2005, 2004 and 2003, was $477, $329 and $146, respectively.



In addition, included in other assets as of September 30, 2005 and 2004 is $1,523 and $321, respectively, of deposits on equipment to be purchased.



Accrued liabilities comprise the following:



|                       |  |               |        |      |   |       |  
|---------------------- |  | ------------- | ------ | ---- | - | ----- | -
|                       |  | September 30, |       
|                       |  | 2005          |        | 2004 |  
|Wages and compensation |  | $             | 5,202  |      | $ | 3,509 |  
|Warranty accrual       |  |               | 1,439  |      |   | 1,549 |  
|Other taxes            |  |               | 1,401  |      |   | (119  | )
|Other                  |  |               | 2,980  |      |   | 1,051 |  
|                       |  |               |        |      |   |       |  
|                       |  | $             | 11,022 |      | $ | 5,990 |  
|                       |  |               |        |      |   |       |  



|5. | Investment - 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, 2005 is $450 and is included in other assets in the consolidated balance sheets. The Company accounts for its investment in Cornerstone using the cost method of accounting.



48



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##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



The Company periodically reviews this investment for other-than-temporary declines in fair value.
Fair value for this investment is estimated based on several factors including; recent financial information and estimated market prices for comparable companies and pricing models using historical and forecasted financial information. To date,
there has been no impairment of the investment in Cornerstone.



|6. | Income Taxes
|-- | ------------



United States and foreign income before taxes are as follows:



|                                                                      |  |                           |        |   |      |   |        |      |  |   |       |  
|--------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                                      |  | Years Ended September 30, |       
|                                                                      |  | 2005                      |        |   | 2004 |   |        | 2003 | 
|United States                                                         |  | $                         | 38,474 |   |      | $ | 25,107 |      |  | $ | 5,150 |  
|Foreign                                                               |  |                           | 15,053 |   |      |   | 10,744 |      |  |   | 1,722 |  
|                                                                      |  |                           |        |   |      |   |        |      |  |   |       |  
|                                                                      |  | $                         | 53,527 |   |      | $ | 35,851 |      |  | $ | 6,872 |  
|                                                                      |  |                           |        |   |      |   |        |      |  |   |       |  
|                                                                      |  |                           |       
|The provision for income taxes consisted of the following components: |  |                           |        |   |      |   |        |      |  |   |       |  
|                                                                      | 
|                                                                      |  | Years Ended September 30, |       
|                                                                      |  | 2005                      |        |   | 2004 |   |        | 2003 | 
|Current                                                               |  |                           |        |   |      |   |        |      |  |   |       |  
|Federal                                                               |  | $                         | 10,767 |   |      | $ | 8,240  |      |  | $ | 1,720 |  
|State                                                                 |  |                           | 1,295  |   |      |   | 2,214  |      |  |   | 518   |  
|Foreign                                                               |  |                           | 3,622  |   |      |   | 2,635  |      |  |   | 263   |  
|                                                                      |  |                           |        |   |      |   |        |      |  |   |       |  
|                                                                      |  |                           | 15,684 |   |      |   | 13,089 |      |  |   | 2,501 |  
|                                                                      |  |                           |        |   |      |   |        |      |  |   |       |  
|Deferred                                                              |  |                           |        |   |      |   |        |      |  |   |       |  
|Federal                                                               |  |                           | (94    | ) |      |   | (1,154 | )    |  |   | (93   | )
|State                                                                 |  |                           | 62     |   |      |   | (221   | )    |  |   | (99   | )
|Foreign                                                               |  |                           | 709    |   |      |   | (1,569 | )    |  |   | (14   | )
|                                                                      |  |                           |        |   |      |   |        |      |  |   |       |  
|                                                                      |  |                           | 677    |   |      |   | (2,944 | )    |  |   | (206  | )
|                                                                      |  |                           |        |   |      |   |        |      |  |   |       |  
|                                                                      |  | $                         | 16,361 |   |      | $ | 10,145 |      |  | $ | 2,295 |  
|                                                                      |  |                           |        |   |      |   |        |      |  |   |       |  



Deferred tax assets
and (liabilities) comprise the following:



|                                |  |               |       |   |      |   |        |  
|------------------------------- |  | ------------- | ----- | - | ---- | - | ------ | -
|                                |  | September 30, |      
|                                |  | 2005          |       |   | 2004 |  
|Deferred tax assets             |  |               |       |   |      |   |        |  
|Inventory                       |  | $             | 1,475 |   |      | $ | 1,096  |  
|Depreciation                    |  |               | 640   |   |      |   | 1,166  |  
|Stock-based compensation        |  |               | 173   |   |      |   | 286    |  
|Accrued expenses                |  |               | 432   |   |      |   | 356    |  
|Allowance for doubtful accounts |  |               | 181   |   |      |   | 103    |  
|Warranty reserve                |  |               | 577   |   |      |   | 673    |  
|Capital loss carryforward       |  |               | 63    |   |      |   |       |  
|Royalty payment                 |  |               |      |   |      |   | 360    |  
|Investments                     |  |               | 314   |   |      |   | 338    |  
|State taxes                     |  |               | 321   |   |      |   | 698    |  
|Other                           |  |               | 30    |   |      |   | 57     |  
|                                |  |               |       |   |      |   |        |  
|Subtotal deferred tax assets    |  |               | 4,206 |   |      |   | 5,133  |  
|                                |  |               |       |   |      |   |        |  
|Valuation allowance             |  |               | (377  | ) |      |   |       |  
|                                |  |               |       |   |      |   |        |  
|Total deferred tax assets       |  |               | 3,829 |   |      |   | 5,133  |  
|                                |  |               |       |   |      |   |        |  
|Deferred tax liabilities        |  |               |       |   |      |   |        |  
|Depreciation                    |  |               | (800  | ) |      |   | (1,232 | )
|Other                           |  |               | 81    |   |      |   | (113   | )
|                                |  |               |       |   |      |   |        |  
|Total deferred tax liabilities  |  |               | (719  | ) |      |   | (1,345 | )
|                                |  |               |       |   |      |   |        |  
|Net deferred tax assets         |  | $             | 3,110 |   |      | $ | 3,788  |  
|                                |  |               |       |   |      |   |        |  



49



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MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



The Company established a valuation allowance of approximately $377 as of September 30, 2005.
The valuation allowance relates to capital loss carryforwards generated amounting to $63 generated in fiscal 2005 for which there is an uncertainty regarding the future realization and management has determined that it is will more likely than not
these carryforwards will expire unused. The valuation allowance also includes the deferred income tax benefits of the book losses attributable to the Companys investment in a partnership amounting to $314 for which it is more likely than not
that it will not receive future tax benefits.



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



|                                             |  |                           |    |  |      |    |  |      |   
|-------------------------------------------- |  | ------------------------- | -- |  | ---- | -- |  | ---- | --
|                                             |  | Years Ended September 30, |   
|                                             |  | 2005                      |    |  | 2004 |    |  | 2003 |   
|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          |  | 2.7                       | %  |  | 3.4  | %  |  | 4.0  | % 
|Foreign tax credit                           |  | (3.4                      | )% |  | (1.2 | )% |  |     |   
|Foreign rate variance                        |  | (3.9                      | )% |  | (8.0 | )% |  | (5.2 | )%
|Nondeductible expenses                       |  | 0.1                       | %  |  | 0.1  | %  |  | 0.8  | % 
|Other                                        |  | 0.0                       | %  |  | (1.0 | )% |  | (1.2 | )%
|                                             |  |                           |    |  |      |    |  |      |   
|                                             |  | 30.5                      | %  |  | 28.3 | %  |  | 33.4 | % 
|                                             |  |                           |    |  |      |    |  |      |   



The Company operates
under a tax holiday in China, which had a zero percent tax rate 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, 2005 and 2004. MFC1 will
continue to be subject to taxes equal to 12% until December 31, 2007. 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
two years (beginning in the first year of profitability) followed by three years of operation at a reduced income tax equal to 12% (versus the applicable Chinese tax rate of approximately 27%). MFC2 is subject to a 12% rate beginning January 1,
2006.



Had the Company not received the tax holiday for its
operations in China, net income for the years ended September 30, 2005, 2004 and 2003 would have been decreased to the pro forma amounts below:



|                        |  |                           |        |   |      |   |        |      |  |   |       |  
|----------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                        |  | Years Ended September 30, |       
|                        |  | 2005                      |        |   | 2004 |   |        | 2003 | 
|Net income, as reported |  | $                         | 37,166 |   |      | $ | 25,706 |      |  | $ | 4,577 |  
|Additional tax in China |  |                           | (3,532 | ) |      |   | (2,750 | )    |  |   | (258  | )
|                        |  |                           |        |   |      |   |        |      |  |   |       |  
|Pro forma net income    |  | $                         | 33,634 |   |      | $ | 22,956 |      |  | $ | 4,319 |  
|                        |  |                           |        |   |      |   |        |      |  |   |       |  
|Net income per share    |  |                           |        |   |      |   |        |      |  |   |       |  
|Basic, as reported      |  |                           | 1.57   |   |      |   | 1.33   |      |  |   | 0.39  |  
|Basic, pro forma        |  |                           | 1.42   |   |      |   | 1.23   |      |  |   | 0.37  |  
|Diluted, as reported    |  |                           | 1.51   |   |      |   | 1.27   |      |  |   | 0.38  |  
|Diluted, pro forma      |  |                           | 1.37   |   |      |   | 1.17   |      |  |   | 0.36  |  



Undistributed earnings
of the Companys foreign subsidiaries amounted to approximately $28,595, $14,264 and $4,175 for the years ended September 30, 2005, 2004 and 2003, 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 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.



During the year ended September 30, 2005, the Chinese Tax Authority completed its audit of MFC1s income tax returns for fiscal years 1999
through 2004. The audit resulted in approximately $1,100 of foreign withholding tax expense that is fully creditable on the United States federal tax return, resulting in no additional tax on a consolidated basis.



The Company establishes reserves when it believes that certain positions are
likely to be challenged by the tax authorities and that the Company may not succeed, despite its belief that the tax return positions are fully supportable. The



50



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MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



Company adjusts these reserves in light of changing facts and circumstances, including the progress of a tax audit. The Companys effective tax rate
includes the impact of these estimates.



The IRS has begun its
audit of fiscal year ended September 30, 2003. While it is difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes the results of these audits are not expected to have a material
impact on the Companys financial position or results of operations. Unfavorable settlement of any particular issue would require the use of cash. Favorable resolution would be recognized as a reduction to the effective tax rate in the year of
resolution. The Companys tax reserves are included in the balance sheet with income taxes receivable.



|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. The line of credit was increased by RMB 40,000 to RMB 100,000 in October 2004 ($12,358 at September 30, 2005). The line of credit will mature in October 2005, and bears interest at LIBOR (3.95% and 1.91% at September 30, 2005 and
2004, respectively) plus 0.4%, which is payable quarterly (Note 15). During the year ended September 30, 2005, the Company had borrowings of $3,000 and made repayments of $3,000. As of September 30, 2005, the Company had no borrowings
outstanding under this line of credit.



The Company also
maintains a $20,000 line of credit with SPDB. The line of credit will mature in July 2006 and bears interest at LIBOR (3.95% and 1.91% at September 30, 2005 and 2004,) plus 0.4%, which is payable quarterly. As of September 30, 2004, the
Company had borrowings outstanding of $3,369. During the year ended September 30, 2005, the Company borrowed $1,950 and made payments of $5,319. As of September 30, 2005, the Company had no borrowings outstanding under this line of credit.



In November 2003, the Company entered into a $25,000 unsecured
revolving line of credit with NLG. Borrowings bear interest at SIBOR plus 1.4% correlating to the time period of the borrowing. In connection with the IPO, the parties agreed to reduce the facility to $15,000. In July 2005, the Company terminated
the $15,000 credit facility and entered into a new $15,000 credit facility with NLG. Borrowings under the new facility will bear interest at LIBOR plus 2.5% correlating with the time period of the borrowing. The facility matures six months after the
first borrowing date. As of September 30, 2005, the Company had no borrowings outstanding under this line of credit.



The Company is required under the line of credit with NLG to maintain certain financial ratios 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, 2005, the Company was in compliance with these covenants with NLG.



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. 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.



A summary of the lines of credit follows:



|                      |  |                                  |        |                                    |   |      |  |   |      
|--------------------- |  | -------------------------------- | ------ | ---------------------------------- | - | ---- |  | - | -----
|                      |  | AmountsAvailable atSeptember 30, |        | AmountsOutstanding atSeptember 30,
|                      |  | 2005                             |        | 2005                               |   | 2004
|Line of credit (BC)   |  | $                                | 12,358 |                                    | $ |     |  | $ |     
|Line of credit (SPDB) |  |                                  | 20,000 |                                    |   |     |  |   | 3,369
|Line of credit (NLG)  |  |                                  | 15,000 |                                    |   |     |  |   |     
|                      |  |                                  |        |                                    |   |      |  |   |      
|                      |  | $                                | 47,358 |                                    | $ |     |  | $ | 3,369
|                      |  |                                  |        |                                    |   |      |  |   |      



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MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



|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 entity 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, |         
|                              |  | 2005                      |          |   | 2004 |   |         | 2003 | 
|Net sales                     |  |                           |          |   |      |   |         |      |  |   |         |  
|United States                 |  | $                         | 271,393  |   |      | $ | 185,422 |      |  | $ | 113,742 |  
|China                         |  |                           | 205,109  |   |      |   | 119,751 |      |  |   | 35,361  |  
|Eliminations                  |  |                           | (119,412 | ) |      |   | (52,124 | )    |  |   | (19,688 | )
|                              |  |                           |          |   |      |   |         |      |  |   |         |  
|Total                         |  | $                         | 357,090  |   |      | $ | 253,049 |      |  | $ | 129,415 |  
|                              |  |                           |          |   |      |   |         |      |  |   |         |  
|Operating income              |  |                           |          |   |      |   |         |      |  |   |         |  
|United States                 |  |                           | 19,048   |   |      |   | 22,331  |      |  |   | 5,844   |  
|China                         |  |                           | 33,587   |   |      |   | 14,088  |      |  |   | 1,863   |  
|                              |  |                           |          |   |      |   |         |      |  |   |         |  
|Total                         |  | $                         | 52,635   |   |      | $ | 36,419  |      |  | $ | 7,707   |  
|                              |  |                           |          |   |      |   |         |      |  |   |         |  
|Depreciation and amortization |  |                           |          |   |      |   |         |      |  |   |         |  
|United States                 |  | $                         | 2,873    |   |      |   | 2,491   |      |  |   | 1,747   |  
|China                         |  |                           | 8,561    |   |      |   | 4,213   |      |  |   | 2,631   |  
|                              |  |                           |          |   |      |   |         |      |  |   |         |  
|Total                         |  | $                         | 11,434   |   |      | $ | 6,704   |      |  | $ | 4,378   |  
|                              |  |                           |          |   |      |   |         |      |  |   |         |  



|                  |  |               |         |   |      |   |         |  
|----------------- |  | ------------- | ------- | - | ---- | - | ------- | -
|                  |  | September 30, |        
|                  |  | 2005          |         |   | 2004 |  
|Total assets      |  |               |         |   |      |   |         |  
|United States     |  | $             | 196,912 |   |      | $ | 161,797 |  
|China             |  |               | 142,779 |   |      |   | 69,766  |  
|Eliminations      |  |               | (80,091 | ) |      |   | (41,565 | )
|                  |  |               |         |   |      |   |         |  
|Total             |  | $             | 259,600 |   |      | $ | 189,998 |  
|                  |  |               |         |   |      |   |         |  
|Long-lived assets |  |               |         |   |      |   |         |  
|United States     |  | $             | 18,712  |   |      | $ | 17,879  |  
|China             |  |               | 59,358  |   |      |   | 45,950  |  
|                  |  |               |         |   |      |   |         |  
|Total             |  | $             | 78,070  |   |      | $ | 63,829  |  
|                  |  |               |         |   |      |   |         |  



|                     |  |                           |        |      |   |       
|-------------------- |  | ------------------------- | ------ | ---- | - | ------
|                     |  | Years Ended September 30,
|                     |  | 2005                      |        | 2004
|Capital Expenditures |  |                           |        |      |   |       
|United States        |  | $                         | 810    |      | $ | 2,247 
|China                |  |                           | 22,084 |      |   | 18,116
|                     |  |                           |        |      |   |       
|Total                |  | $                         | 22,894 |      | $ | 20,363
|                     |  |                           |        |      |   |       



|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, |  
|           |  | 2005                      |   |  | 2004 |   |  | 2003 |  
|Net sales  |  |                           |   |  |      |   |  |      |  
|CustomerA |  | 55                        | % |  | 29   | % |  | 7    | %
|CustomerB |  | 4                         | % |  | 11   | % |  | 14   | %
|CustomerC |  | 1                         | % |  | 7    | % |  | 21   | %
|CustomerD |  | 2                         | % |  | 10   | % |  | 12   | %



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MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



|                    |  |               |   |  |      |   |  |      |  
|------------------- |  | ------------- | - |  | ---- | - |  | ---- | -
|                    |  | September 30, |  
|                    |  | 2005          |   |  | 2004 |   |  | 2003 |  
|Accounts Receivable |  |               |   |  |      |   |  |      |  
|CustomerA          |  | 66            | % |  | 31   | % |  | 10   | %
|CustomerB          |  | 4             | % |  | 4    | % |  | 19   | %
|CustomerC          |  | 0             | % |  | 5    | % |  | 18   | %
|CustomerD          |  | 0             | % |  | 6    | % |  | 14   | %



Customers B, C and D
are subcontractors of Customer A. In addition, during the years ended September 30, 2005, 2004 and 2003, 81%, 80% and 71% of the Companys net sales were realized from Customer A and its subcontractors.



|          |  |                           |   |  |      |   |  |      |  
|--------- |  | ------------------------- | - |  | ---- | - |  | ---- | -
|          |  | Years Ended September 30, |  
|          |  | 2005                      |   |  | 2004 |   |  | 2003 |  
|Purchases |  |                           |   |  |      |   |  |      |  
|VendorA  |  | 16                        | % |  | 18   | % |  | 18   | %
|VendorB  |  | 10                        | % |  | 8    | % |  | 11   | %
|VendorC  |  | 3                         | % |  | 10   | % |  | 2    | %
|VendorD  |  | 11                        | % |  | 8    | % |  | 6    | %



|                 |  |               |   |  |      |   |  |      |  
|---------------- |  | ------------- | - |  | ---- | - |  | ---- | -
|                 |  | September 30, |  
|                 |  | 2005          |   |  | 2004 |   |  | 2003 |  
|Accounts payable |  |               |   |  |      |   |  |      |  
|VendorA         |  | 10            | % |  | 9    | % |  | 12   | %



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,
|                   |  | 2005                      |         | 2004 |   | 2003   
|North America      |  | $                         | 44,047  |      | $ | 33,819  |  | $ | 28,275 
|China              |  |                           | 231,393 |      |   | 116,713 |  |   | 42,103 
|Hong Kong          |  |                           | 45,786  |      |   | 39,925  |  |   | 22,785 
|Japan              |  |                           | 5,585   |      |   | 27,487  |  |   | 16,945 
|Other Asia-Pacific |  |                           | 23,925  |      |   | 20,144  |  |   | 11,104 
|Europe             |  |                           | 3,777   |      |   | 14,418  |  |   | 8,113  
|Other foreign      |  |                           | 2,577   |      |   | 543     |  |   | 90     
|                   |  |                           |         |      |   |         |  |   |        
|                   |  | $                         | 357,090 |      | $ | 253,049 |  | $ | 129,415
|                   |  |                           |         |      |   |         |  |   |        



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, Sweden, Hungary, Poland, Ireland, Belgium, Denmark, Finland, Scotland, Germany, France and the United Kingdom.



Industry



In the years ended September 30, 2005, 2004 and 2003, 84%, 83% and 75% 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.



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##### 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, 2005 are as follows:



|                          |  |                 |      
|------------------------- |  | --------------- | -----
|Year Ending September 30, |  | OperatingLeases
|2006                      |  | $               | 991  
|2007                      |  |                 | 561  
|2008                      |  |                 | 533  
|2009                      |  |                 | 458  
|2010 and after            |  |                 | 3,052
|                          |  |                 |      
|Total                     |  | $               | 5,595
|                          |  |                 |      



Total rent expense was
$899, $692 and $761 for the years ended September 30, 2005, 2004 and 2003, respectively.



Capital Leases



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 $69, $69, $69 and $40 during the years ended
September 30, 2006 through 2009, respectively. During the year ended September 30, 2005, the Company recorded a capital lease obligation of $108 related to the assumption of an equipment lease that was held by Aurora Optical prior to the
acquisition. The Company is obligated to pay $68 and $17 during the years ended September 30, 2006 and 2007, respectively.



Other Commitments



As of September 30, 2005 and 2004, the Company had outstanding purchase commitments related to MFC2 capital projects which totaled $4,573 and
$18,002, respectively.



Pursuant to the laws applicable to the
Peoples Republic of Chinas Foreign Investment Enterprises, the Companys two wholly owned subsidiaries in China, MFC1 and MFC2, are restricted from paying cash dividends on 10% of after-tax profit, subject to certain cumulative
limits. The amount of net income restricted by the foregoing for the years ended September 30, 2005, 2004 and 2003 are equal to $166, $111 and $116, 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.



Indemnifications



In the normal course of business the Company provides indemnification and guarantee of varying scope to customers and others. These indemnities include
among other things, intellectual property indemnities to customers in connection with sale of the Companys products, warranty guarantees to customers related to products sold and indemnities to the Companys directors and officers to the
maximum extent permitted by Delaware law. The duration of these indemnities and guarantees varies, and, in certain cases, is indeterminate. Historically, costs related to these indemnification provision have not been significant and with the
exception of the warranty accrual (Note 1) no liabilities have been recorded for these indemnification provisions.



|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



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##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



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.



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, 2005, 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 officially terminated 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, restricted common stock and restricted common stock units to employees, non-employee 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 ofShares |   |  | Weighted-AverageExercise Price
|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 
|                                          |  |                 |   |  |                                |      
|Granted                                   |  | 177,000         |   |  |                                | 18.37
|Exercised                                 |  | (915,049        | ) |  |                                | 3.28 
|Forfeited                                 |  | (78,651         | ) |  |                                | 11.64
|                                          |  |                 |   |  |                                |      
|Options outstanding at September 30, 2005 |  | 1,981,705       |   |  |                                | 7.65 
|                                          |  |                 |   |  |                                |      



The following table
summarizes information about stock options outstanding and exercisable as of September 30, 2005:



|                         |  |                     |  |                                                    |  |                               |       |                            |           |                               |   |      
|------------------------ |  | ------------------- |  | -------------------------------------------------- |  | ----------------------------- | ----- | -------------------------- | --------- | ----------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                               
|Range of Exercise Prices |  | Outstanding         |  | Weighted-AverageRemainingContractualLife (inyears) |  | Weighted-AverageExercisePrice |       | Number ofSharesExercisable |           | Weighted-AverageExercisePrice
|$2.00$2.07              |  | 352,530             |  | 3.3                                                |  | $                             | 2.05  |                            | 352,530   |                               | $ | 2.05 
|$3.73$4.00              |  | 560,120             |  | 4.3                                                |  |                               | 3.94  |                            | 560,120   |                               |   | 3.94 
|$8.75                    |  | 20,000              |  | 8.9                                                |  |                               | 8.75  |                            | 5,416     |                               |   | 8.75 
|$10.00                   |  | 872,055             |  | 8.8                                                |  |                               | 10.00 |                            | 242,153   |                               |   | 10.00
|$16.80$18.08            |  | 102,000             |  | 9.4                                                |  |                               | 17.55 |                            |          |                               |   |     
|$20.18$20.81            |  | 75,000              |  | 9.2                                                |  |                               | 20.56 |                            |          |                               |   |     
|                         |  |                     |  |                                                    |  |                               |       |                            |           |                               |   |      
|                         |  | 1,981,705           |  |                                                    |  | $                             | 7.65  |                            | 1,160,219 |                               | $ | 4.65 
|                         |  |                     |  |                                                    |  |                               |       |                            |           |                               |   |      



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##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



Options exercisable at September 30, 2004 and 2003 were 2,798,405 and 1,768,305, with a
weighted-average exercise price of $3.03 and $2.94, respectively.



At September 30, 2005, the number of shares available for issuance under the 2004 Plan was 1,736,051.



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 was 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(FIN 44). 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.



In January
2005, the Company fully vested a portion of unvested options for two Board members who resigned from the Company. The acceleration of the vesting resulted in a new measurement date under FIN 44. The Company recorded compensation expense of $99
related to this modification, which was based on the difference between the estimated fair value of the options before and after the modification.



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 3.95% and 3.84% for the years ended September 30, 2005 and 2004, respectively, no dividend yield, expected life of five years and volatility of 67% and 73% for the years ended September 30, 2005 and 2004,
respectively. The weighted average fair value of options granted during the year ended September 30, 2005 and 2004 was $18.78 and $6.19, respectively.



|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 $127, $120 and $106 for the years ended September 30, 2005, 2004 and 2003, respectively.



|14. | Acquisition
|--- | -----------



In June 2005, the Company completed an acquisition of the assets of Applied Optics, Inc. to add design and manufacturing capabilities of complete camera
modules, including the lens, used in cell phones. The Company operates the business as a wholly owned subsidiary under the name Aurora Optical, Inc.



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##### Table of Contents

MULTI-FINELINE ELECTRONIX, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In Thousands, Except Per Share and Share Data)



The subsidiary hired certain employees of Applied Optics, Inc. and assumed its facility lease in
Tucson, Arizona. In accordance with SFAS No. 141, Business Combinations, this acquisition was accounted for using the purchase method of accounting. The acquisition purchase price and related purchase price allocation was as follows:



|                                                      |  |   |        |  
|----------------------------------------------------- |  | - | ------ | -
|Cash paid                                             |  | $ | 6,300  |  
|Direct transaction costs                              |  |   | 106    |  
|                                                      |  |   |        |  
|Total consideration paid and direct transaction costs |  | $ | 6,406  |  
|Less:                                                 |  |   |        |  
|Fair value of tangible asset acquired                 |  |   | (3,026 | )
|Add:                                                  |  |   |        |  
|Fair value of tangible liabilities assumed            |  |   | 567    |  
|                                                      |  |   |        |  
|Total fair value step-up                              |  | $ | 3,947  |  
|                                                      |  |   |        |  



The total purchase
price was allocated to the intangible assets and goodwill based on their fair values determined by the Company with the assistance of an independent third party appraisal as follows:



|                                     |  |   |      
|------------------------------------ |  | - | -----
|Identifiable intangible assets       |  | $ | 318  
|Goodwill                             |  |   | 3,629
|                                     |  |   |      
|Total goodwill and intangible assets |  | $ | 3,947
|                                     |  |   |      



The useful lives of the intangible
assets were determined to be between two and twenty-four months. During the year ended September 30, 2005, $56 of amortization expense was recognized. During the years ending September 30, 2006 and 2007, amortization expense of $153 and
$108 will be recognized related to these intangible assets, respectively. The consolidated financial statements include the results of the subsidiary from the date of the acquisition.



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##### Table of Contents



MULTI-FINELINE ELECTRONIX, INC.



SCHEDULE II

CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003

(In Thousands)



|                               |  |                            |  
|------------------------------ |  | -------------------------- | -
|                               |  | AccountsReceivableReserves |  
|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                        |  
|Charged to operations          |  | 2,064                      |  
|Write-offs                     |  | (1,713                     | )
|                               |  |                            |  
|Balances at September 30, 2005 |  | 601                        |  
|                               |  |                            |  



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##### Table of Contents

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



There have been no changes in our independent registered public accounting firm 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
|-------- | -----------------------



Managements Report on Internal Control Over Financial Reporting



Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, or the Exchange Act. A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness of controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Under the supervision and with the participation of management, including our
Chief Executive Officer, or CEO and Chief Financial Officer, or CFO, management conducted an assessment of the effectiveness of our internal control over financial reporting as of September 30, 2005. In making this assessment, management used
the criteria set forth in the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled Internal ControlIntegrated Framework. Based on this evaluation and on the criteria
in Internal ControlIntegrated Framework, management has concluded that our internal control over financial reporting was effective as of September 30, 2005.



Managements assessment of the effectiveness of the Companys internal control over financial reporting as of
September 30, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.



Changes in Internal Control over Financial Reporting



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.



Disclosure 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 CEO and 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 Exchange Act), are effective.



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##### Table of Contents

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
2006 Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for our 2006 Annual Meeting of Stockholders expected to be held on March 21, 2006, 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 2006 Proxy Statement under the caption Other MattersSection 16(a) Beneficial Ownership Reporting Compliance.



We have adopted a Code of Ethics for Senior Officers, or Code of Ethics, 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. We have also adopted a Code of Business Conduct that applies to all of our employees, officers and directors. A copy of the Code
of Ethics is included as Exhibit 14.1 to this Annual Report. Each of the Code of Ethics and Code of Business Conduct may be found 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 and the requirements under Section 10A of the Exchange
Act for serving on an audit committee. Our board of directors has determined that Mr. Kane qualifies as an audit committee financial expert within the meaning of such regulations.



|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 2006 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 2006 Proxy Statement, and is incorporated herein by reference.



Equity Compensation Plan Information



The following summarizes our equity compensation plans at September 30, 2005:



|                                                           |  |                                                                                         |  |                                                                          |      |                                                                                                                                      |          
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ---- | ------------------------------------------------------------------------------------------------------------------------------------ | ---------
|                                                           |  | (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 underequitycompensation plans(excluding
securitiesreflected in column(a))
|Equity compensation plans approved by security holders     |  | 1,981,705                                                                               |  | $                                                                        | 4.65 |                                                                                                                                      | 1,736,051
|Equity compensation plans not approved by security holders |  |                                                                                        |  |                                                                          |     |                                                                                                                                      |         
|Total                                                      |  | 1,981,705                                                                               |  | $                                                                        | 4.65 |                                                                                                                                      | 1,736,051



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##### Table of Contents

|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 2006 Proxy Statement, and is incorporated herein by reference.



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



The information required by this item will be contained under the captions Ratification of Independent Registered Public Accounting
FirmPrincipal Accountant Fees and Services and Ratification of Independent Registered Public Accounting FirmPre-Approval Policies and Procedures in our 2006 Proxy Statement and is incorporated herein by reference.



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



| | (b) | Exhibits:
| | --- | ---------



|         |  |                                                                                                                                                                                                          
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2(1)   |  | Restated Certificate of Incorporation of the Company                                                                                                                                                     
|         | 
|3.4(4)   |  | Amended and Restated Bylaws of the Company                                                                                                                                                               
|         | 
|4.1(1)   |  | Form of Common Stock Certificate                                                                                                                                                                         
|         | 
|10.1(1)  |  | Form of Indemnification Agreement between the Company and its officers and directors                                                                                                                     
|         | 
|10.2(1)  |  | 1994 Stock Plan of the Company, as amended                                                                                                                                                               
|         | 
|10.3(1)  |  | 2004 Stock Incentive Plan of the Company                                                                                                                                                                 
|         | 
|10.4(1)  |  | Corporate Services Agreement dated as of June 4, 2004 by and between the Company and Wearne Brothers Services (Private) Limited                                                                          
|         | 
|10.7(1)  |  | 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                         
|         | 
|10.12(3) |  | Bank and Company Cooperation Agreement dated July 29, 2003 by and between Bank of China Suzhou City Wuzhong Branch and Multi-Fineline Electronix (Suzhou) Co., Ltd.                                      
|         | 
|10.17(3) |  | Maximum Amount Guarantee Contract dated August 4, 2004 by and between Multi-Fineline Electronix (Suzhou) Co., Ltd and SPDB Suzhou                                                                        
|         | 
|10.18(5) |  | Uncommitted Revolving Credit Facility Agreement by and between Norddeutsche Landesbank Girozentrale, New York Branch and the company dated July 14, 2005                                                 
|         | 
|10.19(5) |  | Revolving Credit Note dated July 14, 2005 with the company as Borrower and Norddeutsche Landesbank Girozentrale, New York Branch, as Lender                                                              
|         | 
|10.20(6) |  | Amended and Restated Stockholders Agreement dated October 25, 2005 between Multi-Fineline Electronix, Inc., Wearnes Technology Pte. Ltd, United Wearnes Technology Pte. Ltd., and WBL
Corporation Limited
|         | 
|10.21(7) |  | Form of Restricted Stock Unit agreement                                                                                                                                                                  



61



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##### Table of Contents

|        |  |                                                                                                   
|------- |  | --------------------------------------------------------------------------------------------------
|14.1(2) |  | Code of Ethics for Senior Officers                                                                
|        | 
|21.1    |  | List of Subsidiaries of the Registrant                                                            
|        | 
|23.1    |  | Consent of PricewaterhouseCoopers LLP                                                             
|        | 
|24.1    |  | Power of Attorney (see signature page 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

---

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



|(2) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Annual
Report on Form 10-K filed with the SEC for the year ended September 30, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to exhibits (with same exhibit number) to the Companys
Quarterly Report on Form 10-Q filed with the SEC for the quarter ended March 31, 2005.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to an exhibit (with same exhibit number) to the Companys
Current Report on Form 8-K filed with the SEC on May 24, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to exhibits (with same exhibit number) to the Companys
Current Report on Form 8-K filed with the SEC on July 20, 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Current
Report on Form 8-K filed with the SEC on October 25, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Current
Report on Form 8-K filed with the SEC on December 9, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------



62



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##### 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 12, 2005 |  |  |  | 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) |  | December 5, 2005
|                                                |  |                                                                                             
|/s/    CRAIG RIEDELCraig Riedel                 |  | Chief Financial Officer (Principal Financial and Accounting Officer)                         |  | December 5, 2005
|                                                |  |                                                                                             
|/s/    PETER BLACKMOREPeter Blackmore           |  | Director                                                                                     |  | December 5, 2005
|                                                |  |                                                                                             
|/s/    RICHARD J.
DADAMORichard J.
Dadamo       |  | Director                                                                                     |  | December 5, 2005
|                                                |  |                                                                                             
|/s/    SANFORD L. KANESanford L. Kane           |  | Director                                                                                     |  | December 5, 2005
|                                                |  |                                                                                             
|/s/    HUAT SENG LIM,
PH.D.Huat Seng Lim,
Ph.D. |  | Director                                                                                     |  | December 5, 2005
|                                                |  |                                                                                             
|/s/    CHOON SENG
TANChoon Seng Tan             |  | Director                                                                                     |  | December 5, 2005
|                                                |  |                                                                                             
|/s/    SAM YAUSam Yau                           |  | Director                                                                                     |  | December 5, 2005



63



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##### Table of Contents



EXHIBIT INDEX



|              |  |                                                                                                                                                                                                          
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                  
|3.2(1)        |  | Restated Certificate of Incorporation of the Company                                                                                                                                                     
|              | 
|3.4(4)        |  | Amended and Restated Bylaws of the Company                                                                                                                                                               
|              | 
|4.1(1)        |  | Form of Common Stock Certificate                                                                                                                                                                         
|              | 
|10.1(1)       |  | Form of Indemnification Agreement between the Company and its officers and directors                                                                                                                     
|              | 
|10.2(1)       |  | 1994 Stock Plan of the Company, as amended                                                                                                                                                               
|              | 
|10.3(1)       |  | 2004 Stock Incentive Plan of the Company                                                                                                                                                                 
|              | 
|10.4(1)       |  | Corporate Services Agreement dated as of June 4, 2004 by and between the Company and Wearne Brothers Services (Private) Limited                                                                          
|              | 
|10.7(1)       |  | 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                         
|              | 
|10.12(3)      |  | Bank and Company Cooperation Agreement dated July 29, 2003 by and between Bank of China Suzhou City Wuzhong Branch and Multi-Fineline Electronix (Suzhou) Co., Ltd.                                      
|              | 
|10.17(3)      |  | Maximum Amount Guarantee Contract dated August 4, 2004 by and between Multi-Fineline Electronix (Suzhou) Co., Ltd and SPDB Suzhou                                                                        
|              | 
|10.18(5)      |  | Uncommitted Revolving Credit Facility Agreement by and between Norddeutsche Landesbank Girozentrale, New York Branch and the company dated July 14, 2005                                                 
|              | 
|10.19(5)      |  | Revolving Credit Note dated July 14, 2005 with the company as Borrower and Norddeutsche Landesbank Girozentrale, New York Branch, as Lender                                                              
|              | 
|10.20(6)      |  | Amended and Restated Stockholders Agreement dated October 25, 2005 between Multi-Fineline Electronix, Inc., Wearnes Technology Pte. Ltd, United Wearnes Technology Pte. Ltd., and WBL
Corporation Limited
|              | 
|10.21(7)      |  | Form of Restricted Stock Unit agreement                                                                                                                                                                  
|              | 
|14.1(2)       |  | Code of Ethics for Senior Officers                                                                                                                                                                       
|              | 
|21.1          |  | List of Subsidiaries of the Registrant                                                                                                                                                                   
|              | 
|23.1          |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                    
|              | 
|24.1          |  | Power of Attorney (see signature page 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                                                                                                       

---

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



|(2) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Annual
Report on Form 10-K filed with the SEC for the year ended September 30, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to exhibits (with same exhibit number) to the Companys
Quarterly Report on Form 10-Q filed with the SEC for the quarter ended March 31, 2005.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to an exhibit (with same exhibit number) to the Companys
Current Report on Form 8-K filed with the SEC on May 24, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to exhibits (with same exhibit number) to the Companys
Current Report on Form 8-K filed with the SEC on July 20, 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Current
Report on Form 8-K filed with the SEC on October 25, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Current
Report on Form 8-K filed with the SEC on December 9, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------



64