Multi-Fineline Electronix (MFLX)

Liquidity and Capital Resources

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

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It is our practice to carefully monitor the state of our business, cash requirements and capital structure. We believe that funds generated from our operations and available from our borrowing facilities will be sufficient to fund current business operations as well as anticipated growth over at least the next twelve months. We also believe we will have sufficient capital to fund our operations without the need to derive cash from the sale of our auction rate securities; however, there can be no assurance that any growth will occur and unexpected events may result in our need to raise additional capital. The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact its valuation include changes to credit ratings of the securities, as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, market interest rates, discount rates and ongoing strength. Market variables utilized in developing the valuation model for these securities include relative yields on federal student loan securities, average 90 day T-Bill rates, 90 day LIBOR rates, interest rate spreads as determined by the changing credit market environment and quality of market credit and liquidity.

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

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

Our principal investing and financing activities for the six months ended March 31, 2009, were as follows:

As of March 31, 2009, and September 30, 2008, we had outstanding purchase commitments related to expansion activities at various locations in Suzhou, China, and for research and development related equipment purchases at our Anaheim, California facility which totaled $4.6 million and $9.2 million, respectively. In conjunction with our acquisition of Pelikon, additional Contingent Consideration may be paid based on the net amount of sales for certain products, during calendar years 2009 and 2010. Any Contingent Consideration paid shall not exceed $2.2 million in 2009 and $7.2 million in 2010, and if one or both of the Earn-Out Targets are not achieved, the Contingent Consideration will not be paid for one or both of the Earn-Out Periods.

In April 2009, we entered into an engineering, design and construction contract for MFC3 which involves aggregate costs of approximately $24 million, although we may delay construction in our discretion.

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Market Risk

Market risk represents the risk of loss arising from adverse changes in liquidity, market rates and foreign exchange rates. At March 31, 2009, no amounts were outstanding under our loan agreements with Bank of America, N.A., Shanghai Pudong Development Bank or 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 based on our current borrowing level.

Foreign Currency Risk

We derive a substantial portion of our sales outside of the U.S. Approximately $330 million, or 98%, of total shipments to these foreign manufacturers for the six months ended March 31, 2009, were made in U.S. dollars. The balance of our net sales is denominated in RMB. The exchange rate for the RMB to the U.S. dollar has been an average of 6.84 RMB per U.S. dollar for the six months ended March 31, 2009. We are subject to a 0.3% maximum daily appreciation against the U.S. dollar. 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 and recently the appreciation of the RMB versus the U.S. dollar has stabilized; however, we continue to be vulnerable to appreciation or depreciation of foreign currencies against the U.S. dollar.

Liquidity Risk

As a result of the liquidity issues experienced in the global credit and capital markets, during 2008 auctions for investment in auction rate securities held by us failed. An auction fails when there is insufficient demand. However, a failed auction does not represent a default by the issuer. The auction rate securities continue to pay interest in accordance with the terms of the underlying security; however, liquidity will be limited until there is a successful auction or until such time as other markets for these investments develop. However, due to the current absence of a liquid market, we have reclassified our investments in auction rate securities from current assets to non-current assets in our consolidated condensed balance sheet. When liquidity for these types of investments returns in the market, we intend to sell these investments or reclassify them back to current assets. We do not believe that the lack of liquidity relating to auction rate securities will have an impact on our ability to fund operations.

All of our auction rate securities are rated AAA/Aaa, are collateralized by student loans substantially guaranteed by the U.S. government and continue to pay interest in accordance with their contractual terms. The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact the valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates and ongoing strength and quality of market credit and liquidity. As of March 31, 2009, the fair value of our auction rate securities of $11.1 million was determined using a model that calculates the present value of the expected future cash flows from our securities and other indications of value, and as a consequence of our belief that the impairment is of an other than temporary nature, we have recorded aggregate charges of $2.2 million in our results of operations.

Liquidity and Capital Resources

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

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It is our policy to carefully monitor the state of our business, cash requirements and capital structure. We believe that funds generated from our operations and available from our borrowing facilities will be sufficient to fund current business operations as well as anticipated growth over at least the next 12 months. We also believe we will have sufficient capital to fund our operations without the need to derive cash from the sale of our auction rate securities; however, there can be no assurance that any growth will occur and unexpected events may result in our need to raise additional capital. The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact its valuation include changes to credit ratings of the securities, as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, market interest rates, discount rates and ongoing strength. Market variables utilized in developing the valuation model for these securities include relative yields on federal student loan securities, average 90 day T-Bill rates, 90 day LIBOR rates, interest rate spreads as determined by the changing credit market environment and quality of market credit and liquidity.

During the three months ended December 31, 2008, net income of $14.1 million, adjusted for depreciation and amortization, loss on equipment disposal, stock-based compensation expense, deferred taxes and provision for doubtful accounts, generated $25.6 million of operating cash. This amount was decreased by $5.4 million used to meet working capital requirements.

Changes in the principal components of working capital for the three months ended December 31, 2008 were as follows:

Our principal investing and financing activities for the three months ended December 31, 2008, were as follows:

As of December 31, 2008, and September 30, 2008, we had outstanding purchase commitments related to expansion activities at various locations in Suzhou, China, and for research and development equipment-related purchases at our Anaheim, California facility which totaled $4.8 million and $9.2 million, respectively. In conjunction with the Company’s acquisition of Pelikon, additional Contingent Consideration may be paid based on the net amount of sales for certain products, during calendar years 2009 and 2010. Any Contingent Consideration paid shall not exceed $2,190 in 2009 and $7,236 in 2010, and if one or both of the Earn-Out Targets are not achieved, the Contingent Consideration will not be paid for one or both of the Earn-Out Periods. During the month of January 2009, the Company repurchased a total of 120,386 shares for a total value of $2.0 million pursuant to a 10b5-1 plan.

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Market Risk

Market risk represents the risk of loss arising from adverse changes in liquidity, market rates and foreign exchange rates. At December 31, 2008, no amounts were outstanding under our loan agreements with Shanghai Pudong Development Bank or 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 based on our current borrowing level.

Foreign Currency Risk

We derive a substantial portion of our sales outside of the U.S. Approximately $179 million, or 97%, of total shipments to these foreign manufacturers for the quarter ended December 31, 2008, were made in U.S. Dollars. The balance of our net sales is denominated in RMB. The exchange rate for the RMB to the U.S. Dollar has been an average of 6.8 RMB per U.S. Dollar for the quarter ended December 31, 2008. In July 2005, the People’s Bank of China (“PBOC”) terminated the fixed exchange rate between the RMB and the U.S. Dollar, adjusted the exchange rate from 8.3 to 8.1 and established a 0.3% maximum daily appreciation against the U.S. Dollar. 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.

Liquidity Risk

As a result of the liquidity issues experienced in the global credit and capital markets, during 2008 auctions for investment in auction rate securities held by us failed. An auction fails when there is insufficient demand. However, a failed auction does not represent a default by the issuer. The auction rate securities continue to pay interest in accordance with the terms of the underlying security; however, liquidity will be limited until there is a successful auction or until such time as other markets for these investments develop. However, due to the current absence of a liquid market, we have reclassified our investments in auction rate securities from current assets to non-current assets in our consolidated condensed balance sheet. When liquidity for these types of investments returns in the market, we intend to sell these investments or reclassify them back to current assets. We do not believe that the lack of liquidity relating to auction rate securities will have an impact on our ability to fund operations.

All of our auction rate securities are rated AAA/Aaa, are collateralized by student loans substantially guaranteed by the U.S. government and continue to pay interest in accordance with their contractual terms. The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact the valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates and ongoing strength and quality of market credit and liquidity. As of December 31, 2008, the fair value of our auction rate securities of $11.1 million was determined using a model that calculates the present value of the expected future cash flows from our securities and other indications of value, and as a consequence of our belief that the impairment is of an other than temporary nature, we have recorded aggregate charges of $2.2 million in our results of operations.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash provided by operations and borrowings under our various credit facilities. At June 30, 2008, no amounts were outstanding under our loan agreements with Shanghai Pudong Development Bank and Bank of China. On March 31, 2008, we mutually terminated our credit facility with Norddeutsche Landesbank Girozentrale (“Nord”). Our principal uses of cash have been to finance working capital, facility expansions and other capital expenditures. We anticipate these uses will continue to be our principal uses of cash in the future.

The Company’s subsidiaries in China are in final negotiations and expect to enter into credit line agreements with SPDB, providing for two borrowing facilities of RMB 75 million (equal to $10.97 million each at July 31, 2008). The credit lines will mature in July 2009 and for so long as the borrowing subsidiary has at least U.S. $3 million on deposit with SPDB, the interest rate will be LIBOR (4.478% at July 31, 2008), minus 15 basis points. Otherwise, interest shall be determined within the scope ruled by the PBoC and if there is no such rule, as determined by SPDB.

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

During the nine months ended June 30, 2008, net income of $32.8 million, adjusted for depreciation and amortization, loss on equipment disposal, impairment of cost investment, stock-based compensation expense, deferred taxes and provision for doubtful accounts, generated $58.0 million of operating cash. This amount was increased by $4.2 million generated from working capital.

Changes in the principal components of working capital for the nine months ended June 30, 2008 were as follows:

Our principal investing and financing activities for the nine months ended June 30, 2008 were as follows:

Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At June 30, 2008 and September 30, 2007, no amounts were outstanding under our loan agreements with Shanghai Pudong Development Bank and Bank of China. On March 31, 2008, we mutually terminated our credit facility with Nord. 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 based on our current borrowing level.

We derive a substantial portion of our sales outside the United States. Approximately $444 million, or 96%, of total shipments to these foreign manufacturers for fiscal 2007 were made in U.S. dollars. The balance of our net sales is denominated in Chinese Renminbi, or RMB. The exchange rate for the RMB to the U.S. dollar has been an average of 7.7 RMB and 7.1 RMB per U.S. dollar for the fiscal year ended September 30, 2007 and the nine months ended June 30, 2008, respectively. Transactions in RMB represent approximately 4% and 3%, respectively of total net sales from foreign customers for the fiscal year ended September 30, 2007 and the nine months ended June 30, 2008. In July 2005, the People’s Bank of China, or PBOC, terminated the fixed exchange rate between the RMB and the U.S. dollar, adjusted the exchange rate from 8.3 to 8.1 and established a 0.3% maximum daily appreciation limit against the U.S. dollar. However, during the third quarter of fiscal 2007, the PBOC increased the rate at which the RMB/U.S. dollar exchange can fluctuate, which resulted in a greater RMB appreciation. We expect the RMB appreciation against the U.S. dollar to continue to increase, and possibly accelerate further in the future, which will result in an increase in the cost of our business expenses in China due to the movement of the exchange rates. Therefore, we are vulnerable to appreciation or depreciation of foreign currencies against the U.S. dollar.

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As a result of the recent liquidity issues experienced in the global credit and capital markets, in February and March of 2008, auctions for auction rate securities held by us failed. An auction fails when there is insufficient demand. However, a failed auction does not represent a default by the issuer. The auction rate securities continue to pay interest in accordance with the terms of the underlying security; however, liquidity will be limited until there is a successful auction or until such time as other markets for these investments develop. In anticipation of liquidity returning in the market, we have the intent and ability to hold these investments. However, due to the current absence of a liquid market, we have reclassified our investments in auction rate securities from current assets to non-current assets in our consolidated condensed balance sheet. When liquidity for these types of investments returns in the market, we intend to sell these investments or reclassify them back to current assets. We do not believe that the lack of liquidity relating to auction rate securities will have an impact on our ability to fund operations.

All of our auction rate securities are rated AAA/Aaa, are collateralized by student loans substantially guaranteed by the U.S. government and continue to pay interest in accordance with their contractual terms. As of June 30, 2008, the fair value of our auction rate securities of $12.5 million was determined using a model that calculates the present value of the expected future cash flows from our securities and other indications of value, resulting in a temporary impairment charge of $821,000 recorded as a component of other comprehensive income included in stockholders’ equity. The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact the valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates and ongoing strength and quality of market credit and liquidity.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash provided by operations and borrowings under our various credit facilities. At March 31, 2008, no amounts were outstanding under our loan agreements with Shanghai Pudong Development Bank, Bank of China or Norddeutsche Landesbank Girozentrale (“Nord”), and on March 31, 2008, we mutually terminated the Nord credit facility. Our principal uses of cash have been to finance working capital, facility expansions and other capital expenditures. We anticipate these uses will continue to be our principal uses of cash in the future.

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

During the six months ended March 31, 2008, net income of $24.0 million, adjusted for depreciation and amortization, loss on equipment disposal, impairment of cost investment, stock-based compensation expense, deferred taxes and provision for doubtful accounts, generated $41.1 million of operating cash. This amount was increased by $3.6 million generated from working capital.

Changes in the principal components of working capital for the six months ended March 31, 2008 were as follows:

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Our principal investing and financing activities for the six months ended March 31, 2008 were as follows:

Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At March 31, 2008 and September 30, 2007, no amounts were outstanding under our loan agreements with Shanghai Pudong Development Bank, Bank of China or Norddeutsche Landesbank Girozentrale (“Nord”), and on March 31, 2008, we mutually terminated the Nord credit facility. 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 based on our current borrowing level.

We derive a substantial portion of our sales outside of the United States. Approximately $444 million, or 96%, of total shipments to these foreign manufacturers for fiscal 2007 were made in U.S. Dollars. The balance of our net sales is denominated in Chinese Renminbi, or RMB. The exchange rate for the RMB to the U.S. Dollar has been an average of 7.7 RMB and 7.2 RMB per U.S. Dollar for the fiscal year ended September 30, 2007 and the six months ended March 31, 2008, respectively. Transactions in RMB represent approximately 4% of total net sales from foreign customers for the fiscal year ended September 30, 2007 and the six months ended March 31, 2008. In July 2005, the People’s Bank of China, or PBOC, terminated the fixed exchange rate between the RMB and the U.S. Dollar, adjusted the exchange rate from 8.3 to 8.1 and established a 0.3% maximum daily appreciation limit against the U.S. Dollar. However, during the third quarter of fiscal 2007, the PBOC increased the rate at which the RMB/U.S. Dollar exchange can fluctuate, which resulted in a greater RMB appreciation. We expect the RMB appreciation against the U.S. Dollar to continue to increase, and possibly accelerate further in the future, which will result in an increase in the cost of our business expenses in China due to the movement of the exchange rates. Therefore, we continue to be vulnerable to appreciation or depreciation of foreign currencies against the U.S. dollar.

As a result of the recent liquidity issues experienced in the global credit and capital markets, in February and March of 2008, auctions for auction rate securities held by us failed. An auction fails when there is insufficient demand. However, a failed auction does not represent a default by the issuer. The auction rate securities continue to pay interest in accordance with the terms of the underlying security; however, liquidity will be limited until there is a successful auction or until such time as other markets for these investments develop. In anticipation of liquidity returning in the market, we have the intent and ability to hold these investments. However, due to the current absence of a liquid market, we have reclassified our investments in auction rate securities from current assets to non-current assets in our consolidated condensed balance sheet. When liquidity for these types of investments returns in the market, we intend to sell these investments or reclassify them back to current assets. We do not believe that the lack of liquidity relating to auction rate securities will have an impact on our ability to fund operations.

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All of our auction rate securities are rated AAA/Aaa, are collateralized by student loans substantially guaranteed by the U.S. government and continue to pay interest in accordance with their contractual terms. As of March 31, 2008, the fair value of our auction rate securities of $12.7 million was determined using a model that calculates the present value of the expected future cash flows from our securities and other indications of value, resulting in a temporary impairment charge of $600,000 recorded as a component of other comprehensive income included in stockholders’ equity. The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact our valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates and ongoing strength and quality of market credit and liquidity.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash provided by operations and borrowings under our various credit facilities. Our principal uses of cash have been to finance working capital, facility expansions and other capital expenditures. We anticipate these uses will continue to be our principal uses of cash in the future.

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

During the three months ended December 31, 2007, net income of $13.6 million, adjusted for depreciation and amortization, loss on equipment disposal, stock-based compensation expense, deferred taxes and provision for doubtful accounts, generated $20.2 million of operating cash. This amount was decreased by $8.0 million used to meet working capital requirements.

Changes in the principal components of working capital for the three months ended December 31, 2007 were as follows:

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Our principal investing and financing activities for the three months ended December 31, 2007 were as follows:

Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At December 31 and September 30, 2007, no amounts were outstanding under our loan agreements with Shanghai Pudong Development Bank, Bank of China or NLG. 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 based on our current borrowing level.

We derive a substantial portion of our sales outside of the United States. Approximately $444 million, or 96%, of total shipments to these foreign manufacturers for fiscal 2007 were made in U.S. Dollars. The balance of our net sales are denominated in Chinese Renminbi, or RMB. The exchange rate for the RMB to the U.S. Dollar has been an average of 7.7 RMB and 7.4 RMB per U.S. Dollar for the fiscal year ended September 30, 2007 and the three months ended December 31, 2007, respectively. Transactions in RMB represent approximately 4% of total net sales from foreign customers for the fiscal year ended September 30, 2007 and the three months ended December 31, 2007. In July 2005, the People’s Bank of China, or PBOC, terminated the fixed exchange rate between the RMB and the U.S. Dollar, adjusted the exchange rate from 8.3 to 8.1 and established a 0.3% maximum daily appreciation limit against the U.S. Dollar. However, during the third quarter of fiscal 2007, the PBOC increased the rate at which the RMB/U.S. Dollar exchange can fluctuate, which resulted in a greater RMB appreciation. We expect the RMB appreciation against the U.S. Dollar to continue to increase in the future, which will result in an increase in the cost of our business expenses in China due to the movement of the exchange rates. 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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Liquidity and Capital Resources

Our principal sources of liquidity have been cash provided by operations and borrowings under our various credit facilities. Our principal uses of cash have been to finance working capital, facility expansions and capital expenditures. We anticipate these uses, will continue to be our principal uses of cash in the future. Cash and cash equivalents were $37.5 million at June 30, 2007 and $24.5 million at September 30, 2006.

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

During the nine months ended June 30, 2007, net income of $7,000, adjusted for depreciation and amortization, loss on equipment disposal, stock-based compensation expense and provision for doubtful accounts, generated $16.8 million of operating cash. This amount was increased by $18.0 million generated by working capital.

Changes in the principal components of working capital for the nine months ended June 30, 2007 were as follows:

Our principal investing and financing activities for the nine months ended June 30, 2007 were as follows:

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Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At June 30, 2007 and September 30, 2006, no amounts were outstanding under our loan agreements with SPDB and BC and zero and $4.0 million, respectively, were outstanding under our loan agreement with NLG. 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 based on our current borrowing level.

We derive a substantial portion of our sales outside of the United States. Approximately $340 million, or 95%, of total shipments to these foreign manufacturers for fiscal 2006 were made in U.S. Dollars. The balance of our sales are denominated in RMB. The exchange rate for the RMB to the U.S. Dollar has been an average of 8.0 RMB and 7.8 per U.S. Dollar for the fiscal year ended September 30, 2006 and the nine months ended June 30, 2007, respectively. Transactions in RMB represent approximately 5% and 2.7% of total net sales from foreign customers for the fiscal year ended September 30, 2006 and the nine months ended June 30, 2007, respectively. In July 2005, the People’s Bank of China, or PBOC, terminated the fixed exchange rate between the RMB and the U.S. Dollar, adjusted the exchange rate from 8.3 to 8.1, and established a 0.3% maximum daily appreciation limit against the U.S. Dollar. However, during the third quarter of fiscal 2007, the PBOC increased the rate at which the RMB/U.S. Dollar exchange rate can fluctuate, which resulted in a greater RMB appreciation during this quarter. We expect the RMB appreciation against the U.S. Dollar to continue to increase in the future, which will result in the increase in the cost of our business expenses in China due to the movement in the exchange rates. 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.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash provided by operations and borrowings under our various credit facilities. Our principal uses of cash have been to finance working capital, facility expansions and capital expenditures. We anticipate these uses, together with the uses described below if the Offer proceeds, will continue to be our principal uses of cash in the future. Cash and cash equivalents were $20.5 million at March 31, 2007 and $24.5 million at September 30, 2006.

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

In addition, if the Offer closes, it would likely significantly reduce our excess borrowing capacity, since the Offer could involve the payment of up to $241.3 million in cash (assuming WBL Corporation were to tender its MFS shares for stock consideration pursuant to the terms of the Offer), and we would be required to finance substantially all, or all, of such amount. If the Offer closes and the substantial debt of $241.3 million (assuming all stockholders except WBL Corporation tender for cash) is incurred, the combined company would have to manage substantial debt service payments. If the financial performance of the combined company was to continue to deteriorate, the debt service could result in the combined company not being able to continue as a going concern without restructuring the debt or additional capital.

During the six months ended March 31, 2007, net income of $6.7 million, adjusted for depreciation and amortization, income tax benefit related to stock option exercise, loss on equipment disposal, stock-based compensation expense, provision for doubtful accounts and loss on equity investment, generated $16.7 million of operating cash. This amount was decreased by $7.9 million used by working capital.

Changes in the principal components of working capital for the six months ended March 31, 2007 were as follows:

Our principal investing and financing activities for the six months ended March 31, 2007 were as follows:

Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At March 31, 2007 and September 30, 2006, no amounts were outstanding under our loan agreements with Shanghai Pudong Development Bank and Bank of China and $2.0 million and $4.0 million, respectively, was outstanding under our loan agreement with NLG. 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 based on our current borrowing level; however, if we make the Offer and it closes, we will be extremely vulnerable to interest rate risk in the future given the substantial debt we will likely incur.

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We derive a substantial portion of our sales outside of the United States. Approximately $340 million, or 95%, of total shipments to these foreign manufacturers for fiscal 2006 was made in U.S. Dollars. The balance of our sales is denominated in RMB. The exchange rate for the RMB to the U.S. Dollar has been an average of 8.0 RMB and 7.8 per U.S. Dollar for the fiscal year ended September 30, 2006 and the six months ended March 31, 2007, respectively. Transactions in RMB represent approximately 5% and 1.1% of total net sales from foreign customers for the fiscal year ended September 30, 2006 and the six months ended March 31, 2007, respectively. 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.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash provided by operations and borrowings under our various credit facilities. Our principal uses of cash have been to finance working capital, facility expansions and capital expenditures. We anticipate these uses, together with the uses described below if the Offer proceeds, will continue to be our principal uses of cash in the future. Cash and cash equivalents were $21.9 million at December 31, 2006 and $24.5 million at September 30, 2006. Short term investments were $19.3 million at December 31, 2006 and September 30, 2006.

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

In addition, the Offer, if made and closed, would likely significantly reduce our excess borrowing capacity, since the Offer could involve the payment of up to $241 million in cash (assuming WBL Corporation were to tender its MFS shares for stock consideration pursuant to the terms of the Offer), and we would be required to finance substantially all, or all, of such amount. If the Offer was to be completed and the substantial debt of $241 million (assuming all stockholders except WBL Corporation tendered for cash) was incurred, the combined company would have to manage substantial debt service payments. If the financial performance of the combined company was to continue to deteriorate, the debt service could result in the combined company not being able to continue as a going concern without restructuring of the debt or additional capital.

During the three months ended December 31, 2006, net income of $3.7 million, adjusted for depreciation and amortization, loss on equipment disposal, stock-based compensation expense and provision for doubtful accounts, generated $8.6 million of operating cash. This amount was decreased by $1.5 million used to meet working capital requirements.

Changes in the principal components of working capital for the three months ended December 31, 2006 were as follows:

Our principal investing and financing activities for the three months ended December 31, 2006 were as follows:

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Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At December 31 and September 30, 2006, no amounts were outstanding under our loan agreements with Shanghai Pudong Development Bank and Bank of China and $4.0 million was outstanding under our loan agreement with NLG. 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 based on our current borrowing level. We derive a substantial portion of our sales outside of the United States. Approximately $340 million, or 95%, of total shipments to these foreign manufacturers for fiscal 2006 was made in U.S. Dollars. The balance of our sales is denominated in RMB. The exchange rate for the RMB to the U.S. Dollar has been an average of 8.0 RMB and 7.8 per U.S. Dollar for the fiscal year ended September 30, 2006 and the three months ended December 31, 2006, respectively. Transactions in RMB represent approximately 5% and 0.4% of total net sales from foreign customers for the fiscal year ended September 30, 2006 and the three months ended December 31, 2006, respectively. 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. In addition, if we are required to make and complete the Offer, given the substantial debt we likely will incur, we will be extremely vulnerable to interest rate risk in the future.