##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(MARK ONE)

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


For the fiscal year ended August 29, 2003
OR

o 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 001-11098

SOLECTRON CORPORATION
(Exact name of Registrant as Specified in its Charter)

Delaware
    
    94-2447045(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification Number)


777 Gibraltar DriveMilpitas, California 95035
(Address of Principal Executive Offices including Zip Code)(408) 957-8500
(Registrants Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:7.25% Adjustable Conversion-Rate Equity Security Units
3.25% Liquid Yield Option Notes due 2020
2.75% Liquid Yield Option Notes due 2020
Common Stock
Securities registered pursuant to Section 12(g) of the Act:None

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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. o

Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes þ No o

The aggregate market value of the Registrants Common Stock held by
non-affiliates on October 31, 2003 was approximately $2,878 million (based upon
the last reported price of the Common Stock on the New York Stock Exchange on
such date). Shares of Common Stock held by each officer, director, and holder
of 5% 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.

As of October 31, 2003, there were approximately 836 million shares of the
Registrants common stock outstanding including approximately 31 million shares
of Solectron Global Services Canada, Inc. which are exchangeable on a
one-to-one basis for the Registrants common stock.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrants definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on January 7, 2004, which Solectron will file with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year covered by this report, is incorporated by reference in Part III of this
Form 10-K to the extent stated herein.





---

TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | ITEM 1: BUSINESS                                                                             
|              | ITEM 2: PROPERTIES                                                                           
|              | ITEM 3: LEGAL PROCEEDINGS                                                                    
|              | ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II      
|              | ITEM 5: MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS            
|              | ITEM 6: SELECTED FINANCIAL DATA                                                              
|              | ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|              | ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|              | ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 
|              | ITEM 9a. CONTROLS AND PROCEDURES                                                             
|PART III     
|              | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|              | ITEM 11: EXECUTIVE COMPENSATION                                                              
|              | ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|              | ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|              | ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES                                              
|PART IV      
|              | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES   
|EXHIBIT 3.2  
|EXHIBIT 10.2 
|EXHIBIT 10.12
|EXHIBIT 10.15
|EXHIBIT 10.16
|EXHIBIT 12.1 
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



---



##### Table of Contents



SOLECTRON CORPORATION

2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

PagePart I
    
    
    
    3Item 1.
    
    Business
    
    3Item 2.
    
    Properties
    
    10Item 3.
    
    Legal Proceedings
    
    12Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    13Part II
    
    
    
    14Item 5.
    

Market
for the Registrants Common Equity and Related Stockholder Matters
    
    14Item 6.
    
    Selected Financial Data
    
    15Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    17Item 7a.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    38Item 8.
    
    Financial Statements and Supplementary Data
    
    38Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    75Item 9a.
    
    Controls and Procedures
    
    75Part III
    
    
    
    75Item 10.
    
    Directors and Executive Officers of the Registrant
    
    75Item 11.
    
    Executive Compensation
    
    75Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    75Item 13.
    
    Certain Relationships and Related Transactions
    
    75Item 14.
    
    Principal Accountant Fees and Services
    
    76Part IV
    
    
    
    76Item 15.
    

Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    76Signatures
    
    
    
    77


Solectron and the Solectron logo are registered trademarks of Solectron
Corporation. All other names are trademarks and/or registered trademarks of
their respective owners.

2



---



##### Table of Contents









PART I







ITEM 1: BUSINESS

The information contained in this business overview is qualified in its
entirety by, and is subject to, the detailed information, consolidated
financial statements and notes thereto contained within this document under the
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Financial Statements and Supplementary Data sections.

Overview

We provide electronics supply chain services to original equipment
manufacturers (OEMs) around the world. These companies contract with us to
build their products or to obtain services related to product development,
manufacturing and post-production requirements. In most cases, we build and
service products that carry the brand names of our customers.

We serve several segments of the electronics products and technology markets.
Much of our business is related to the following products:



| |  | Networking equipment such as routers and switches that move traffic across the Internet;
|- |  | ----------------------------------------------------------------------------------------



| |  | Telecommunications equipment;
|- |  | -----------------------------



| |  | Computing equipment, including workstations, notebooks, desktops, servers, storage systems and peripherals;
|- |  | -----------------------------------------------------------------------------------------------------------



| |  | Consumer products such as high-end cellular phones, set-top boxes, personal/handheld communications devices and home game
consoles;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  | Automotive electronics systems and components, including audio and navigation systems, system control modules, pressure
sensors and switches, and actuators and body electronics;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Semiconductor and test equipment, including wafer fabrication equipment controls, process automation equipment and home
appliance electronics controls;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Medical products such as X-ray equipment, ultrasound fetal monitors, MRI scanners, blood analyzers, ECG patient monitors,
surgical robotic systems, HPLCs, spectrometers, and laser surgery equipment; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other electronics equipment and products.
|- |  | -----------------------------------------

Our customers include many of the worlds leading technology companies, such as
Cisco Systems, Nortel Networks, Ericsson, Sun Microsystems, IBM, Apple, Sony,
Lucent Technologies and Hewlett-Packard.

We have a comprehensive range of services designed to meet customer supply
chain needs throughout the product life cycle. Our services include:



| |  | Collaborative design support and design for manufacturability;
|- |  | --------------------------------------------------------------



| |  | New product introduction (NPI) engineering services;
|- |  | ----------------------------------------------------



| |  | Supply chain design and sourcing;
|- |  | ---------------------------------



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



| |  | Product testing;
|- |  | ----------------



| |  | Full product manufacturing, including printed circuit board assembly (PCBA) and complete product systems assembly;
|- |  | ------------------------------------------------------------------------------------------------------------------



| |  | Materials purchasing and supply base management;
|- |  | ------------------------------------------------



| |  | Product fulfillment services, including packaging, distribution and installation;
|- |  | ---------------------------------------------------------------------------------



| |  | Product repair and warranty service; and
|- |  | ----------------------------------------



| |  | End-consumer technical support and customer relationship management (CRM) services.
|- |  | -----------------------------------------------------------------------------------

3



---



##### Table of Contents



We bring these services together to provide integrated solutions for customers
in electronics and technology markets. By utilizing our services, customers
gain cost, time and quality advantages that help improve their competitiveness
and enable them to focus on their core competencies of sales, marketing, and
research and development. More specifically, we provide the following benefits
to OEMs:

Faster Time-to-Market: Due to intense competitive pressures in the electronics
industry, shorter product life cycles require OEMs to reduce the time needed to
bring a product to market. OEMs can reduce time-to-market by using our
services, expertise and infrastructure. For example, OEMs can partner with us
during the stages of product design and product improvement to expedite the
transition into large volume production in our manufacturing centers.

Lower Costs: OEMs that work with us can realize significantly lower costs as a
result of several factors: our ability to perform services in the most
value-adding, cost-effective locations around the world; our ability to pool
purchasing across our customer base; our ability to produce multiple products
within a given facility; and our flexibility to adapt our operations to
changing customer demand.

Better Asset Utilization: By using us to provide supply chain services, OEMs
can lower their investment in property, plant and equipment, as well as systems
and infrastructure. This lower investment can lead to better asset utilization
and higher return on assets for our OEM customers.

Focused Resource Allocation: As a result of market demands, many OEMs focus
their resources on activities that add the greatest value. By offering
comprehensive electronics supply chain services, we allow OEMs to focus on
their own core competencies, such as next-generation product development,
marketing and sales.

Leading Manufacturing and Service Technologies: Electronic products,
electronics manufacturing and service technologies have become increasingly
sophisticated and complex. This makes it difficult for OEMs to maintain the
necessary technological expertise to manufacture and repair products
internally. OEMs are motivated to work with us to gain access to our expertise
in interconnect, test, process, repair and other technologies, such as
lead-free manufacturing processes.

Cost-Effective Global Capabilities: We have facilities in Asia/Pacific, Europe,
North America and Latin America. Through our global presence, we perform
electronics supply chain services in locations to best address our customers
objectives, including cost containment; compliance with local content
regulations; proximity to end markets and end consumers; and the elimination or
reduction of expensive freight costs, tariffs and time-consuming customs
clearances.

We have benefited from increased worldwide market acceptance of, and reliance
upon, the outsourcing of electronics manufacturing and supply chain services by
electronics OEMs. Many OEMs in the electronics and other industries outsource
electronics manufacturing and related supply chain services as part of their
business strategies.

Industry Overview

OEMs in electronics and technology markets around the world are seeking to
increase their competitiveness by expanding their utilization of Electronic
Manufacturing Service (EMS) companies. Faced with shorter product life cycles,
more complex technology and market pressures to reduce costs and product ramp
time, OEMs are turning to EMS providers for a broader range of electronics
supply chain services. Outsourcing enables OEMs to concentrate on their core
competencies of product research and development, marketing and sales.

Strategy

Our strategy is to offer our customers significant competitive advantages by
having them outsource to us their electronics supply chain service needs. We
accomplish this by offering value-added solutions based on our broad and
integrated range of services. As a result, we create compelling outsourcing
solutions that our customers can utilize in whole or in part.

Capitalize on Industry Growth Trends
Our business benefits from the greater OEM acceptance of, and reliance upon,
outsourced manufacturing and supply chain management services. To meet the
growing outsourcing needs of OEMs, we offer a wide range of services, including
collaborative design support, manufacturing and extensive after-sales technical
support, repair and CRM services.

Concentrate on Core and Emerging Markets
We are focused on extending our leadership and capabilities in our core
markets, which include the telecommunications, networking, and computing and
storage industries. The products we manufacture  and customers we serve  in
these markets represent a substantial portion of our revenues and reflect our
strong expertise in these areas. In addition, we participate in new
growth markets  such as the consumer, automotive, industrial, and medical
industries  where we can leverage our core strengths and believe we can earn
attractive returns.

4



---



##### Table of Contents



Uncompromising Quality
Quality is central to our culture. We strive to use and continuously improve
our consistent processes, and we use several quality improvement and
measurement techniques to monitor our performance. We have received many
service and quality awards from internationally recognized quality
organizations and customers. We have received several awards recently,
including recognition from Cisco Systems, Sun Microsystems, NEC and Stratus
Technologies. In addition, substantially all of our manufacturing facilities
are certified under ISO international quality standards for design,
manufacturing and distribution management systems.

Efficiency and Cost Competitiveness
We believe that a fundamental requirement for sustained growth and
profitability in the EMS industry is to be an efficient and cost-competitive
manufacturer. To this end, we are focused on driving efficiency throughout our
organization, and have undertaken several initiatives to reduce costs and
increase our competitiveness. This includes an initiative to implement Six
Sigma Lean quality and manufacturing methods throughout the company, beginning
with our manufacturing operations. We believe the implementation of these
methods will assist us to eliminate non-value adding activities and increase
production efficiencies, resulting in a significant competitive advantage.

Strategic Relationships
We seek to establish long-term strategic relationships with major and emerging
OEM leaders in diverse electronics and technology industry segments. Our goal
is to strengthen these relationships by delivering value through integrated
supply chains, from design to full product manufacturing and distribution, to
after-sales services such as product failure analysis and repair.

Align Services to Improve Customer Supply Chains
We believe that, as technologies become more complex and as product life cycles
continue to shorten, OEMs will outsource more of their electronics supply chain
needs. As they do this, we believe they will look to a partner that can provide
these services on a seamless basis. As a result, we are aligning our services
to improve OEM supply chains and deliver lower costs, higher quality, improved
flexibility and faster time-to-market. We believe that this will position us to
be a primary provider to OEMs by delivering integrated supply chains that add
value to their businesses.

Advanced Technology Processes
We offer customers access to advanced technology processes, including design,
NPI and repair expertise. Our involvement with customers products during the
early design stages can help reduce cost and product time-to-market, improve
manufacturability and quality, and enables a fast ramp to volume manufacturing.
We will use our design capabilities to partner with our customers, not compete
with them. We have developed common tools for industrial, electrical,
mechanical and manufacturing applications designed to shorten the design cycle
and maintain cost effectiveness. Our repair expertise also spans a wide range
of products and advanced technologies, from the system to the component level.

Diverse Geographic Operations
We locate our operations based on several considerations including where we can
generate manufacturing efficiencies and lower total costs, proximity to
customers, proximity to end-markets and end-users, and where we can
cost-effectively generate the greatest value. We have operations in the
Asia/Pacific region, the Americas and Europe. We believe our facilities in
these regions enable us to best meet our customers requirements.

Business Units

In late fiscal 2003, we began shifting from our business unit structure to a
functionally aligned organizational structure. Upon completion in early fiscal
2004, customer-oriented functions will be organized by key activities important
to our customers and our overall business  Worldwide Design and Engineering
Services; Worldwide Operations (which includes logistics, manufacturing, and
post-manufacturing services); Worldwide Strategy and Marketing; and Worldwide
Sales and Account Management.

In addition to our organizational realignment initiated in late fiscal 2003, we
also initiated a portfolio review of our operations to identify those that are
not viewed as synergistic to our new strategy. During the fourth quarter of
fiscal 2003, we committed to a plan to divest some such operations. Each business
unit/operating segment discussed below includes one such operation that is
treated as a discontinued operation. Business unit numerical data provided in
the following discussion excludes these operations, which are classified as
discontinued operations in our consolidated financial statements. However,
discussions of the nature of services provided by each business unit and in
each geography include the discontinued operations in order to maintain
confidentiality during the divestiture process related to these operations. It
is also anticipated that as plans to divest certain additional operations are
implemented during fiscal 2004, those operations will also qualify for
classification as discontinued operations.

Through August 31, 2003, we remained organized into four business units as
follows:

5



---



##### Table of Contents



Global Operations

Global Operations provides customers with pre-manufacturing, manufacturing,
materials management and fulfillment services for printed circuit boards,
backplanes, system enclosures and complete electronic products. In fiscal 2003,
Global Operations generated sales from continuing operations of $8.8 billion,
or 79.7% of our total net sales.

The core function of Global Operations is to provide manufacturing services to
meet a wide range of customer needs, from large-volume/low-complexity products
to highly complex configure-to-order/build-to-order systems. These
manufacturing services include systems and product testing, PCBA, sub-systems
assembly, configure-to-order and build-to-order systems assembly; and product
installation, as well as related logistical support. Our advanced
manufacturing technology processes, failure analysis and test capabilities can
help our customers products reach the market faster and at lower cost. Our
materials management and fulfillment services seek to ensure that the necessary
parts and products are in the right place at the right time to meet customer
requirements. Materials management includes the planning, purchasing,
expediting, warehousing and preparation of components and materials required to
assemble products or portions of products. Through product fulfillment, we
manufacture, package and ship the products directly to our customers or their
customers.

Technology Solutions

Technology Solutions provides modular memory and embedded systems design and
related manufacturing services. Within Technology Solutions, SMART Modular
Technologies (SMART) and Force Computers design, manufacture, and market a wide
range of flash and DRAM memory modules, input/output (I/O), and embedded
computer products to OEM customers that incorporate those products into their
own systems. In fiscal 2003, Technology Solutions generated sales from
continuing operations of $1.3 billion, or 12.1% of our total net sales.

Through SMART, Technology Solutions offers memory and communications products
for OEMs that demand proven technology, quality and logistical support. Through
Force Computers, Technology Solutions offers a variety of embedded computer
boards and systems serving the telecom/datacom, military and aerospace,
medical, and industrial markets.

Global Services

Global Services groups our post-manufacturing services that provide solutions
for products from when they are put in service until they are removed from the
market. These services include: product failure analysis and repair; upgrades;
re-manufacturing and maintenance through factory and fast-hub service centers
located around the world; help-desk support through customer call centers for
end users; logistics and parts management including management of strategic
stocking locations; returns processing; warehousing; engineering change
management; and end-of-life manufacturing. In fiscal 2003, Global Services
generated sales from continuing operations of $657.1 million, or 6.0% of our
total net sales.

MicroSystems

MicroSystems was established as a business unit upon the completion of our
acquisition of C-MAC Industries in fiscal 2002. MicroSystems is involved in
every stage of the fabrication of hybrid microcircuits from design to
manufacturing. It uses state-of-the-art technologies to provide integrated
solutions for applications as varied as optical transceivers and pressure
sensors. Customer needs for high functionality and miniaturization are
supported by MicroSystems low-temperature co-fired ceramic (LTCC) operations.
The ceramic-based technologies find broad application within the automotive,
military, aerospace and telecommunications markets. In fiscal 2003,
MicroSystems generated sales from continuing operations of $238.2 million, or
2.2% of total net sales.

A second core technology is based on quartz crystals and frequency products.
MicroSystems offers a full range of products and technologies from low-end
oscillators to highly sophisticated TCXOs, OCXOs and SAWs. In addition, state
of the art ceramic-based and micro-machined silicon (MEM) sensors satisfy a
comprehensive range of applications in automotive, industrial and aerospace
applications.

Global Footprint

Our footprint  or facilities location  strategy is to locate specific
services and capabilities where we believe they can generate the greatest value
at the lowest total cost. These decisions are made based on low-cost
manufacturing options, proximity to our customers and prospective customers,
proximity to end markets and end users, and the location of specific resources
needed to deliver value.

We have shifted our manufacturing capacity to lower-cost locations over the
past few years  Mexico, Eastern Europe and, particularly, Asia. This reflects
our belief that OEM customers will be driven by the cost advantages associated
with these locations, among other factors, in the coming years. As of August
31, 2003, approximately 70% of our manufacturing capacity in terms of headcount
and equipment, and 50% of our manufacturing capacity in terms of square
footage, were in these low-cost regions.

6



---



##### Table of Contents



We locate our other services based on how best to add value and to gain access
to pools of people with the skills and experience we need to create solutions
and deliver world-class services. For example, we have major design and product
launch centers in California and Western Europe. This enables us to draw from a
highly skilled labor pool, and it gives us close proximity and immediate access
to interact with customers at critical phases of the new product life cycle.

For our after-sales services, we operate repair and warranty centers based on
proximity to transportation infrastructure and proximity to end users. We also
operate customer contact centers in various locations that provide qualified
workers skilled at handling end-user inquiries.

Our ability to serve our customers effectively also depends upon our materials
management and logistic capabilities. Our locations are served by a materials
organization consisting of multiple groups across multiple locations, and
backed by information technology. The materials group is responsible for
ordering, tracking and ensuring that the correct parts are delivered to the
correct locations on a just-in-time basis to meet our customers needs.

Americas

Our North American facilities are increasingly focused on higher value
activities, such as a variety of design services, technology development, NPI,
after-sales services, and manufacturing low-volume, highly complex products.
Our facilities in Latin America provide supply-chain services that support the
North and Latin American markets. The Latin American regions proximity to
North America is useful for production where low-cost and time-to-market,
and/or geographical diversity are particular concerns for OEMs.

Global Operations operates facilities that provide electronics design,
manufacturing and fulfillment services in the U.S., Canada, Mexico and Brazil.
Technology Solutions operates facilities in the U.S., Canada, Puerto Rico and
Mexico that provide design and manufacturing services for technology building
block products, such as memory modules and embedded systems. Global Services
provides electronics product repair and related technical support through
service and call centers in the U.S., Canada and Mexico. MicroSystems operates
facilities in the U.S. and Canada for the design and production of advanced
electronic components, subsystems and systems.

Since fiscal 2001, we have reduced our overall manufacturing and call center
presence in North America as a result of our restructuring activities and our
strategic shift of manufacturing capacity toward lower-cost regions.

Asia/Pacific

This region is a significant end-market for our customers, and our facilities
in Asia/Pacific are located to take advantage of the regions well-developed
supply base, transportation and logistics infrastructure, educated workforce,
and lower cost.

Global Operations provides low-cost, mid- to high-volume electronics
manufacturing and fulfillment at centers in China, Malaysia, and Indonesia. In
addition, the unit operates facilities in Japan, Singapore and Taiwan to
provide design, high-complexity electronics manufacturing and fulfillment.
Technology Solutions operates a center for the development of technology
building block products in India, and a manufacturing facility in Malaysia.
Global Services operates electronics repair and technical support centers in
Australia, China, Japan and Singapore. MicroSystems operates facilities in
China and India for the design and production of advanced electronic
components, subsystems and systems.

Europe

Our locations in Western Europe are focused on providing high value services,
such as electronics design; NPI; high-complexity, low-volume manufacturing; and
repair. Our Eastern European locations provide low-cost, high-volume
electronics manufacturing services. Driven by our strategy and the general
economic downturn, we have streamlined our operations in Western Europe through our
restructuring actions.

Global Operations provides electronics design, manufacturing and fulfillment
services in France, Germany, Hungary, Romania, Sweden, Turkey and the United
Kingdom. Technology Solutions operates a center for the development of
technology building block products in the United Kingdom and manufacturing
facilities in Germany and Scotland. Global Services provides electronic repair
and technical support services at facilities in Belgium, France, Italy, the
Netherlands and the United Kingdom. MicroSystems operates facilities in
Belgium, Germany and the United Kingdom for the design and production of
advanced electronic components, subsystems and systems.

Sales and Marketing

Sales and marketing are integrated processes involving direct salespersons,
project managers and senior executives. We direct our sales resources and
activities at several management and staff levels within customer and
prospective customer companies. We also use independent sales representatives
in certain geographic areas. We receive unsolicited inquiries resulting from
word of mouth, from advertising and public relations activities, and through
referrals from current customers. We evaluate these opportunities against our
customer selection criteria and assign direct salespersons or independent sales
representatives, as appropriate.

7



---



##### Table of Contents



See Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations, for customer sales information.

Backlog

Backlog consists of contracts or purchase orders with delivery dates scheduled
within the next 12 months. At August 31, 2003, our backlog was approximately
$1.7 billion, compared with backlog of approximately $1.6 billion at August 31,
2002. Because customers may cancel or reschedule deliveries, often with little
or no financial penalty, backlog is not a meaningful indicator of future
financial results.

Competition

The EMS industry comprises many companies, several of which have substantial
market share. We also face competition from current and prospective customers
that evaluate our capabilities against the merits of manufacturing products
internally. We compete with different companies depending on the type of
service or geographic area. We believe the primary basis of competition in our
targeted markets is proven execution, reliability, manufacturing technology,
flexibility, continuity of supply, quality, responsiveness, value-adding
services, ability to serve global customers and price. To remain competitive,
we must continue to provide technologically advanced services; deliver
solutions that integrate our range of services; maintain high quality levels;
offer flexible delivery schedules; deliver finished products on a reliable
basis; and compete favorably on price.

Associates

As of August 31, 2003, we employed approximately 66,000 associates worldwide,
including approximately 13,000 temporary associates.

Patents and Trademarks

We hold certain United States and foreign patents and patent licenses relating
to certain of the processes and equipment used in our manufacturing technology,
as well as certain of the products which we have designed and
manufactured. In
addition, we have registered trademarks (service marks) in the United States
and various other countries throughout the world. Some of these patents and
trademarks are related to businesses which we expect to divest in fiscal 2004.

Although we do not believe that our trademarks, manufacturing processes,
patents or license rights to which we have access infringe on the intellectual
property rights of others, we cannot ensure that third parties will not assert
infringement claims against us in the future. If such an assertion were to be
made, it may become necessary or useful for us to enter into licensing
arrangements or to resolve such an issue through litigation. However, we cannot
ensure that such license rights would be available to us on commercially
acceptable terms or that any such litigation would be resolved favorably. Any
litigation could be lengthy and costly and, regardless of its outcome, could
materially harm our financial condition.

Environmental Matters

We are required to comply with local, state, federal and international
environmental laws and regulations relating to the treatment, storage, use,
discharge, emission and disposal of hazardous materials used in our
manufacturing and service processes. We are also required to comply with laws
and regulations relating to occupational safety and health, product take back
and product content and labeling. Failing to comply with these present and
future laws and regulations could restrict our ability to expand facilities, or
could require us to acquire costly equipment or to incur other significant
expenses to comply with environmental regulations, and could impair our
relations with customers. Moreover, to the extent we are found non-compliant
with any of these laws and regulations, we may incur substantial fines and
penalties. We are committed to maintaining compliance in all of our facilities
and to continuously improving our environmental practices.

We are also required to obtain and maintain environmental permits for many of
our facilities. These permits, which must be renewed periodically, are subject
to revocation if we violate environmental laws. There can be no assurance that
violations will not occur as a result of equipment failure, human error or
other causes. If a violation of environmental laws occurs, we could be held
liable for damages, fines and costs of remedial actions, and our permits could
be revoked. Any such revocation could require us to cease or limit production
at one or more of our facilities, and may adversely impact our results of
operations.

We have been, and in the future may be, held liable for remediation of sites
where our hazardous materials (or those of companies we have acquired) have
been disposed of. To date, these liabilities have not been substantial or
material to our business, financial condition and results of operations. We
believe, based on our current knowledge, that the cost of any groundwater or
soil clean-up that may be required at any of our facilities would not
materially harm our business, financial condition and results of operations.
However, it is costly to remediate contamination, and there can be no assurance
that any future remediation costs would not harm our business, financial
condition and results of operations.

8



---



##### Table of Contents



Additional Information

Our Internet address is http://www.solectron.com. We make available on our
Internet website, free of charge, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) of the Securities Exchange
Act of 1934 as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission.
Information accessible through our website does not constitue a part of, and is
not incorporated into, this annual report on Form 10-K or into any of our other
filings with the Securities and Exchange Commission.

Solectron was first incorporated in California in August 1977 and was
reincorporated in Delaware in February 1997. Our principal executive offices
are at 847 Gibraltar Drive, Milpitas, California, 95035. Our telephone number
is (408) 957-8500.

9



---



##### Table of Contents









ITEM 2: PROPERTIES

The table below lists our major facilities leased or owned as of August 31,
2003:

Location
    
    Square Footage
    
    Leased/Owned
    
    Primarily UsedGlobal OperationsMilpitas, Fremont; California
    
    
    542,000
    
    
    leased
    
    PCBA & Systems IntegrationCharlotte, North Carolina
    
    
    456,000
    
    
    owned
    
    PCBA & Systems IntegrationResearch Triangle Park, North Carolina
    
    
    473,000
    
    
    183,000 leased/290,000 owned
    
    Systems IntegrationColumbia, South Carolina
    
    
    313,000
    
    
    leased
    
    Systems IntegrationAustin, Texas
    
    
    322,000
    
    
    leased
    
    PCBA & Systems IntegrationSherbrooke, Quebec, Canada
    
    
    121,000
    
    
    owned
    
    Systems IntegrationSt. Laurent, Quebec, Canada
    
    
    112,000
    
    
    leased
    
    WarehouseKanata, Ontario, Canada
    
    
    185,000
    
    
    71,000 leased/114,000 owned
    
    PCBA & Systems IntegrationDollard des Ormeaux, Quebec, Canada
    
    
    165,000
    
    
    leased
    
    Metal FabricationWinnipeg, Manitoba, Canada
    
    
    94,000
    
    
    owned
    
    PCBA & Systems IntegrationGuadalajara, Mexico
    
    
    632,000
    
    
    owned
    
    PCBA & Systems IntegrationJaguariuna, Hortolandia; Brazil
    
    
    282,000
    
    
    49,000 leased/233,000 owned
    
    PCBA & Systems IntegrationBordeaux, France
    
    
    190,000
    
    
    leased
    
    PCBA & Systems IntegrationHerrenberg, Germany
    
    
    110,000
    
    
    owned
    
    PCBA & Systems IntegrationBudapest, Hungary
    
    
    293,000
    
    
    owned
    
    Systems IntegrationCarrickfergus, Northern Ireland
    
    
    116,000
    
    
    leased
    
    WarehouseTimisoara, Romania
    
    
    278,000
    
    
    owned
    
    PCBA & Systems IntegrationDunfermline, Scotland
    
    
    164,000
    
    
    owned
    
    PCBA & Systems IntegrationOstersund, Sweden
    
    
    280,000
    
    
    owned
    
    PCBA & Systems IntegrationSuzhou, China
    
    
    583,000
    
    
    owned
    
    PCBA & Systems IntegrationShanghai, China
    
    
    372,000
    
    
    leased
    
    PCBA & Systems IntegrationShenzhen, China
    
    
    230,000
    
    
    owned
    
    PCBA & Systems IntegrationBatam, Indonesia
    
    
    137,000
    
    
    leased
    
    PCBA & Systems IntegrationIbaraki, Japan
    
    
    137,000
    
    
    leased
    
    PCBA & Systems IntegrationNakaniida, Japan
    
    
    379,000
    
    
    owned
    
    PCBA & Systems IntegrationPenang, Malaysia
    
    
    778,000
    
    
    31,000 leased/747,000 owned
    
    PCBA & Systems IntegrationSingapore
    
    
    370,000
    
    
    281,000 leased/89,000 owned
    
    PCBA, Systems Integration & Metal FabricationKaohsiung, Taiwan
    
    
    136,000
    
    
    owned
    
    PCBA & Systems IntegrationJohor, Malysia
    
    
    125,000
    
    
    owned
    
    PCBA & Systems IntegrationOthers
    
    
    286,000
    
    
    189,000 leased/97,000 owned
    
    Metal Fabrication, Design & Engineering, Metal Stamping & Backplain Mfg, PCBA & Systems Integration, AdministrationTotal
    
    
    8,661,000Technology SolutionsAguadilla, Puerto Rico
    
    
    164,000
    
    
    leased
    
    Memory Mfg & EngineeringFremont, California
    
    
    130,000
    
    
    leased
    
    Memory Mfg & EngineeringMunich, Germany
    
    
    276,000
    
    
    leased
    
    Boards, Systems & EngineeringOthers
    
    
    178,000
    
    
    leased
    
    Memory Mfg, Design & EngineeringTotal
    
    
    748,000


10



---



##### Table of Contents



Location
    
    Square Footage
    
    Leased/Owned
    
    Primarily UsedGlobal ServicesLincoln, California
    
    
    405,000
    
    
    leased
    
    Systems Repair & RefurbishMilpitas, California
    
    
    253,000
    
    
    leased
    
    Systems Repair & RefurbishResearch Triangle Park, North Carolina
    
    
    323,000
    
    
    leased
    
    Systems Repair & RefurbishAustin, Texas
    
    
    180,000
    
    
    leased
    
    Systems Repair & RefurbishMemphis, Tennessee
    
    
    275,000
    
    
    leased
    
    Systems Repair & RefurbishLouisville, Kentucky
    
    
    300,000
    
    
    leased
    
    Systems Repair & RefurbishBeaverton, Oregon
    
    
    93,000
    
    
    leased
    
    Call CenterBelleville, Ontario, Canada
    
    
    87,000
    
    
    leased
    
    Call CenterNewmarket, Ontario, Canada
    
    
    185,000
    
    
    leased
    
    Systems Repair & RefurbishCape Breton, Nova Scotia, Canada
    
    
    100,000
    
    
    leased
    
    Call CenterChilliwack, BC, Canada
    
    
    93,000
    
    
    leased
    
    Call CenterLondon, Ontario, Canada
    
    
    84,000
    
    
    leased
    
    Call CenterBordeaux, France
    
    
    123,000
    
    
    leased
    
    Systems Repair & RefurbishCwmcarn, Wales
    
    
    102,000
    
    
    owned
    
    Systems Repair & RefurbishSydney, Australia
    
    
    133,000
    
    
    leased
    
    Systems Repair & RefurbishOthers
    
    
    612,000
    
    
    545,000 leased/67,000 owned
    
    Systems Repair & Refurbish, Call CenterTotal
    
    
    3,348,000MicroSystemsMoorpark, California
    
    
    279,000
    
    
    leased
    
    Sensor Design & ManufactureRonse, Belgium
    
    
    90,000
    
    
    owned
    
    Design & Manufacture Hybrid MicrocircuitsWest Palm Beach, Florida
    
    
    100,000
    
    
    leased
    
    Design & Manufacture Hybrid MicrocircuitsGreat Yarmouth, England
    
    
    82,000
    
    
    owned
    
    Design & Manufacture Hybrid MicrocircuitsOthers
    
    
    326,000
    
    
    135,000 leased/191,000 owned
    
    Design & Manufacture Oscillators and Hybrid Microcircuits, Automotive Mechatronics, Frequency Products & Quartz Crystal Mfg, Resale Frequency Control Products, Sensor Design & Mfg, Sales OfficeTotal
    
    
    877,000CorporateMilpitas, California
    
    
    169,000
    
    
    leased
    
    HeadquartersSan Jose, California
    
    
    93,000
    
    
    leased
    
    AdministrationOther
    
    
    20,000
    
    
    leased
    
    AdministrationTotal
    
    
    282,000Grand total
    
    
    13,916,000


11



---



##### Table of Contents









ITEM 3: LEGAL PROCEEDINGS

We are from time to time involved in various litigation and legal matters,
including those described below. By describing the particular matters set forth
below, we do not intend to imply that the Company or its legal advisors have
concluded or believe that the outcome of any of those particular matters is or
is not likely to have a material adverse impact upon our business or financial
condition.

On September 19, 2002, one of our former employees filed a complaint against us
in the Superior Court of the State of California, Santa Clara County, asserting
two claims for wrongful termination. The case is encaptioned Ronald Sorisho v.
Solectron Corporation et al., Case No. CV811243. In the complaint, plaintiff
alleges that he was wrongfully terminated by us in supposed retaliation for his
alleged efforts to ensure that we timely recognized a charge for excess,
obsolete and slow moving inventory in the Technology Solutions business unit.
Plaintiff seeks compensatory damages in an amount not less than $2.5 million
as well as punitive damages. We believe Mr. Sorishos claims of wrongful
termination are without merit and we intend to vigorously defend ourselves. We
filed a motion with the court challenging the sufficiency of Mr. Sorishos
complaint and, in response to this motion, Mr. Sorisho filed an amended
complaint in which he dropped one of his two original wrongful termination
claims, but added a new claim for purported defamation based upon statements
attributed to us in a news article regarding Mr. Sorishos allegations against
us. We tendered the defense of the defamation claim to our insurance carrier,
and the insurance carrier has assumed the defense of the defamation claim,
subject to a reservation of rights. We are also continuing to vigorously defend
against Mr. Sorishos wrongful termination claim.

On March 6, 2003, a putative shareholder class action lawsuit was filed against
us and certain of our officers in the United States District Court for the
Northern District of California alleging claims under Section 10(b) and 20(a)
of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder.
The case is entitled Abrams v. Solectron Corporation et al., Case No. 03-0986
CRB. The complaint alleged that the defendants issued false and misleading
statements in certain of our press releases and SEC filings issued between
September 17, 2001 and September 26, 2002. In particular, plaintiff alleged
that the defendants failed to disclose and to properly account for excess and
obsolete inventory in our Technology Solutions business unit during the
relevant time period. Additional complaints making similar allegations were
subsequently filed in the same court and, pursuant to an order entered June 2,
2003, the Court appointed lead counsel and plaintiffs to represent the putative
class in a single consolidated action. The Consolidated Amended Complaint,
filed September 8, 2003, alleges an expanded class period of June 18, 2001
through September 26, 2002, and purports to add a claim for violation of
Section 11 of the Securities Act of 1933 on behalf of a putative class of
former shareholders of C-MAC Industries, Inc., who acquired Solectron stock
pursuant to the October 19, 2001 Registration Statement filed in connection
with Solectrons acquisition of C-MAC Industries, Inc. In addition, while the
initial complaints focused on alleged inventory issues at the Technology
Solutions business unit, the Consolidated Amended Complaint adds allegations of
inadequate disclosure and failure to properly account for excess and obsolete
inventory at our other business units. The complaint seeks an unspecified
amount of damages on behalf of the putative class. We intend to vigorously
defend against the consolidated lawsuit. There can be no assurance, however,
that the outcome of the lawsuit will be favorable to us or will not have a
material adverse effect on our business, financial condition and results of
operations. In addition, we may be forced to incur substantial litigation
expenses in defending this litigation.

On March 21, 2003, we, all of the current members of our Board of Directors,
and two former officers, were named as defendants in a shareholder derivative
lawsuit entitled Lifshitz v. Cannon et al.,Case No. CV815693, filed in the
Santa Clara County, California Superior Court. The plaintiff alleges that he
should be permitted to pursue litigation, purportedly for the benefit of the
Company, against the individual director and officer defendants for alleged
mismanagement and waste of corporate assets during the period from May 2001 to
the present, purported breaches of fiduciary duty, constructive fraud, abuse
of control, and alleged violations of the California Corporations Code by
certain of the individual defendants who sold some of their Solectron
stockholdings during the period from September 2001 through September 2002. On
May 19, 2003, Solectron and the individual defendants moved to dismiss the
Lifshitzcomplaint. In the meantime, two substantively identical derivative
lawsuits, entitled Schactner v. Cannon, et al., Case No. CV817112, and Nims v.
Cannon, et al.,Case No. CV817158, were filed in the same Court on May 14 and
May 15, respectively. Counsel for the plaintiffs in all three suits
subsequently advised the Court that they would be filing a Consolidated Amended
Complaint, and accordingly, defendants motion to dismiss was taken off
calendar pending the filing of the Consolidated Amended Complaint combining the
three lawsuits. On June 27, 2003, the plaintiffs served their Consolidated Amended
Complaint now alleging that since January of 1999 all of the current members
of Solectrons Board of Directors, as well as four former officers and
directors, purportedly breached their fiduciary duties and participated in or
permitted constructive fraud, unjust enrichment, and alleged violations of
the California Corporations Code. The consolidated complaint alleged an
unspecified amount of compensatory and punitive damages, and sought the
relinquishment of all profits realized by those individual defendants who sold
Solectron stock during the relevant period, together with statutory penalties
under California Corporations Code section 25402, which plaintiff alleged to be
applicable to those sales of Solectron stock. We moved to dismiss the
Consolidated Amended Complaint because we do not believe plaintiffs have
adequately alleged a basis for plaintiffs to appropriate for themselves the
duties of our Board of Directors under applicable Delaware law, and we believe
the consolidated complaint contains various factual errors and legal
deficiencies. On October 7, 2003, the California Superior Court granted our
motion to dismiss, but granted the plaintiffs an opportunity to try to cure the
deficiencies in their Consolidated Amended Complaint through a further amended
complaint. We anticipate that the plaintiffs will file a further amended
complaint within the next 90 days, after which we expect to seek dismissal of
that complaint because we do not believe the plaintiffs can show a sufficient
basis to allow them to appropriate for themselves the duties of our Board of
Directors under applicable Delaware law. We may be forced to incur substantial
litigation expenses in defending this litigation.

12



---



##### Table of Contents









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 the fiscal year covered by this report.

EXECUTIVE OFFICERS OF SOLECTRON

Our executive officers and their ages
as of November 14, 2003 are as follows:

Name
    
    Age
    
    PositionMichael R. Cannon
    
    51
    
    President and Chief Executive OfficerDavid Everett
    
    60
    
    Executive Vice President, Sales and Account ManagementPerry Hayes
    
    50
    
    Vice President, Treasurer and Investor RelationsWarren J. Ligan
    
    50
    
    Vice President and Corporate ControllerCraig London
    
    57
    
    Executive Vice President, Strategy and MarketingKevin OConnor
    
    45
    
    Senior Vice President, Human ResourcesMarc Onetto
    
    53
    
    Executive Vice President, OperationsKiran Patel
    
    55
    
    Executive Vice President and Chief Financial Officer


Mr. Cannon joined Solectron in January 2003 as president and CEO and as a
director on the company board of directors and has more than 25 years of
manufacturing and technology experience. Prior to joining Solectron, Mr.
Cannon was president, CEO and a director of Maxtor Corporation, a leading
global provider of hard-disk drives and storage systems. Previously, Mr.
Cannon was with IBMs Personal Storage Systems Division, where he held several
senior leadership positions, including vice president of the Systems Storage
business, vice president of product design and vice president of worldwide
operations. Prior to IBM, Mr. Cannon worked at several companies in the
disk-drive industry, including Control Data Corporations Imprimis Technology
spin-off. Mr. Cannon began his career at The Boeing Company, where he held
engineering and management positions in the Manufacturing Research and
Development Group. Mr. Cannon studied mechanical engineering at Michigan State
University and completed the Advanced Management Program at Harvard Business
School.

Mr. Everett has more than 20 years of sales and sales management experience in
high-tech businesses. As executive vice president, sales and account
management, Mr. Everett is responsible for generating revenues; forging strong
long-term customer relationships; developing major accounts; building
high-performance sales teams and sales skills development programs; and
creating a dynamic sales infrastructure. Prior to joining Solectron in 2003,
Mr. Everett was senior vice president and general manager of the Platform
Enabling Division of Phoenix Technologies, a publicly traded provider of
device-enabling and management software products for personal computers and
other digital products. In 1998 and 1999, he was president and chief executive
officer of Dynamic Pictures, a California-based start-up workstation graphics
company acquired by 3-D Labs. In 1993 and 1994, Mr. Everett was executive vice
president of sales and marketing for SyQuest Technology, and from 1984 to 1993
he was senior vice president, sales and corporate marketing, at Wyse
Technology. Mr. Everett earned a bachelors degree in business administration
from Michigan State University and attended the MBA program at Wayne State
(Mich.) University.

Mr. Hayes joined Solectron in 1999 with extensive financial and management
experience in the technology and banking industries. As vice president,
treasurer and investor relations, Mr. Hayes is responsible for financing and
capital market activities, as well as corporate liquidity and risk management.
He also manages Solectrons interaction with investors, institutional
shareholders, financial analysts and credit rating agencies. Prior to
Solectron, Mr. Hayes held senior treasury positions with Dell Computer and
AirTouch Communications, Inc. He also has more than 10 years of international
finance and banking experience as a vice president with Bank of America,
working out of the companys San Francisco, London and New York locations. Mr.
Hayes holds a masters degree in international business from the University of
South Carolina.

Mr. Ligan joined Solectron in 2000 with more than 20 years of extensive
financial and management experience. As vice president and corporate
controller, Mr. Ligan is responsible for corporate accounting; tax; external
reporting; financial planning and analysis; and the companys financial shared
services. Prior to this role, Mr. Ligan served as vice president, global
taxation, managing Solectrons global tax position. Mr. Ligan came to Solectron
from Chiquita Brands International, where as senior vice president and chief
financial officer he oversaw all corporate financial functions, as well as
purchasing and IT. Prior to becoming the companys chief financial officer, Mr.
Ligan served as vice president of taxation. Before Chiquita, Mr. Ligan has held
a variety of financial and tax management positions with the Monsanto Company
and its subsidiary G. D. Searle & Co., The Upjohn Company, Coopers & Lybrand,
and Football News Co. He began his career in the corporate accounting
department of Chrysler Corporation. Mr. Ligan holds a bachelors degree in
business administration from the Walsh College of Accountancy & Business
Administration, and a law degree from the Detroit College of Law. He also holds
a master of law degree in taxation from DePaul University.

13



---



##### Table of Contents



Mr. London joined Solectron in 2002 with nearly 30 years of sales, marketing
and engineering management experience in the electronics industry. As executive
vice president, strategy and marketing, Mr. London is responsible for strategic
planning and market development, as well as integrating and building the
companys design capabilities worldwide. Previously, Mr. London was executive
vice president and president of Solectrons Technology Solutions business unit.
Mr. London came to Solectron from Safeguard Scientifics, Inc., a diversified
information technology company that identifies, develops and operates emerging
technologies, where he served as an executive officer and managing director,
technology products. Previously, he was president and chief executive officer
of Diva Communications, Inc., a wireless communications equipment manufacturer.
Mr. London also held various executive management positions including sales,
service and operations in the United States and Asia during eight years with
Nortel Networks. His experience also includes various management positions at
Rockwell International Telecommunications, Electronic Systems Associates,
Pacific Telephone and AT&T. Mr. London holds a masters degree in business
administration from Pepperdine University and a bachelors degree in physics
from the University of California, Berkeley.

Mr. OConnor has more than 20 years of experience in human resources. As
senior vice president, human resources, he is responsible for Solectrons
corporate human resources program and infrastructure to support the needs of
the corporation. Before joining Solectron in October 2002, Mr. OConnor served
as senior vice president, global human resources for Axcelis Technologies.
Prior to Axcelis, Mr. OConnor served as vice president, global human resources
for Iomega Corporation. Before Iomega, he held a variety of senior human
resources roles for Dell Computer, Frito-Lay (a division of PepsiCo) and Sperry
Flight Systems. Mr. OConnor holds a degree in management with an emphasis in
industrial relations from Arizona State University.

Mr. Onetto has nearly 30 years of experience in supply-chain and operational
management, as well as finance and information systems. As executive vice
president, operations, Mr. Onetto is responsible for manufacturing, materials
management, quality, new product introduction, information technology,
logistics and repair operations. Mr. Onetto joined Solectron after a 15-year
career with GE. Most recently, he was vice president of GEs European
operations. From 1992 through 2002, he held several senior leadership positions
involving global supply chain, global quality/six sigma, global process
reengineering and chief information officer in GEs Medical Systems business.
Prior to GE, Mr. Onetto spent 12 years with Exxon Corporation, serving in
supply-operations, information systems and finance. Mr. Onetto holds a B.A. in
economics from the University of Lyon, France, an M.S. in engineering from
Ecole Centrale de Lyon and a masters degree in industrial administration from
Carnegie Mellon University, Pittsburgh.

Mr. Patel joined Solectron in 2001, and has extensive financial and senior
management experience. As executive vice president and chief financial
officer, Mr. Patel leads Solectrons finance, legal, investor relations and
business development activities. Mr. Patel came to Solectron after an extensive
career with Cummins Inc. In his 27 years at Cummins, he served in a broad
range of finance positions at the operating unit and corporate level. In 1996,
he became vice president and chief financial officer of the company and was
promoted to executive vice president in 1999. In 2000, Mr. Patel was the chief
financial officer of iMotors, an Internet-based value-added retailer of used
cars. Mr. Patel holds a masters degree in business administration from the
University of Tennessee, a bachelors degree in electrical engineering, and is
a certified public accountant.

There is no family relationship among any of the executive officers.







PART II







ITEM 5: MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Common Stock Information

The following table sets forth the quarterly high and low per share sales
prices of our common stock for the fiscal periods, as quoted on the New York
Stock Exchange under the symbol SLR.



14



---



##### Table of Contents



High
    
    LowFiscal 2003Fourth quarter
    
    $
    6.05
    
    
    $
    3.20Third quarter
    
    
    4.10
    
    
    
    2.84Second quarter
    
    
    5.14
    
    
    
    2.80First quarter
    
    
    4.86
    
    
    
    1.39Fiscal 2002Fourth quarter
    
    $
    8.11
    
    
    $
    2.56Third quarter
    
    
    10.68
    
    
    
    6.99Second quarter
    
    
    16.45
    
    
    
    8.09First quarter
    
    
    15.50
    
    
    
    9.91


We have not paid any cash dividends since inception and do not intend to pay
any cash dividends in the foreseeable future. Additionally, the covenants to
our financing agreements prohibit the payment of cash dividends. As
of October 31, 2003, there were 8,393 stockholders of record based on data
obtained from our transfer agent.







ITEM 6: SELECTED FINANCIAL DATA

The following selected historical financial information of Solectron has been
derived from the historical consolidated financial statements and should be
read in conjunction with the consolidated financial statements and the notes
included therein. For further discussion of factors that could affect
comparability of these financial statements, see the notes following the
information.



15



---



##### Table of Contents



Five-Year Selected Financial Highlights
(in millions, except per-share data)

Consolidated Statements of Operations Data:
    
    Years Ended August 312003
    
    2002
    
    2001
    
    2000
    
    1999Net Sales
    
    $
    11,014.0
    
    
    $
    11,571.2
    
    
    $
    18,569.0
    
    
    $
    14,137.5
    
    
    $
    9,669.2Operating income (loss)
    
    
    (2,399.1
    )
    
    
    (3,555.2
    )
    
    
    (114.1
    )
    
    
    704.2
    
    
    
    516.1Income (loss) from continuing operations
    
    
    (2,523.9
    )
    
    
    (3,621.1
    )
    
    
    (110.2
    )
    
    
    739.5
    
    
    
    514.5Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.5
    )
    
    
    Income (loss) from discontinued operations, net of tax
    
    
    (357.1
    )
    
    
    27.9
    
    
    
    (47.5
    )
    
    
    
    
    
    
    Net income (loss)
    
    $
    (3,462.0
    )
    
    $
    (3,110.2
    )
    
    $
    (123.5
    )
    
    $
    497.2
    
    
    $
    350.3Basic net income (loss) per share:Continuing operations
    
    $
    (3.75
    )
    
    $
    (4.02
    )
    
    $
    (0.12
    )
    
    $
    0.84
    
    
    $
    0.65Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    Discontinued operations
    
    
    (0.43
    )
    
    
    0.04
    
    
    
    (0.07
    )
    
    
    
    
    
    
    $
    (4.18
    )
    
    $
    (3.98
    )
    
    $
    (0.19
    )
    
    $
    0.83
    
    
    $
    0.65Diluted net income (loss) per share:Continuing operations
    
    $
    (3.75
    )
    
    $
    (4.02
    )
    
    $
    (0.12
    )
    
    $
    0.80
    
    
    $
    0.61Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Discontinued operations
    
    
    (0.43
    )
    
    
    0.04
    
    
    
    (0.07
    )
    
    
    
    
    
    
    $
    (4.18
    )
    
    $
    (3.98
    )
    
    $
    (0.19
    )
    
    $
    0.80
    
    
    $
    0.61


Consolidated Balance Sheet Data*
    
    August 312003
    
    2002
    
    2001
    
    2000
    
    1999Working capital
    
    $
    1,718.9
    
    
    $
    3,654.8
    
    
    $
    6,014.8
    
    
    $
    5,411.4
    
    
    $
    3,162.7Total assets
    
    
    6,529.5
    
    
    
    11,014.0
    
    
    
    13,079.9
    
    
    
    10,375.6
    
    
    
    5,420.5Long-term debt
    
    
    1,824.4
    
    
    
    3,183.9
    
    
    
    5,027.5
    
    
    
    3,319.5
    
    
    
    922.7Stockholders equity
    
    
    1,422.0
    
    
    
    4,772.7
    
    
    
    5,150.7
    
    
    
    3,802.1
    
    
    
    3,166.9


*Continuing and discontinued operations

Consolidated statements of operations financial data for fiscal years 2002 and
2001 differ from those previously reported due to the classification of certain
operations as discontinued in fiscal 2003.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, Solectron is accounting for all business combinations
initiated or completed after June 30, 2001 using the purchase method of
accounting. Solectron adopted the remaining provisions of SFAS No. 141 and SFAS
No. 142, Goodwill and Other Intangible Assets effective September 1, 2001
resulting in the cessation of goodwill amortization. These accounting changes
are discussed in Note 1, Summary of Significant Accounting Policies, and Note
17, Goodwill and Other Intangible Assets, to the consolidated financial
statements. In addition, business combinations are discussed and related pro
forma disclosures are provided in Note 15, Business Combinations, to the
consolidated financial statements.

Beginning in fiscal 2003, Solectron classified certain expense items
differently than in prior periods. Solectron has revised previously reported
financial information to conform the expense classifications to the current
presentation. None of these reclassifications had any impact on net loss or net
loss per share for the periods presented. These reclassifications were:



|1. |  | In fiscal 2003, Solectron began reporting other income and expense
items as a separate line item rather than including such items in
selling, general and administrative expenses. Accordingly, Solectron
reclassified other income of $30.5 million from selling, general and
administrative expenses to other income-net and $75.7 million of gains
on retirement of debt from a separate non-operating line item to other income-net in fiscal 2002. In fiscal
2001, Solectron also reclassified other income of $61.1 million from
selling, general and administrative expenses to other income-net.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16



---



##### Table of Contents





|2. |  | In fiscal 2003, Solectron classified certain items in cost of sales
that in previous periods were included in selling, general and
administrative expenses. Accordingly, Solectron reclassified $23.2
million and $52.1 million from selling, general and administrative
expenses to cost of sales in fiscal 2002 and 2001, respectively.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

With the exception of historical facts, the statements contained in this annual
report are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
as amended (the Exchange Act), and are subject to the safe harbor provisions
set forth in the Exchange Act. These forward-looking statements relate to
matters including, but not limited to:



| |  | future sales and operating results;
|- |  | -----------------------------------



| |  | future prospects and growth;
|- |  | ----------------------------



| |  | the capabilities and capacities of our business operations;
|- |  | -----------------------------------------------------------



| |  | any financial or other guidance;
|- |  | --------------------------------



| |  | our shift from business units to a functionally aligned organizational structure;
|- |  | ---------------------------------------------------------------------------------



| |  | our business strategy and our ability to execute on such strategy;
|- |  | ------------------------------------------------------------------



| |  | our ability to successfully divest certain operations;
|- |  | ------------------------------------------------------



| |  | the anticipated financial impact of recent and future acquisitions and divestitures;
|- |  | ------------------------------------------------------------------------------------



| |  | the timing and amount of our planned restructuring activities and related estimated cost savings;
|- |  | -------------------------------------------------------------------------------------------------



| |  | the expansion of our low-cost manufacturing capacity and redirection
of our manufacturing operations to lower-cost facilities;
|- |  | ------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to weather the current economic downturn with a
sustainable long-term cost structure to support improved operating
efficiency and margins;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the anticipated production levels and revenues of manufacturing and supply agreements with customers;
|- |  | -----------------------------------------------------------------------------------------------------



| |  | the potential impact of, and our strategies for addressing, our current litigation and environmental liability exposure; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------



| |  | various other forward-looking statements contained in Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

We intend that our forward-looking statements be subject to the safe harbors
created by the Exchange Act. The forward-looking statements are generally
accompanied by words such as intend, anticipate, believe, estimate,
expect and other similar words and statements. Our forward-looking
statements are based on current expectations, forecasts and assumptions and are
subject to risks, uncertainties and changes in condition, significance, value
and effect, including those discussed under the heading Risk Factors in this
report and in our reports filed with the Securities and Exchange Commission on
Forms 10-K, 8-K, 10-Q, S-3, S-4 and S-8. Such risks, uncertainties and changes
in condition, significance, value and effect could cause our actual results to
differ materially from our anticipated outcomes. Although we believe that the
assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could prove inaccurate. Therefore, we can give no assurance
that the results implied by these forward-looking statements will be realized.
The inclusion of forward-looking information should not be regarded as a
representation by our company or any other person that the future events, plans
or expectations contemplated by Solectron will be achieved. Furthermore, past
performance in operations and share price is not necessarily indicative of
future performance. We disclaim any intention or obligation to update or revise
any forward-looking statements contained in the documents incorporated by
reference herein, whether as a result of new information, future events or
otherwise.

17



---



##### Table of Contents



Critical Accounting Policies

Management is required to make judgments, assumptions and estimates that affect
the amounts reported when we prepare financial statements and related
disclosures in conformity with generally accepted accounting principles in the
United States. Note 1, Summary of Significant Accounting Policies, to the
consolidated financial statements describes the significant accounting policies
and methods used in the preparation of our consolidated financial statements.
Estimates are used for, but not limited to, our accounting for contingencies,
allowance for doubtful accounts, inventory valuation, goodwill and other
intangible asset impairments, restructuring costs, and income taxes. Actual
results could differ from these estimates. The following critical accounting
policies are impacted significantly by judgments, assumptions and estimates
used in the preparation of our consolidated financial statements.

Revenue Recognition

Our net sales are primarily derived from product manufacturing including, but
not limited to, PCBA, sub-system and system assembly and manufacturing of
memory products and embedded systems. We also offer services consisting of
repair, warranty and end-customer technical support services. Revenue from
manufacturing services and product sales is generally recognized upon shipment
of the manufactured product. Revenue from other services is recognized as the
services are performed.

Loss Contingencies

We are subject to the possibility of various loss contingencies arising in the
ordinary course of business. We consider the likelihood and our ability to
reasonably estimate the amount of loss in determining the necessity for, and
amount of any loss contingencies. Estimated loss contingencies are accrued when
it is probable that a liability has been incurred and the amount of loss can be
reasonably estimated. We regularly evaluate information available to us to
determine whether any such accruals should be adjusted.

Inventory Valuation

Our inventories are stated at the lower of weighted average cost or market. Our
industry is characterized by rapid technological change, short-term customer
commitments and rapid changes in demand, as well as any other lower of cost or
market considerations. We make provisions for estimated excess and obsolete
inventory based on our regular reviews of inventory quantities on hand and the
latest forecasts of product demand and production requirements from our
customers. Our provisions for excess and obsolete inventory are also impacted
by our contractual arrangements with our customers including our ability or
inability to re-sell such inventory to them. If actual market conditions or our
customers product demands are less favorable than those projected or if our
customers are unwilling or unable to comply with any contractual arrangements
related to excess and obsolete inventory, additional provisions may be
required.

Allowance for Doubtful Accounts

We evaluate the collectibility of our accounts receivable based on a
combination of factors. Where we are aware of circumstances that may impair a
specific customers ability to meet its financial obligations to us, we record
a specific allowance against amounts due to us and thereby reduce the net
receivable to the amount we reasonably believe is likely to be collected. For
all other customers, we recognize allowances for doubtful accounts based on the
length of time the receivables are outstanding, industry and geographic
concentrations, the current business environment and our historical experience.
If the financial condition of our customers deteriorates or if economic
conditions worsen, additional allowances may be required.

Goodwill

We perform goodwill impairment tests annually during the fourth quarter of our
fiscal year and more frequently if an event or circumstance indicates that an
impairment loss has occurred. Such events or circumstances may include
significant adverse changes in the general business climate or a prolonged
depressed market capitalization, among others. We perform the impairment tests
at the reporting unit level, which we have determined to be consistent with our
business units except for Technology Solutions and Global Services, which were
disaggregated further into two reporting units each, resulting in a total of
six reporting units. The tests are performed by determining the fair values of
our reporting units using a discounted future cash flow model and comparing
those fair values to the carrying values of the reporting units, including
goodwill. If the fair value of a reporting unit is less than its carrying
value, we then allocate the fair value of the unit to all the assets and
liabilities of that unit (including any unrecognized intangible assets) as if
the reporting units fair value was the purchase price to acquire the reporting
unit. The excess of the fair value of the reporting unit over the amounts
assigned to its assets and liabilities is the implied fair value of the
goodwill. If the carrying amount of the reporting units goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The process of evaluating the potential impairment
of goodwill is subjective and requires judgment at many points during the test
including future revenue forecasts, discount rates and various reporting unit
allocations.

18



---



##### Table of Contents



Other Intangible Assets

Our intangible assets consist primarily of supply agreements and intellectual
property obtained from asset acquisitions. Intangible assets are evaluated for
impairment whenever events or changes in circumstances indicate the carrying
value of an asset may not be recoverable. Such an asset is considered impaired
if the carrying amount of the asset grouping including the intangible asset
exceeds the sum of the undiscounted cash flows expected to result from the use
and ultimate disposition of the assets. If such assets are considered to be
impaired, the impairment to be recognized is the amount by which the carrying
amount of the assets exceeds fair value determined using a discounted cash flow
model. While our cash flow assumptions and estimated useful lives are
consistent with our business plans, there is significant judgment involved in
determining these cash flows.

Restructuring and Related Impairment Costs

We have recorded restructuring and impairment costs as we continue to
rationalize our operations in light of customer demand declines and the current
economic downturn. These restructuring and impairment charges include employee
severance and benefit costs, costs related to leased facilities that will be
abandoned and subleased, owned facilities no longer used by us which will be
disposed of, costs related to leased equipment that has been or will be
abandoned, and impairment of owned equipment that will be disposed of. For
owned facilities and equipment, the impairment loss recognized was based on the
fair value less costs to sell, with fair value estimated based on existing
market prices for similar assets. Severance and benefit costs and other costs
associated with restructuring activities initiated prior to
January 1, 2003 were recorded in compliance with Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. Severance and benefit costs
associated with restructuring activities initiated on or after January 1, 2003
are recorded in accordance with SFAS No. 112, Employers Accounting for
Postemployment Benefits, as we concluded that we had a substantive severance
plan. For leased facilities that will be abandoned and subleased, the estimated
lease loss accrued represents future lease payments subsequent to abandonment
less any estimated sublease income. In order to estimate future sublease
income, we work with an independent broker to estimate the length of time until
we can sublease a facility and the amount of rent we can expect to receive. As
of August 31, 2003, the majority of our facilities we plan to sublease have not
been subleased and, accordingly, our estimates of expected sublease income
could change based on factors that affect our ability to sublease those
facilities such as general economic conditions and the real estate market,
among others.

Income Taxes

We currently have significant deferred tax assets in certain jurisdictions
resulting from tax credit carryforwards, net operating losses and other
deductible temporary differences, which will reduce taxable income in such
jurisdictions in future periods. We established a full valuation allowance for
most of our remaining deferred tax assets and recognized a $721 million charge
during the third quarter of fiscal 2003. In previous reporting periods, we had
provided valuation allowances for future tax benefits resulting from foreign
net operating loss carryforwards and for certain other U.S. and foreign
deductible temporary differences where we believed future realizability was in
doubt. We had believed it was more likely than not that the remaining net
deferred tax assets would be realized principally based upon forecasted taxable
income, generally within the twenty-year net operating loss carryforward
periods. SFAS No. 109 requires a valuation allowance be established when it is
more likely than not that all or a portion of deferred tax assets will not be
realized, and further provides that it is difficult to conclude that a
valuation allowance is not needed when there is negative evidence in the form
of cumulative losses in recent years. Therefore, cumulative losses weigh
heavily in the overall assessment. We identified several significant
developments, which we considered in determining the need for nearly a full
valuation allowance recorded in the third quarter of fiscal 2003, including the continuing
market conditions, the absence of material growth in quarterly revenue levels,
the necessity for further cost reduction actions to attain profitability, and
the resulting inability to accurately predict sustainable profit levels in the
countries in which the deferred tax assets arose sufficient to establish, to
the requisite level of certainty, that we would be able to utilize those
deferred tax assets. As a result of our assessment, we increased our total
valuation allowance on deferred tax assets arising from continuing operations
to approximately $1.4 billion at August 31, 2003. We expect to record a full
valuation allowance on future tax benefits until we reach a sustained level of
profitability in the countries in which deferred tax assets arise.

RESULTS OF OPERATIONS FOR FISCAL YEARS 2003, 2002 AND 2001  CONTINUING OPERATIONS

The following table summarizes certain items in the consolidated statements of
operations as a percentage of net sales. The financial information and the
discussion below should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. The discussion following
the table is provided separately for continuing and discontinued operations. In
fiscal 2003, certain operations we plan to divest were classified as
discontinued operations. Accordingly, our consolidated statements of operations
include these results in discontinued operations for all periods presented.
Information related to the discontinued operations results is provided
separately following the continuing operations discussion. In addition, we
expect that certain operations which are presently included in the following
discussion of continuing operations will, as a result of further divestment
activity during the course of fiscal 2004, qualify for classification as
discontinued operations prior to the end of fiscal 2004.



19



---



##### Table of Contents



Years Ended August 312003
    
    2002
    
    2001Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    94.7
    
    
    
    95.2
    
    
    
    92.3Gross profit
    
    
    5.3
    
    
    
    4.8
    
    
    
    7.7Operating expenses:Selling, general and
administrative
    
    
    5.8
    
    
    
    6.4
    
    
    
    4.3Research and development
    
    
    0.6
    
    
    
    0.5
    
    
    
    0.4Restructuring and impairment costs
    
    
    5.8
    
    
    
    7.0
    
    
    
    2.8Goodwill impairment
    
    
    14.9
    
    
    
    21.6
    
    
    
    Acquisition costs
    
    
    
    
    
    
    
    
    
    
    0.1Goodwill amorization expense
    
    
    
    
    
    
    
    
    
    
    0.7Operating loss
    
    
    (21.8
    )
    
    
    (30.7
    )
    
    
    (0.6
    )Interest income
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.6Interest expense
    
    
    (1.9
    )
    
    
    (2.1
    )
    
    
    (0.9
    )Other income-net
    
    
    0.5
    
    
    
    0.9
    
    
    
    0.3Operating loss from continuing
operations before income taxes
    
    
    (22.9
    )
    
    
    (31.3
    )
    
    
    (0.6
    )Income tax expense (benefit)
    
    
    5.3
    
    
    
    (4.2
    )
    
    
    (0.2
    )Net loss from continuing
operations
    
    
    (28.2)
    %
    
    
    (27.1)
    %
    
    
    (0.4)
    %Discontinued operations:Income (loss) from discontinued
operations
    
    
    (2.6
    )
    
    
    0.4
    
    
    
    (0.3
    )Income tax expense
    
    
    0.6
    
    
    
    0.2
    
    
    
    Net loss
    
    
    (31.4)
    %
    
    
    (26.9)
    %
    
    
    (0.7)
    %


NET SALES  CONTINUING OPERATIONS

For the year ended August 31, 2003, net sales declined to $11.0 billion, a
decrease of 4.8% from fiscal 2002. Net sales of $11.6 billion in fiscal 2002
were 37.7% lower than fiscal 2001. These sales declines were primarily
attributable to continued weakness in customer demand, particularly in our
telecommunications and networking segments, resulting from the worldwide
economic slowdown that significantly impacted the electronics industry. The
decreases were partially offset by revenues from our acquisitions completed in
fiscal 2002, including C-MAC Industries, Inc.

We were organized into four business units including Global Operations,
Technology Solutions, Global Services and MicroSystems. Our largest business
unit, Global Operations, provided 79.7%, 86.9% and 91.8% of net sales,
respectively, for fiscal 2003, 2002 and 2001. Technology Solutions contributed
12.1%, 7.0% and 6.5% of net sales, respectively, for fiscal 2003, 2002 and
2001. Global Services contributed 6.0%, 4.5% and 1.7% of net sales,
respectively, in fiscal 2003, 2002 and 2001. MicroSystems contributed 2.2% and
1.6% of net sales during fiscal 2003 and 2002, respectively, and did not exist
in fiscal 2001.

Global Operations

Net sales were $8.8 billion, $10.1 billion and $17.1 billion in fiscal years
2003, 2002 and 2001, respectively. The decrease in fiscal 2003 of 12.7% from
fiscal 2002 primarily resulted from weakness in end markets for networking,
communications, PC/notebooks, and a customers decision to move production of a
gaming console back in-house. The weaknesses in these areas were partially
offset by strength in our

20



---



##### Table of Contents



high-end computing, semiconductor, test and consumer products in addition to
our business and asset acquisitions during the past year. The decrease in 2002
of 41.0% from fiscal 2001 was due to continued weakness in customer demand,
particularly in our telecommunications and networking sectors.

Technology Solutions

Net sales were $1.3 billion, $809.1 million and $1.2 billion in fiscal years
2003, 2002 and 2001, respectively. The increase in fiscal 2003 of 65.0% from
fiscal 2002 was primarily due to increased demand for memory products and
embedded computer systems resulting in business wins from new and existing
customers. The decrease in 2002 of 32.6% from fiscal 2001 was principally due
to sluggish demand and declines in average selling prices of memory components.

Global Services

Net sales were $657.1 million, $521.7 million and $309.6 million in fiscal
years 2003, 2002 and 2001, respectively. Net sales increased 26.0% in fiscal
2003 compared to fiscal 2002. The increase primarily resulted from our
acquisitions of Magnetic Data Technologies in June 2002 and IBMs global asset
recovery operations in the second quarter of fiscal 2003. The increase of 68.5%
in net sales in fiscal 2002 compared to fiscal 2001 was primarily due to
acquisition of Artesyn Solutions, Inc. and higher demand by customers for
after-sales support service provided by this business unit.

MicroSystems

Net sales were $238.2 million and $184.1 million in fiscal 2003 and 2002,
respectively. The increase of 29.4% in fiscal 2003 over fiscal 2002 was
primarily due to the acquisition of C-MAC in the second quarter of fiscal 2002
which contributed only three quarters results in fiscal 2002.

International Sales

International locations contributed 64% of consolidated net sales in fiscal
2003, compared with 66% in fiscal 2002 and 53% in fiscal 2001. The increase
since fiscal 2001 has primarily been due to project transfers from sites in the
United States to lower cost regions. As a result of our international sales and
facilities, our operations are subject to the risks of doing business abroad.
See Risk Factors for additional factors relating to possible fluctuations of
our international operating results. While these dynamics have not materially
harmed our results of operations, we cannot assure that there will not be such
an impact in the future.

Major Customers

Net sales to major customers as a percentage of consolidated net sales were as
follows:

Years Ended August 312003
    
    2002
    
    2001Hewlett-Packard
    
    12.3%
    
    11.0%
    
    10.6%Nortel Networks
    
    11.5%
    
    14.5%
    
    11.9%Cisco Systems
    
    11.4%
    
    11.6%
    
    11.5%Ericsson
    
    *
    
    *
    
    13.7%


*less than 10%

Our top ten customers accounted for 61% of net sales in fiscal 2003, 68% of net
sales in fiscal 2002 and 72% of net sales in fiscal 2001. We are dependent upon
continued revenues from Nortel Networks, Cisco Systems and Hewlett-Packard as
well as our other large customers. We cannot guarantee that these or any other
customers will not increase or decrease as a percentage of consolidated net
sales either individually or as a group. Consequently, any material decrease in
sales to these or other customers could materially harm our results of
operations.

We believe that our ability to grow depends on increasing sales to existing
customers for their current and future product generations and on successfully
attracting new customers. Customer contracts can be canceled and volume levels
can be changed or delayed. The timely replacement of delayed, canceled or
reduced orders with new business cannot be ensured. In addition, we
cannot assure that any of our current customers will continue to utilize our
services, and if they were to cease using our services, our results of
operations might be materially adversely affected.

21



---



##### Table of Contents



GROSS PROFIT  CONTINUING OPERATIONS

Our gross margin percentages were 5.3%, 4.8% and 7.7% for fiscal 2003, 2002 and
2001, respectively. The increase in gross margin percentage from 4.8% in fiscal
2002 to 5.3% in fiscal 2003 was primarily due to project transfers from sites
in the United States to lower cost regions. This increase from fiscal 2002 was
partially offset by inventory charges related to excess and obsolete inventory
in Global Operations. The decrease in gross margin percentage from 7.7% in
fiscal 2001 to 4.8% in fiscal 2002 was primarily due to inefficiencies
associated with reduced demand and inventory charges related to excess and
obsolete inventory in Global Operations and Technology Solutions.

During the second quarter of fiscal 2003, we recorded a charge of approximately
$76 million related to excess and obsolete inventory in our Global Operations
business unit, which was taken due to the continued depressed condition of the
telecommunications market. During the fourth quarter of fiscal 2002, we
recorded a charge of approximately $97 million to reduce the carrying value
of excess and obsolete inventory. This charge was related to excess and
obsolete inventory identified in product-oriented Technology Solutions and
Global Operations.

For Global Operations, we anticipate a larger percentage of our sales may be
derived from systems-build projects that generally yield lower profit margins
than PCBA. We expect most of our Technology Solutions sales may continue to be
derived from turn-key projects, which typically yield lower profit margins than
consignment projects. In addition, factors affecting Technology Solutions
profit margins include the sales mix of specialty memory modules, standard
memory modules, communication card products and embedded computer systems, as
well as changes in average memory densities used in memory products.

In the foreseeable future, our overall gross margin will depend primarily on
several factors, including but not limited to, product mix, production
efficiencies, utilization of manufacturing capacity, start-up and integration
costs of new and acquired businesses, percentage of sales derived from
systems-build and turn-key projects, pricing within the electronics industry,
component costs and delivery linearity, and the cost structure at individual
sites. Over time, gross margins at the individual sites and for Solectron as a
whole may continue to fluctuate. Increases in the systems-build business or
turn-key projects, additional costs associated with new projects, and price
erosion within the electronics industry could harm our gross margin.

In addition, we have experienced component shortages in the past. While the
component availability fluctuates from time to time and is subject to lead time
and other constraints, this could possibly have a negative impact on our sales
and gross margins in the foreseeable future. Therefore, we cannot assure that
our gross margin will not fluctuate in future periods.

Sales of inventory previously written down or written off have not been
significant and have not had any material impact on our gross margins to date.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES  CONTINUING OPERATIONS

In absolute dollars, our selling, general and administrative (SG&A) expenses
decreased $113.4 million in fiscal 2003 compared to fiscal 2002 and decreased
$54.1 million in fiscal 2002 compared to fiscal 2001.

As a percentage of net sales, SG&A expenses were 5.8% in fiscal 2003, 6.4% in
fiscal 2002 and 4.3% in fiscal 2001. The decrease as a percentage of net sales
in fiscal 2003 as compared to fiscal 2002 was due to headcount and other SG&A
expense reductions resulting from our continued restructuring and cost
containment activities, partially offset by higher SG&A expenses resulting from
our fiscal 2002 acquisitions, including C-MAC. The increase as a percentage of
net sales in fiscal 2002 as compared to fiscal 2001 resulted from a large
reduction in net sales and the benefits from our restructuring activities
lagging behind the sales decline.

RESEARCH AND DEVELOPMENT EXPENSES  CONTINUING OPERATIONS

With the exception of Technology Solutions, our research and development (R&D)
activities have been primarily developing prototype and engineering design
capabilities, developing common tools for electrical, mechanical design,
standardizing a single functional test platform, developing methods for
handling, processing and re-flow of high I/O ball grid array, high reliability
environmental stress technology and the implementation of environmentally
friendly assembly processes such as lead free and no-clean. Technology
Solutions R&D efforts are concentrated on new product development and
improvement of product designs through improvements in functionality and the
use of microprocessors in embedded applications.

In absolute dollars, R&D expenses have remained relatively consistent and were
$69.1 million, $59.7 million and $65.9 million in fiscal 2003, 2002 and 2001,
respectively. As a percentage of net sales, R&D expense was 0.6%, 0.5% and 0.4%
of net sales for fiscal 2003, 2002 and 2001, respectively.

22



---



##### Table of Contents



RESTRUCTURING AND IMPAIRMENT COSTS  CONTINUING OPERATIONS

Beginning in the second quarter of fiscal 2001, we began a series of
restructuring initiatives in light of the current economic downturn. The
measures, which included reducing the workforce, consolidating facilities and
changing the strategic focus of a number of sites, have been intended to align
our capacity and infrastructure to anticipated customer demand, transition our
operations to lower cost regions, and rationalize our footprint worldwide. In
furtherance of the implementation of the restructuring plan, we expect to incur
restructuring-related charges in the range of an aggregate of $50 million to
$75 million over the next few quarters, although no certainty can be attributed
to this amount or the timing of its recognition. We continue to evaluate our
cost structure relative to our revenue levels and may take additional
restructuring charges in the future. If we incur additional
restructuring-related charges, our financial condition and results of
operations may suffer.

Total restructuring and impairment costs of $469.6 million, $615.9 million and
$517.3 million (excluding goodwill and intangible impairments) were charged
against earnings during fiscal 2003, 2002 and 2001, respectively.

To date, we estimate that we have reduced our annual operating expenses by
approximately $1 billion. These reductions relate primarily to reduced
headcount, reduced expenses related to leased equipment and facilities and
reduced depreciation. We expect our previously announced restructuring
activities to be completed by the second half of fiscal 2004. Upon completion
of our current planned restructuring activities, we estimate our annual
operating expenses will have been reduced by approximately $1.3 billion from
earlier levels.

See Note 16, Restructuring, to the consolidated financial statements for
further discussion of our restructuring since initiation of the activities in
fiscal 2001.

GOODWILL IMPAIRMENT  CONTINUING OPERATIONS

Goodwill impairment was approximately $1.6 billion and $2.5 billion for fiscal
2003 and 2002, respectively, as a result of our goodwill impairment tests.
There was no goodwill impairment in fiscal 2001. See Note 17, Goodwill and
Other Intangible Assets, to the consolidated financial statements for further
discussion.

ACQUISITION COSTS  CONTINUING OPERATIONS

During fiscal 2001, we recorded $23.9 million in acquisition and
integration costs, which were primarily related to the NEL acquisition and were
not includable in the purchase price. There were no acquisition costs in fiscal
2003 and 2002.

GOODWILL AMORTIZATION EXPENSE  CONTINUING OPERATIONS

We adopted SFAS No. 142, Goodwill and Other Intangible Assets, effective
September 1, 2001, and discontinued amortization of goodwill beginning in
fiscal 2002. The goodwill amortization expense of $139.9 million in fiscal 2001
primarily resulted from the Natsteel Electronics LTD. (NEL) acquisition. During
the second quarter of fiscal 2001, we purchased all of the outstanding issued
share capital and convertible bonds of NEL for approximately $2.3 billion and
$122.4 million, respectively. The NEL acquisition was accounted for under the
purchase accounting method and, as a result, we recorded approximately $2
billion of goodwill that was amortized over ten years prior to our adoption of
the new standard in fiscal 2002.

INTEREST INCOME  CONTINUING OPERATIONS

Interest income was $31.2 million in fiscal 2003 compared to $69.3 million in
fiscal 2002 and $116.9 million in fiscal 2001. The interest income decreases
are due to yearly reductions in average cash, cash equivalent and short-term
investment balances and average interest rates.

INTEREST EXPENSE  CONTINUING OPERATIONS

Interest expense was $210.3 million in fiscal 2003 compared to $241.6 million
in fiscal 2002 and $175.6 million in fiscal 2001. The interest expense
decrease in fiscal 2003 was primarily due to the retirement of approximately
$7.0 billion aggregate principal amount at maturity of our Liquid Yield Option
Notes (LYONs) during the past two fiscal years. This decrease was partially
offset by the issuance in fiscal 2002 of our 7.25% Adjustable Conversion-Rate
Equity Security units (ACES) and 9.625% Senior Notes due 2009 in the second
quarter of fiscal 2002 for gross proceeds of approximately $1.6 billion that
bear interest at higher rates than the LYONs. The interest expense increase in
fiscal 2002 primarily resulted from our issuance of the ACES and the Senior
Notes, which were used to repay lower interest LYONs.

 Trademark of Merrill Lynch & Co., Inc.

23



---



##### Table of Contents



OTHER INCOME  NET  CONTINUING OPERATIONS

Other income for fiscal 2003 was $54.3 million, compared to $106.4 million in
fiscal 2002 and $62.6 million in fiscal 2001. Other income  net primarily
consists of gains on retirement of our LYONs. The following table provides the
details of the retirement of our 4.0% LYONs due 2019, 2.75% LYONs due 2020 and
our 3.25% LYONs due 2020 in each period presented in the accompanying
consolidated financial statements (in millions):

Years Ended August 312003
    
    2002
    
    2001Principal amount at maturity
    
    $
    1,771.1
    
    
    $
    5,170.2
    
    
    $
    Carrying value
    
    $
    1,047.8
    
    
    $
    2,911.0
    
    
    $
    Cash paid and payable
    
    
    1,008.4
    
    
    
    2,835.3
    
    
    
    Gain included in other income-net
    
    $
    39.4
    
    
    $
    75.7
    
    
    $
    


The remaining components of other income-net fluctuate primarily due to foreign
currency gains and losses and other miscellaneous income and expense items.

See Basis of Presentation and Recent Accounting Pronouncements, of Note 1,
Summary of Significant Accounting Policies, to the consolidated financial
statements, for further discussion of other income-net.

INCOME TAXES  CONTINUING OPERATIONS

Our income tax expense was $581.0 million in fiscal 2003. We recorded income
tax benefits of $483.0 million in fiscal 2002 and $34.2 million in fiscal 2001
arising from the losses incurred in those periods. Managements decision to
provide a valuation allowance on certain deferred tax assets resulted in the
tax expense incurred in fiscal 2003. Our effective income tax benefit rates
for continuing operations were approximately 13.3% and 31.0% in fiscal 2002 and
2001, respectively. Our benefit rate in fiscal 2002 was less than the fiscal
2001 rate primarily due to our goodwill impairment, which is mostly
nondeductible for tax purposes.

In prior years, the effective income tax rate had been largely a function of
the balance between income and losses from domestic and international
operations. Our international operations, taken as a whole, have been subject
to tax at a lower rate than operations in the United States, primarily due to
tax holidays granted to several of our overseas sites in Malaysia, Singapore
and China. The Malaysian tax holiday is effective through July 2011, subject to
some conditions, including maintaining certain levels of research and
development expenditures. The Singapore tax holiday is effective through March
2011, subject to some conditions. Seven of our China sites have separate tax
holiday agreements. Each agreement expires five years from the first profitable
year for each site.

LIQUIDITY AND CAPITAL RESOURCES  CONTINUING OPERATIONS

Cash and cash equivalents decreased to approximately $1.4 billion at August 31,
2003 from approximately $1.7 billion at August 31, 2002. Our restricted cash,
cash equivalents and short-term investments are restricted primarily in
connection with the terms of our leasing transactions and under the collateral
obligations for our ACES securities, which require an amount equal to the next
quarterly interest payment.

The decrease in cash and cash equivalents was primarily a result of the
continued retirement of our LYONs. During fiscal 2003, our primary uses of cash
included using approximately $1 billion of our available cash towards
retirement of our LYONs, which was partially offset by cash inflows, such as
cash provided by operating activities of $307 million including income tax
refunds received of $200 million and cash provided by investing activities of
$358 million.

Accounts receivable decreased to approximately $1.6 billion at August 31, 2003
from approximately $1.7 billion at August 31, 2002, primarily due to a decrease
in sales. Inventories decreased to approximately $1.4 billion at August 31,
2003 from approximately $1.8 billion at August 31, 2002, primarily from the
sale of excess raw materials inventory back to our customers throughout fiscal
2003 and a $76 million inventory charge related to excess and obsolete
inventory in Global Operations during the second quarter of fiscal 2003.

As of August 31, 2003, we had available a $200 million revolving credit
facility that expires on February 11, 2004, and a $250 million revolving credit
facility that expires on February 14, 2005. Each of our revolving credit
facilities is guaranteed by certain of our domestic subsidiaries and secured by
the pledge of domestic accounts receivable, inventory and equipment, the pledge
of equity interests in certain

24



---



##### Table of Contents



of our subsidiaries and notes evidencing intercompany debt. Borrowings under
the credit facilities bear interest, at our option, at the London Interbank
offering rate (LIBOR) plus a margin of 1.75% based on our current senior
unsecured debt ratings, or the higher of the Federal Funds Rate plus 1/2 of 1%
or Bank of America N.A.s publicly announced prime rate. As of August 31, 2003,
there were no borrowings outstanding under these facilities. We are subject to
compliance with certain financial covenants set forth in these facilities
including, but not limited to, capital expenditures, consolidated tangible net
worth, cash interest coverage, leverage, liquidity, and minimum cash. Prior to
the end of the fourth quarter of fiscal 2003, we obtained waivers to the
minimum cash interest coverage ratio covenant for the quarter. As a result of these amendments,
we were in compliance with all applicable covenants as of August 31, 2003.

On December 18, 2001, Moodys Investors Service and Standard & Poors
downgraded our senior unsecured debt rating to Ba1 and BB+, respectively,
with a negative outlook. On March 22, 2002, Standard and Poors downgraded our
senior unsecured debt rating to BB with a negative outlook. On May 14, 2002,
Moodys Investors Services downgraded our senior unsecured debt rating to Ba3
with a stable outlook. On March 21, 2003, Standard and Poors downgraded our
senior unsecured debt rating to BB- with a negative outlook. On June 20,
2003, Standard and Poors placed our corporate credit and other ratings on
Credit Watch with negative implications. On June 20, 2003, Moodys placed our
ratings under review for possible downgrade. These rating downgrades increase
our cost of capital should we borrow under our revolving lines of credit, and
may make it more expensive for us to raise additional capital in the future.
Such capital raising activities may be on terms that may not be acceptable to
us or otherwise not available.

In addition, we had $40.5 million in committed and $245.0 million in
uncommitted foreign lines of credit and other bank facilities as of August 31,
2003 related to continuing operations. A committed line of credit obligates a
lender to loan us amounts under the credit facility as long as we adhere to the
terms of the credit agreement. An uncommitted line of credit is extended to us
at the sole discretion of a lender. The interest rates range from the banks
prime lending rate to the banks prime rate plus 2.0%. As of August 31, 2003,
borrowings and guaranteed amounts were $18.2 million under committed and $51.1
million under uncommitted foreign lines of credit. Borrowings are payable on
demand. The weighted-average interest rate was 5.4% for committed and 0.7% for
uncommitted foreign lines of credit as of August 31, 2003.

We have purchased in the past and may continue to purchase in the future our
remaining LYONs on an opportunistic basis. We repurchased LYONs with
approximately $1.8 billion aggregate principal amount at maturity in fiscal
2003 for approximately $1 billion in cash. We repurchased LYONs with
approximately $5.2 billion aggregate principal amount at maturity in fiscal
2002 for approximately $2.8 billion in cash. As a result, we have repurchased
substantially all of the 2.75% LYONs due 2020 and the 4.0% LYONs due 2019
leaving only a portion of our 3.25% LYONs due 2020 outstanding. Based on the
aggregate amount outstanding on August 31, 2003, holders of our 3.25% LYONs due
November 2020 will have the option to require us to repurchase their notes on
May 20, 2004 in an amount of $587.46 per $1,000 principal amount for a total of
approximately $953 million. Our liquidity could be materially adversely
affected if we purchase these LYONs with cash. Instead of repurchasing these
LYONs with cash, we may elect to offer holders our common stock or a
combination of our cash and common stock. At the time of such election, it may
be in the best interest of our shareholders to satisfy such obligation in cash.
However, we may not have sufficient available cash and we may not be able to
finance the required amount on acceptable terms, if at all. As a result, we may
be required to satisfy such obligations with our common stock, which would be
extremely dilutive at our current stock prices. See Risk Factors  We Have
Significant Debt Leverage and Debt Service Obligations.
Conversely, satisfying these
obligations with cash could impair our liquidity.

Our 7.25% subordinated ACES debentures are due November 15, 2006. On or about
August 15, 2004, the ACES debentures will be remarketed and if the remarketing
is successful, the interest rate will be reset at then current rates as
described in the indenture and the proceeds from the remarketing will be used
to satisfy the holders obligation to purchase our common stock in November
2004. If the debentures are not successfully remarketed, the interest rate will
not be reset and we expect to use the pledged debentures to satisfy the
holders obligation to purchase our common stock in November 2004. In addition, our $500 million aggregate principal amount of 9.625%
senior notes is due on February 15, 2009 and our $150 million aggregate
principal amount of 7.375% senior notes is due on March 1, 2006.

During fiscal 2002, we restructured our synthetic lease agreements relating to
five manufacturing sites. The synthetic leases have expiration dates in 2007.
At the end of the lease term, we have an option, subject to certain conditions,
to purchase or to cause a third party to purchase the facilities subject to the
synthetic leases for the Termination Value, which approximates the lessors
original cost, or we may market the property to a third party at a different
price. We are entitled to any proceeds from a sale of the properties to third
parties in excess of the Termination Value and liable to the lessor for any
shortfall. In connection with the restructuring of these synthetic leases, we
provided loans to the lessor equaling approximately 85% of its Termination
Value. These loans are repayable solely from the sale of the properties to
third parties in the future, are subordinated to the amounts payable to the
lessor at the end of the synthetic leases, and may be credited against the
Termination Value payable if we purchase the properties. The approximate
Termination Values and loan amounts are $124.7 million and $106.0 million,
respectively, as of August 31, 2003.

In addition, cash collateral of $18.7 million is pledged for the difference
between the Termination Values and the loan amounts. Each synthetic lease
agreement contains various affirmative and financial covenants. A default under
a lease, including violation of these covenants, may accelerate the termination
date of the arrangement. Prior to the end of the fourth quarter of fiscal 2003,
we obtained a

25



---



##### Table of Contents



waiver to the minimum cash interest
coverage ratio covenant for the quarter. As a result of the
amendment, we were in compliance with all applicable covenants as of August 31,
2003. Monthly lease payments are generally based on the Termination Value and
30-day LIBOR index (1.1% as of August 31, 2003) plus an interest-rate margin,
which may vary depending upon our Moodys Investors Services and Standard and
Poors ratings, and are allocated between the lessor and us based on the
proportion of the loan amount to the total Termination Value for each synthetic
lease.

We account for these synthetic lease arrangements as operating leases in
accordance with SFAS No. 13, Accounting for Leases, as amended. Our loans to
the lessor are included in other long-term assets in the condensed consolidated
balance sheet as of August 31, 2003. If we should determine that it is probable
that the expected fair value of the property at the end of the lease term will
be less than the Termination Value, any expected loss will be recognized on a
straight-line basis over the remaining lease term.

We believe that our current cash, cash equivalents, short-term investments,
lines of credit and cash generated from operations will satisfy our expected
working capital, capital expenditure, debt service and investment requirements
through at least the next 12 months.

The following is a summary of certain obligations and commitments as of August
31, 2003 for continuing operations:

Payments Due by Period(in millions)Total
    
    FY04
    
    FY05
    
    FY06
    
    FY07
    
    FY08
    
    ThereafterShort term debt (1)
    
    $
    998.6
    
    
    $
    998.6
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Long term debt (2)
    
    
    1,817.6
    
    
    
    
    
    
    
    25.2
    
    
    
    162.3
    
    
    
    1111.0
    
    
    
    0.5
    
    
    
    518.6Operating lease
    
    
    227.2
    
    
    
    75.7
    
    
    
    34.4
    
    
    
    22.8
    
    
    
    19.8
    
    
    
    16.6
    
    
    
    57.9




|(1) |  | Since the holders of our 3.25% LYONs due November 2020 have the option to
require us to repurchase on May 20, 2004 their notes in an amount of
$587.46 per $1,000 principal amount at maturity, the payment due reflects
a total of approximately $953 million on such commitment date of May 20,
2004 based on the notes outstanding as of August 31, 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Assumes a successful remarketing of the ACES in August 2004. In the event
of this successful remarketing, we will receive up to $1.1 billion
proceeds from the exercise of the stock purchase contracts included in
each ACES unit in fiscal 2005. See Note 6, Long-Term Debt, to the
consolidated financial statements for further discussion of our ACES.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, we guarantee used and unused lines of credit and debt for our
subsidiaries totaling $285.5 million as of August 31, 2003. We also guarantee
performance of certain of our subsidiaries in various transactions such as
leases, totaling $249.8 million as of August 31, 2003.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

Our off-balance sheet arrangements consist of our synthetic and operating
leases, subsidiary guarantees (leases and subsidiary guarantees are both
described in the Liquidity and Capital Resources portion of Managements
Discussion and Analysis of Financial Condition and Results of Operations), our
interest rate swap instruments related to our long-term debt (described in the
We are exposed to interest rate fluctuations Risk Factor), and our foreign
exchange contracts (described in the We are exposed to fluctuations in foreign
currency exchange rates risk factor).

A tabular presentation of our contractual obligations is provided in the
Liquidity and Capital Resources portion of Managements Discussion and
Analysis of Financial Condition and Results of Operations.

DISCONTINUED OPERATIONS

During the fourth quarter of fiscal 2003, as a result of a full review of our
portfolio of businesses, we committed to a plan to divest a number of business
operations that are no longer part of our strategic plan for the future.

In accordance with SFAS No. 144, we have reported the results of operations and
financial position of these businesses in discontinued operations within the
statements of operations and balance sheets for all periods presented. Each of
our four reportable segments included one of these operations, which are now
classified as discontinued operations. In addition, we expect that certain
additional operations which are presently included in continuing operations
will, as a result of further divestment activity during the course of fiscal
2004, qualify for classification as discontinued operations prior to the end of
fiscal 2004.

The collective results from all discontinued operations for all periods
presented were as follows:

26



---



##### Table of Contents



Years Ended August 312003
    
    2002
    
    2001Net sales
    
    $
    686.4
    
    
    $
    705.0
    
    
    $
    123.2Cost of sales
    
    
    552.8
    
    
    
    554.7
    
    
    
    121.1Gross profit
    
    
    133.6
    
    
    
    150.3
    
    
    
    2.1Operating expenses
    
    
    427.2
    
    
    
    104.7
    
    
    
    47.7Operating income (loss)
    
    
    (293.6
    )
    
    
    45.6
    
    
    
    (45.6
    )Interest income
    
    
    0.9
    
    
    
    0.8
    
    
    
    Interest expense
    
    
    (0.6
    )
    
    
    (2.5
    )
    
    
    (0.4
    )Other expense  net
    
    
    (0.5
    )
    
    
    (0.2
    )
    
    
    (1.5
    )Income (loss) before income taxes
    
    
    (293.8
    )
    
    
    43.7
    
    
    
    (47.5
    )Income tax expense
    
    
    63.3
    
    
    
    15.8
    
    
    
    Income (loss) from discontinued operations, net of tax
    
    $
    (357.1
    )
    
    $
    27.9
    
    
    $
    (47.5
    )


Sales and gross profit declined slightly in fiscal 2003 from fiscal 2002
primarily due to the continued economic downturn that affected all of our
operations. This decline was partially offset by acquisitions during fiscal
2002. Fiscal 2003 included a full year of operations for all the discontinued
operations while fiscal 2002 included partial results. Operating expenses
increased significantly in fiscal 2003 primarily due to approximately $293
million of our goodwill impairment recorded during the third quarter of fiscal
2003 relating to the discontinued operations. Sales, gross profit and operating
expenses increased significantly from fiscal 2001 to fiscal 2002 as only one of
the discontinued operations existed prior to fiscal 2002. Income tax expense
increased significantly in fiscal 2003 from fiscal 2002 primarily due to
approximately $54 million recorded to establish valuation allowances against
deferred tax assets related to the discontinued operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires that the fair value of an asset retirement
obligation be recorded as a liability in the period in which it incurs the
obligation. SFAS No. 143 is effective for fiscal years beginning after June
15, 2002. Adoption of SFAS No. 143 did not have a material impact on our
consolidated financial statements.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting
for Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The primary
objectives of SFAS No. 144 are to develop one accounting model based on the
framework established in SFAS No. 121 for long-lived assets to be disposed of
by sale and to address significant implementation issues identified after the
issuance of SFAS No. 121. We adopted SFAS No. 144 on September 1, 2002 and such
adoption did not have a material impact on our consolidated financial
statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 requires that a liability for
costs associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. SFAS No. 146 was
effective for exit or disposal activities initiated after December 31, 2002.
Adoption of SFAS No. 146 has primarily resulted in changes to the timing of
recognition of restructuring costs as previous accounting literature allowed
recognition upon committing to an exit plan.

In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which requires a guarantor to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantees. It also requires disclosure in
interim and annual financial statements of its obligations under certain
guarantees it has issued. The initial recognition and measurement provisions of
FIN No. 45 are to be applied prospectively to guarantees issued or modified
after December 31, 2002. The disclosure requirements are effective for
financial statements for periods ending after December 15, 2002. Adoption of
FIN No. 45 did not have a material impact on our consolidated financial
statements.

In December 2002, The FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, which amends SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. In addition, SFAS No. 148 amends the

27



---



##### Table of Contents



disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We adopted the disclosure requirements of SFAS No. 148 during the
third quarter of fiscal 2003.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, which requires variable interest entities, previously
referred to as special-purpose entities or off-balance sheet structures, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the entitys activities or is entitled to receive a majority of
the entitys returns or both. The consolidation provisions of FIN No. 46 apply
immediately to variable interest entities created after January 31, 2003 and to
existing entities in the first fiscal year or interim period beginning after
December 15, 2003. Certain disclosure provisions apply in financial statements
issued after January 31, 2003. We do not expect this interpretation to have a
material impact on its synthetic lease arrangements, as variable interest
entities were not used in the transactions.

In April 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133. This statement is effective for contracts
entered into or modified after June 30, 2003, with certain exceptions, and for
hedging relationships designated after June 30, 2003. Adoption of SFAS No. 149
did not have a material impact on our consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
Financial instruments that are within the scope of the statement, which
previously were often classified as equity, must now be classified as
liabilities. This statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. Adoption
of SFAS No. 150 did not have a material impact on our consolidated financial
statements.

RECENT DEVELOPMENTS

On September 2, 2003, we announced that Mr. Ajay Shah resigned as a director of
Solectron effective October 6, 2003 in order to devote more time to his
personal business interests and investments.

On September 30, 2003, we announced that we reached an agreement with Nortel
Networks to extend Solectrons role as an electronics manufacturing services
provider to Nortel Networks. The new supply agreement, which replaces a
four-year supply agreement the companies signed in 2000, defines new terms and
conditions under which Solectron will offer Nortel Networks a full suite of
supply chain services, including design, new product introduction, materials
management, manufacturing, product integration and testing, and repair.
Additional product-specific contracts will further specify terms as existing
business is transitioned to the new contract and as new business is awarded.
The new agreement positions us to compete for Nortel Networks business over a
broad range of product offerings, with actual annual volumes subject to the
economic environment and competitive terms and conditions. While the companies
have announced their agreement and intention to work together under the terms
of the new contract, there is no assurance that we will receive any particular
level of revenues from Nortel Networks, that demand for Nortel Networks
products will reach the levels contemplated by the parties, that Solectron will
be successful in its efforts to win additional business from Nortel Networks,
or that Solectron will be able to profitably supply products and services to
Nortel Networks under the terms of the new agreement.

On October 7, 2003, we announced that Mr. Dennis Wood resigned as a director of
Solectron effective October 6, 2003 in order to devote more time to his
personal business interests.

On October 28, 2003, Standard and Poors downgraded our senior unsecured debt
rating to B+ with a stable outlook.

On October 31, 2003 Moodys downgraded our senior unsecured debt rating to B1
from Ba3 with a stable outlook.

RISK FACTORS

WE ARE EXPOSED TO GENERAL ECONOMIC CONDITIONS, WHICH COULD HAVE A MATERIAL
ADVERSE IMPACT ON OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION.

As a result of the economic downturn in the U.S. and internationally, and
reduced capital spending as well as end-market demand, our customers and
therefore our sales have declined significantly from prior years. In
particular, we depend on the telecommunications and computing industries, where
the decline began in the second quarter of fiscal 2001. If there were to be
continued or resumed weakness in these industries or any further deterioration
in the business or financial condition of our customers, it could have a
material adverse impact

28



---



##### Table of Contents



on our business, operating results and financial condition. In addition, if the
economic conditions in the United States and the other markets we serve worsen,
we may experience a material adverse impact on our business, operating results
and financial condition.

WE HAVE SIGNIFICANT DEBT LEVERAGE AND DEBT SERVICE OBLIGATIONS.

For the fiscal years ended August 31, 2003, 2002 and 2001, our fixed charges
exceeded our earnings from continuing operations by approximately $2.8 billion,
$3.9 billion and $313 million, respectively. The fixed charge excesses are
primarily due to our operating losses. We compute the ratio of earnings from
continuing operations to fixed charges by dividing earnings available for fixed
charges by fixed charges. When the ratio is negative, we report the excess of
fixed charges over earnings rather than a negative ratio. The computations
include our consolidated subsidiaries. For these ratios, earnings represents
(1) loss before tax expense (benefit) and before adjustments for minority
interests, plus (2) fixed charges (excluding capitalized interest), plus (3)
amortization of capitalized interest. Fixed charges consist of (1) interest on
all indebtedness and amortization of debt discount and expense, plus (2)
capitalized interest, plus (3) an interest factor attributable to rentals under
operating leases.

As of August 31, 2003, we had approximately $1 billion of short-term
indebtedness, primarily consisting of our obligation related to our 3.25% LYONs
due 2020 (which are putable to us on May 20, 2004) and approximately $1.8
billion of long-term indebtedness. We will require substantial amounts of cash
to fund scheduled payments of principal and interest on this outstanding
indebtedness, as well as future capital expenditures and any increased working
capital requirements.

We repurchased LYONs with approximately $1.8 billion aggregate principal amount
at maturity in fiscal 2003 for approximately $1 billion in cash. We repurchased
LYONs with approximately $5.2 billion aggregate principal amount at maturity in
fiscal 2002 for approximately $2.8 billion in cash. As a result, we have
repurchased substantially all of the 2.75% LYONs due 2020 and the 4.0% LYONs
due 2019 leaving only a portion of our 3.25% LYONs due 2020 outstanding. Based
on the aggregate amount outstanding on August 31, 2003, holders of our 3.25%
LYONs will have the option to require us to repurchase their notes on May 20,
2004 in an amount of $587.46 per $1,000 principal amount for a total of
approximately $953 million. While we have the right to satisfy these
obligations with shares of our common stock, because this could result in
significant dilution to our stockholders, which in turn could significantly
reduce our earnings per share, we are likely, given recent prices of our common
stock, to choose to satisfy these obligations with cash. Satisfying these
obligations with cash, however, could impair our liquidity.

In addition, the entire principal amount of $500 million of our 9.625% Senior
Notes issued in February 2002 is due on February 15, 2009 and the entire $150
million principal amount of our 7.375% senior notes are due on March 1, 2006.

WE MAY NOT BE ABLE TO MEET OUR CASH REQUIREMENTS BECAUSE OF A NUMBER OF
FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL.

Our ability to meet our cash requirements (including our debt service
obligations) is dependent upon our future performance, which will be subject to
financial, business and other factors affecting our operations, many of which
are beyond our control. If we are unable to meet our cash requirements from
operations, we would be required to fund these cash requirements by alternative
financings. The degree to which we may be leveraged could materially and
adversely affect our ability to obtain financing for working capital,
acquisitions or other purposes, could make us more vulnerable to industry
downturns and competitive pressures, or could limit our flexibility in planning
for, or reacting to, changes and opportunities in the electronics manufacturing
industry, which may place us at a competitive disadvantage compared to our
competitors. There can be no assurance that we will be able to obtain
alternative financing, that any such financing would be on acceptable terms, or
that we will be permitted to do so under the terms of our existing financing
arrangements. In the absence of such financing, our ability to respond to
changing business and economic conditions, make future acquisitions, react to
adverse operating results, meet our debt service obligations or fund required
capital expenditures or increased working capital requirements may be adversely
affected.

WE MAY NOT BE ABLE TO SELL EXCESS OR OBSOLETE INVENTORY TO CUSTOMERS OR THIRD
PARTIES, WHICH COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR FINANCIAL CONDITION.

The majority of our inventory purchases and commitments are based upon demand
forecasts that our customers provide to us. The customers forecasts, and any
changes to the forecasts, including cancellations, may lead to on-hand
inventory quantities and on-order purchase commitments that are in excess of
the customers revised needs, or that become obsolete.

We generally execute supply agreements with our significant customers in our
Global Operations business unit, which accounts for a majority of the inventory
we purchase. Under these supply agreements, the extent of our customers
responsibility for excess or obsolete inventory related to raw materials that
were previously purchased or ordered to meet that customers demand forecast is
defined. If our customers do not comply with their contractual obligations to
purchase excess or obsolete inventory back from us and we are unable to use or
sell such inventory, our financial condition could be materially harmed. Some
of our customers are in the telecommunications industry, an industry that in
recent years has experienced declining revenue, large losses, negative cash
flows, and several bankruptcies or defaults on borrowing arrangements. There is
a risk that these or other customers may not purchase inventory back from us
despite contractual

29



---



##### Table of Contents



obligations, which could harm our financial condition if we are unable to sell
the inventory at carrying value. In addition, enforcement of these supply
agreements may result in material expenses, delays in payment for inventory
and/or disruptions in our customer relationships.

We are responsible for excess and obsolete inventory resulting from inventory
purchases in excess of inventory needed to meet customer demand forecasts at
the time the purchase commitments were made, as well as any inventory purchases
not made pursuant to the customers responsibility under our supply agreements.
For inventory which is not the customers responsibility, provisions are made
when required to reduce any such excess or obsolete inventory to its estimated
net realizable value, based on the quantity of such inventory on hand, our
customers latest forecasts of production requirements, and our assessment of
available disposition alternatives such as use of components on other programs,
the ability and cost to return components to the vendor, and our estimates of
resale values and opportunities. These assessments are necessarily based upon
various assumptions and market conditions which are subject to rapid change,
and/or which may ultimately prove to be inaccurate. Any material changes in our
assumptions or market conditions could have a significant effect on our
estimates of net realizable value, could necessitate material changes in our
allowances for excess and obsolete inventory, and could have a material adverse
impact on our financial condition. In addition, in the normal course of
business, bona fide disagreements may arise over the amount and/or timing of
such claims, and in order to avoid litigation expenses, collection risks, or
disruption of customer relationships, we may elect to settle such disputes for
lesser amounts than we believe we should be entitled to recover. In these
instances, we must bear the economic loss of any such excess or obsolete
inventory, which could have a material adverse impact on our financial
condition. For example, we recorded a charge of $76 million related to excess
and obsolete inventory in our Global Operations business unit during the second
quarter of fiscal 2003, and there can be no assurance that such charges might
not be necessary in future periods.

OUR SUBSTANTIAL DEBT COULD HAVE MATERIAL ADVERSE CONSEQUENCES.

Our substantial debt could have material adverse consequences. For example, it
could:



| |  | require us to dedicate a substantial portion of our cash flow from
operations and other capital resources to debt service, thereby reducing
our ability to fund working capital, capital expenditures and other cash
requirements;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | increase our vulnerability to adverse economic and industry conditions;
|- |  | -----------------------------------------------------------------------



| |  | make it more difficult or impossible for us to make payments on indebtedness or obligations;
|- |  | --------------------------------------------------------------------------------------------



| |  | limit our flexibility in planning for, or reacting to, changes and
opportunities in, the electronics manufacturing industry, which may
place us at a competitive disadvantage compared to our competitors; and
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | limit our ability to incur additional debt on commercially reasonable
terms, if at all.
|- |  | ---------------------------------------------------------------------------------------

We and our subsidiaries may be able to incur substantial indebtedness in the
future, including our ability to borrow under our secured credit facilities. If
new debt is added to our and our subsidiaries current debt levels, the related
risks that we and they now face could intensify.

THE AGREEMENTS GOVERNING OUR EXISTING AND FUTURE DEBT CONTAIN AND WILL CONTAIN
VARIOUS COVENANTS THAT LIMIT OUR DISCRETION IN THE OPERATION OF OUR BUSINESS.

The agreements and instruments governing our existing and future debt and our
secured credit facilities contain and will contain various restrictive
covenants that, among other things, require us to comply with or maintain
certain financial tests and ratios and restrict our ability to:



| |  | incur debt;
|- |  | -----------



| |  | incur or maintain liens;
|- |  | ------------------------



| |  | redeem and/or prepay debt;
|- |  | --------------------------



| |  | make acquisitions of businesses or entities;
|- |  | --------------------------------------------



| |  | make investments, including loans, guarantees and advances;
|- |  | -----------------------------------------------------------



| |  | make capital expenditures;
|- |  | --------------------------



| |  | engage in mergers, consolidations or certain sales of assets;
|- |  | -------------------------------------------------------------



| |  | engage in transactions with affiliates;
|- |  | ---------------------------------------

30



---



##### Table of Contents





| |  | pay dividends or engage in stock redemptions; and
|- |  | -------------------------------------------------



| |  | enter into certain restrictive agreements.
|- |  | ------------------------------------------

Our secured credit facilities are secured by a pledge of all of the capital
stock of our material domestic subsidiaries, 65% of the capital stock of
certain of our material foreign subsidiaries, certain of our intercompany loans
and certain additional assets, including inventory, accounts receivable and
equipment of us and our domestic subsidiaries. The covenants governing our
secured credit facilities also restrict the operations of certain of our
subsidiaries, including, in some cases, limiting the ability of our
subsidiaries to make distributions to us.

Our ability to comply with covenants contained in our secured credit facilities
and other indebtedness to which we are or may become a party may be affected by
events beyond our control, including prevailing economic, financial and
industry conditions. Our failure to comply with our debt-related obligations
could result in an event of default which, if not cured or waived, could result
in an acceleration of our indebtedness and cross-defaults under our other
indebtedness, which could have a material adverse effect on our financial
condition. We obtained waivers related to the minimum cash interest coverage
ratio covenants and amendments to our consolidated tangible net worth covenants
applicable to various debt and lease agreements as described in Liquidity and
Capital Resources. We were in compliance with all applicable covenants as of
August 31, 2003.

Even if we are able to comply with all applicable covenants, the restrictions
on our ability to operate our business in our sole discretion could harm our
business by, among other things, limiting our ability to take advantage of
financings, mergers, acquisitions and other corporate opportunities.

MOST OF OUR NET SALES COME FROM A SMALL NUMBER OF CUSTOMERS; IF WE LOSE ANY OF
THESE CUSTOMERS, OUR NET SALES COULD DECLINE SIGNIFICANTLY.

Most of our annual net sales come from a small number of our customers. Our ten
largest customers accounted for approximately 61%, 68% and 72%, respectively,
of net sales from continuing operations in fiscal 2003, 2002 and 2001. Some of
these customers individually account for more than ten percent of our annual
net sales. Any material delay, cancellation or reduction of orders from these
or other major customers could cause our net sales to decline significantly,
and we may not be able to reduce the accompanying expenses at the same time. We
cannot guarantee that we will be able to retain any of our largest customers or
any other accounts, or that we will be able to realize the expected revenues
under existing or anticipated supply agreements with these customers. Our
business, market share, financial condition and results of operations will
continue to depend significantly on our ability to obtain orders from new
customers, retain existing customers, realize expected revenues under existing
and anticipated supply agreements, as well as on the financial condition and
success of our customers and their customers.

Net sales may not improve, and could decline, in future periods if there is
continued or resumed weakness in customer demand, particularly in the
telecommunications and computing sectors, resulting from worldwide economic
conditions. In addition, net sales were adversely affected due to our unwinding
of our optical products supply agreement with Lucent during fiscal 2003, which
had previously been expected to generate $2 billion in revenues over the
original three-year contract period. Sales, gross profit and operating loss
from this supply agreement were $92 million, $1 million and $7 million,
respectively, in fiscal 2003. Production under this supply agreement
substantially ceased in March 2003.

OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR
LOCATIONS, OR DELAY PRODUCTION.

To remain competitive, EMS companies must provide increasingly rapid product
turnaround, at increasingly competitive prices, for their customers. We
generally do not have long-term contractual commitments from our top customers.
As a result, we cannot guarantee that we will continue to receive any net sales
from our customers. Customers may cancel their orders, change production
quantities or delay production for a number of reasons. Many of our customers
industries have recently experienced a significant decrease in demand for their
products and services, as well as substantial price competition. The generally
uncertain economic condition of several of our customers industries has
resulted, and may continue to result, in some of our customers delaying
purchases on some of the products we manufacture for them, and placing purchase
orders for lower volumes of products than previously anticipated.
Cancellations, reductions or delays by a significant customer or by a group of
customers would seriously harm our results of operations by reducing the
volumes of products manufactured by us for the customers and delivered in that
period, as well as causing a delay in the repayment of our expenditures for
inventory in preparation for customer orders and lower asset utilization
resulting in lower gross margins. In addition, customers may require that
manufacturing of their products be transitioned from one facility to another to
achieve cost and other objectives. Such transfers, if unanticipated or not
flawlessly executed, can result in various inefficiencies and costs, including
excess capacity and overhead at one facility and capacity constraints and
related strains on our resources at the other, disruption and delays in product
deliveries and sales, deterioration in product quality and customer
satisfaction, and increased manufacturing and scrap costs.

31



---



##### Table of Contents



OUR STRATEGIC RELATIONSHIPS WITH MAJOR CUSTOMERS CREATE RISKS.

In the past several years, we completed several strategic transactions with OEM
customers. Under these arrangements, we generally acquired inventory, equipment
and other assets from the OEM, and leased (or in some cases acquired) their
manufacturing facilities, while simultaneously entering into multi-year supply
agreements for the production of their products. There has been strong
competition among EMS companies for these transactions, and this competition
may continue to be a factor in customers selection of their EMS providers.
These transactions contributed to a significant portion of our past revenue
growth, as well as to a significant portion of our more recent restructuring
charges and goodwill and intangible asset impairments. While we do not
anticipate our acquisitions of OEM plants and equipment in the near future to
return to the levels at which they occurred in the recent past, there may be
occasions on which we determine it to be advantageous to complete acquisitions
in selected geographic and/or industry markets. As part of such arrangements,
we would typically enter into supply agreements with the divesting OEMs, but
such agreements generally do not require any minimum volumes of purchases by
the OEM and the actual volume of purchases may be less than anticipated.
Arrangements which may be entered into with divesting OEMs typically would
involve many risks, including the following:



| |  | we may pay a purchase price to the divesting OEMs that exceeds the
value we are ultimately able to realize from the future business of the
OEM;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | the integration into our business of the acquired assets and facilities may be time-consuming and costly;
|- |  | ---------------------------------------------------------------------------------------------------------



| |  | we, rather than the divesting OEM, would bear the risk of excess capacity;
|- |  | --------------------------------------------------------------------------



| |  | we may not achieve anticipated cost reductions and efficiencies;
|- |  | ----------------------------------------------------------------



| |  | we may be unable to meet the expectations of the OEM as to volume, product quality, timeliness and cost reductions; and
|- |  | -----------------------------------------------------------------------------------------------------------------------



| |  | if demand for the OEMs products declines, the OEM may reduce its
volume of purchases, and we may not be able to sufficiently reduce the
expenses of operating the facility or use the facility to provide
services to other OEMs, and we might find it appropriate to close,
rather than continue to operate, the facility, and any such actions
would require us to incur significant restructuring and/or impairment
charges.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of these and other risks, we may be unable to achieve anticipated
levels of profitability under such arrangements and they may not result in
material revenues or contribute positively to our earnings. Additionally, other
OEMs may not wish to obtain logistics or operations management services from
us.

IF WE ARE UNABLE TO MANAGE OUR ACQUISITIONS AND DIVESTITURES, AND
COST-EFFECTIVELY RUN OUR OPERATIONS AND DISPOSE OF NON-STRATEGIC ASSETS, OUR
PROFITABILITY COULD BE ADVERSELY AFFECTED.

Until fiscal 2002, we experienced rapid growth over many years. During fiscal
2002, we completed our acquisition of C-MAC, as well as other smaller
transactions. While we may consider future acquisitions of companies and
strategic assets on a selective basis, subject to compliance with any
restrictions that may exist under certain of our financing instruments, we are
presently focused on divestiture activity. We are in the process of divesting
certain parts of our current operations that we do not believe to be strategic
or synergistic to our primary business focus, and we believe such divestments,
if successfully and timely completed at the presently anticipated valuations
and without undue disruption of operations, present us with the opportunity to
improve our liquidity and reduce our interest and operating expenses.

In order to achieve anticipated revenue and other financial performance
targets, we must continue to manage our assets and operations efficiently while
simultaneously preparing parts of our operations for divestiture. Our
divestiture activities are expected to place a heavy strain on various
personnel and management resources, and must be carefully managed in order to
avoid or minimize disruptions in the business operations of the affected
businesses, customer relations and cash flows, and to enable us to maximize the
value which we may be able to realize from the divestments. There can be no
assurance that such divestment activities will be able to be consummated
without an adverse impact on the near-term operations of the affected
businesses or on Solectron as a whole. Any failure to successfully manage and
consummate the divestments in a timely manner could harm our financial
condition and results of operations, as well as adversely impact the realizable
value of the divested operations. In addition, there can be no assurance that
we will be successful in realizing the presently anticipated benefits from our
divestment activities, as such transactions involve significant risks and
uncertainties with respect to valuation of the entities to be divested,
particularly given the potential disruption of operations inherent in the
divestiture process, and may result in significant costs, expenses and charges
that may significantly reduce the value which we may realize in connection with
the anticipated divestiture transactions. In the event we fail to consummate a
divestment, we may need to incur restructuring charges.

Our ability to manage and integrate our acquisitions, as well as any future
acquisitions, will require progressive increases in manufacturing and logistics
infrastructure, as well as enhancements or upgrades of accounting and other
internal management systems and the implementation of a variety of procedures
and controls. We cannot guarantee that significant problems in these areas will
not occur. Any failure to enhance or expand these systems and implement such
procedures and controls in an efficient manner and at a pace consistent with

32



---



##### Table of Contents



our business activities could harm our financial condition and results of
operations. In addition, we may experience inefficiencies from the management
of geographically dispersed facilities and incur substantial infrastructure and
working capital costs. We incurred approximately $2.3 billion (including
goodwill and other intangible impairment charges of approximately $1.8 billion)
of restructuring and impairment costs relating to continuing operations in
fiscal 2003 and approximately $3.3 billion (including goodwill and other
intangible asset impairment charges of approximately $2.7 billion) during
fiscal 2002. See also the Risk Factor entitled If We Incur More
Restructuring-Related Charges Than Currently Anticipated, Our Financial
Condition and Results of Operations May Suffer.

POSSIBLE FLUCTUATION OF OPERATING RESULTS FROM QUARTER TO QUARTER AND FACTORS
OUT OF OUR CONTROL COULD AFFECT THE MARKET PRICE OF OUR SECURITIES.

Our quarterly earnings and/or stock price may fluctuate in the future due to a
number of factors including the following:



| |  | differences in the profitability of the types of manufacturing
services we provide. For example, high velocity and low complexity
printed circuit boards and systems assembly services have lower gross
margins than low volume/complex printed circuit boards and systems
assembly services;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to maximize the hours of use of our equipment and
facilities is dependent on the duration of the production run time for
each job and customer;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the amount of automation that we can use in the manufacturing process
for cost reduction varies, depending upon the complexity of the product
being made;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our customers demand for our products and their ability to take
delivery of our products and to make timely payments for delivered
products;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to optimize the ordering of inventory as to timing and
amount to avoid holding inventory in excess of immediate production
needs;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to offer technologically advanced, cost-effective, quick response, manufacturing services;
|- |  | ------------------------------------------------------------------------------------------------------



| |  | fluctuations in the availability and pricing of components;
|- |  | -----------------------------------------------------------



| |  | timing of expenditures in anticipation of increased sales;
|- |  | ----------------------------------------------------------



| |  | cyclicality in our target markets;
|- |  | ----------------------------------



| |  | fluctuations in our market share;
|- |  | ---------------------------------



| |  | expenses and disruptions associated with acquisitions and divestitures;
|- |  | -----------------------------------------------------------------------



| |  | announcements of operating results and business conditions by our customers;
|- |  | ----------------------------------------------------------------------------



| |  | announcements by our competitors relating to new customers or technological innovation or new services;
|- |  | -------------------------------------------------------------------------------------------------------



| |  | economic developments in the electronics industry as a whole;
|- |  | -------------------------------------------------------------



| |  | credit rating and stock analyst downgrades;
|- |  | -------------------------------------------



| |  | political and economic developments in countries in which we have operations; and
|- |  | ---------------------------------------------------------------------------------



| |  | general market conditions.
|- |  | --------------------------

If our operating results in the future are below the expectations of securities
analysts and investors, the market price of our outstanding securities could be
harmed.

33



---



##### Table of Contents



IF WE INCUR MORE RESTRUCTURING-RELATED CHARGES THAN CURRENTLY ANTICIPATED, OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY SUFFER.

In furtherance of the continued implementation of the series of restructuring
plans which we have initiated commencing in fiscal 2001, we expect to incur
restructuring-related charges of an aggregate of approximately $50 million to
$75 million over the next few quarters, primarily to consolidate facilities and
reduce our workforce in North America and Europe, although no certainty can be
attributed to this amount or the timing of its recognition. We continue to
evaluate our cost structure relative to our revenue levels and may take
additional restructuring charges in the future. If our estimates about future
restructuring charges prove to be inadequate, our financial condition and
results of operations may suffer. In addition, if we are unable to successfully
move production from higher cost to lower cost facilities without experiencing
degradation of quality or timeliness of our service to our customers, our
business could be harmed.

WE DEPEND ON LIMITED OR SOLE SOURCE SUPPLIERS FOR CRITICAL COMPONENTS. THE
INABILITY TO OBTAIN SUFFICIENT COMPONENTS AS REQUIRED, AND UNDER FAVORABLE
PURCHASE TERMS, WOULD CAUSE HARM TO OUR BUSINESS.

We are dependent on certain suppliers, including limited and sole source
suppliers, to provide key components used in our products. We have experienced,
and may continue to experience, delays in component deliveries, which in turn
could cause delays in product shipments and require the redesign of certain
products. In addition, if we are unable to procure necessary components under
favorable purchase terms, including at favorable prices and with the order
lead-times needed for the efficient and profitable operation of our factories,
our results of operations could suffer. The electronics industry has
experienced in the past, and may experience in the future, shortages in
semiconductor devices, including application-specific integrated circuits,
DRAM, SRAM, flash memory, certain passive devices such as tantalum capacitors,
and other commodities that may be caused by such conditions as overall market
demand surges or supplier production capacity constraints. The inability to
continue to obtain sufficient components as and when required, or to develop
alternative sources as and when required, could cause delays, disruptions or
reductions in product shipments or require product redesigns which could damage
relationships with current or prospective customers, and increase inventory
levels and costs, thereby causing harm to our business.

WE POTENTIALLY BEAR THE RISK OF PRICE INCREASES ASSOCIATED WITH SHORTAGES IN
ELECTRONICS COMPONENTS.

At various times, there have been shortages of components in the electronics
industry leading to increased component prices. One of the services that we
perform for many customers is purchasing electronics components used in the
manufacturing of the customers products. As a result of this service, we
potentially bear the risk of price increases for these components if we are
unable to purchase components at the pricing level anticipated to support the
margins assumed in our agreements with our customers.

34



---



##### Table of Contents



OUR NET SALES COULD DECLINE IF OUR COMPETITORS PROVIDE COMPARABLE MANUFACTURING
SERVICES AND IMPROVED PRODUCTS AT A LOWER COST.

We compete with different contract manufacturers, depending on the type of
service we provide or the geographic locale of our operations, in an industry
which is intensely competitive. These competitors may have greater
manufacturing, financial, R&D and/or marketing resources than we have. In
addition, we may not be able to offer prices as low as some of our competitors
because those competitors may have lower cost structures as a result of their
geographic location or the services they provide, or because such competitors
are willing to accept business at lower margins in order to utilize more of
their excess capacity. In that event, our net sales could decline. We also
expect our competitors to continue to improve the performance of their current
products or services, to reduce their current products or service sales prices
and to introduce new products or services that may offer greater value-added
performance and improved pricing. Any of these could cause a decline in sales,
loss of market acceptance of our products or services and corresponding loss of
market share, or profit margin compression.

WE DEPEND ON THE CONTINUING TREND OF OEMS TO OUTSOURCE.

A substantial factor in our past revenue growth was attributable to the
transfer of manufacturing and supply-based management activities from our OEM
customers. Future growth is partially dependent on new outsourcing
opportunities. To the extent that these opportunities are not available, our
future growth would be unfavorably impacted.

OUR NON-U.S. LOCATIONS REPRESENT A SIGNIFICANT PORTION OF OUR NET
SALES; WE ARE EXPOSED TO RISKS ASSOCIATED WITH OPERATING
INTERNATIONALLY.

Approximately 64%, 66% and 53% of our net sales from continuing operations came
from sites outside the United States in fiscal 2003, 2002 and 2001,
respectively. As a result of our foreign sales and facilities, our operations
are subject to a variety of risks and costs that are unique to international
operations, including the following:



| |  | adverse movement of foreign currencies against the U.S. dollar in which our results are reported;
|- |  | -------------------------------------------------------------------------------------------------



| |  | import and export duties, and value added taxes;
|- |  | ------------------------------------------------



| |  | import and export regulation changes that could erode our profit margins or restrict exports;
|- |  | ---------------------------------------------------------------------------------------------



| |  | potential restrictions on the transfer of funds;
|- |  | ------------------------------------------------



| |  | government and license requirements governing the transfer of technology and products abroad;
|- |  | ---------------------------------------------------------------------------------------------

35



---



##### Table of Contents





| |  | disruption of local labor supply and/or transportation services;
|- |  | ----------------------------------------------------------------



| |  | inflexible employee contracts in the event of business downturns;
|- |  | -----------------------------------------------------------------



| |  | the burden and cost of compliance with import and export regulations and foreign laws; and
|- |  | ------------------------------------------------------------------------------------------



| |  | economic and political risks in emerging or developing economies.
|- |  | -----------------------------------------------------------------

We have been granted tax holidays, which are effective through 2011 subject to
some conditions, for our Malaysian and Singapore sites. We have also been
granted various tax holidays in China. These tax holidays are effective for
various terms and are subject to some conditions. It is possible that the
current tax holidays will be terminated or modified or that future tax holidays
that we may seek will not be granted. If the current tax holidays are
terminated or modified, or if additional tax holidays are not granted in the
future or when our current tax holidays expire, our future effective income tax
rate could increase.

WE ARE EXPOSED TO FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES.

We enter into foreign exchange forward contracts intended to reduce the
short-term impact of foreign currency fluctuations on foreign currency cash,
receivables, investments and payables. The gains and losses on the foreign
exchange forward contracts are intended to offset the transaction gains and
losses on the foreign currency cash, receivables, investments, and payables
recognized in earnings. We do not enter into foreign exchange forward contracts
for speculative purposes. Our foreign exchange forward contracts related to
current assets and liabilities are generally three months or less in original
maturity.

As of August 31, 2003, we had outstanding foreign exchange forward contracts
with a total notional amount of approximately $596 million
related to continuing operations. The change in value
of the foreign exchange forward contracts resulting from a hypothetical 10%
change in foreign exchange rates would be offset by the remeasurement of the
related balance sheet items, the result of which would not be significant.

As of August 31, 2003, the majority of our foreign currency hedging contracts
were scheduled to mature in approximately three months and there were no
material deferred gains or losses. In addition, our international operations in
some instances act as a natural hedge because both operating expenses and a
portion of sales are denominated in local currency. In these instances,
although an unfavorable change in the exchange rate of a foreign currency
against the U.S. dollar will result in lower sales when translated to U.S.
dollars, operating expenses will also be lower in these circumstances. Although
approximately 23% of our net sales from continuing operations in fiscal 2003
were denominated in currencies other than U.S. dollar, we do not believe our
total exposure to be significant because of natural hedges.

We have currency exposure arising from both sales and purchases denominated in
currencies other than the functional currency of our sites. Fluctuations in the
rate of exchange between the currency of the exposure and the functional
currency of our sites could seriously harm our business, operating results and
financial condition. For example, if there is an increase in the rate at which
a foreign currency is exchanged for U.S. dollars, it will require more of the
foreign currency to equal a specified amount of U.S. dollars than before the
rate increase. In such cases, and if we price our products and services in the
foreign currency, we will receive less in U.S. dollars than we did before the
rate increase went into effect. If we price our products and services in U.S.
dollars and competitors price their products in local currency, an increase in
the relative strength of the U.S. dollar could result in our prices being
uncompetitive in markets where business is transacted in the local currency.

WE ARE EXPOSED TO INTEREST RATE FLUCTUATIONS.

The primary objective of our investment activities is to preserve principal,
while at the same time maximize yields without significantly increasing risk.
To achieve this objective, we maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including both government
and corporate obligations, certificates of deposit and money market funds. As
of August 31, 2003 substantially all of our total portfolio was scheduled to
mature in less than six months. In addition, our investments are diversified
and of relatively short maturity. A hypothetical 10% change in interest rates
would not have a material effect on our investment portfolios.

We had approximately $500 million of cash equivalents and short-term
investments that are subject to interest rate risk as of August 31, 2003. The
weighted average interest rate of these balances as of August 31, 2003 was
1.0%. The fair value of these cash equivalents and short-term investments
approximated the carrying value as of August 31, 2003.

Interest on long-term debt instruments is payable at fixed rates. In addition,
the amount of principal to be repaid at maturity is also fixed. During the
third quarter of fiscal 2002, we entered into interest rate swap transactions
under which we pay variable rates and we receive fixed rates. The interest
swaps effectively converted $1 billion of our long-term debt with fixed
interest rates into debt with variable rates of interest. Our interest
rate swaps have a total notional amount of $1 billion. The first
$500 million of swap

36



---



##### Table of Contents



transactions relate to our 7.25% $1.1 billion ACES and expire on November 15,
2004. The second $500 million of swap transactions relate to our 9.625% $500
million senior notes and expire on February 15, 2009. Under each of these swap
transactions, we pay an interest rate equal to the 3-month LIBOR rate plus a
fixed spread. In exchange, we receive fixed interest rates of 7.25% on the $500
million related to the ACES and 9.625% on the $500 million related to the
senior notes. On November 15, 2002, the original swaps related to the senior
notes were settled. This settlement resulted in cash received and a gain of
approximately $26 million, which is being amortized over the remaining life of
the senior notes. Also on November 15, 2002, Solectron entered into swaps with
terms similar to the original swap transactions used to hedge the interest paid
on the senior notes and designated the swaps as fair value hedges under SFAS
No. 133.

WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS.

Our ability to effectively compete may be affected by our ability to protect
our proprietary information. We hold a number of patents and other license
rights. These patents and license rights may not provide meaningful protection
for our manufacturing processes and equipment innovations, which could result
in litigation. Any resulting litigation could be lengthy and costly and could
harm our financial condition.

WE COULD BECOME INVOLVED IN INTELLECTUAL PROPERTY DISPUTES.

In the past we have been and may from time to time continue to be, notified of
claims that we may be infringing patents, copyrights or other intellectual
property rights owned by other parties. In the event of an infringement claim,
we may be required to spend a significant amount of money to develop a
non-infringing alternative, to obtain licenses, and/or to defend against the
claim. We may not be successful in developing such an alternative or obtaining
a license on reasonable terms, if at all. Any litigation, even where an
infringement claim is without merit, could result in substantial costs and
diversion of resources. Accordingly, the resolution or adjudication of
intellectual property disputes could have a material adverse effect on our
business, financial condition and results of operations.

FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD HARM OUR BUSINESS.

As a company in the electronics manufacturing services industry, we are subject
to a variety of environmental regulations, including those relating to the use,
storage, discharge and disposal of hazardous chemicals used during our
manufacturing process as well as air quality and water quality regulations,
restrictions on water use, and storm water regulations. Although we have never
sustained any significant loss as a result of non-compliance with such
regulations, any failure by us to comply with environmental laws and
regulations could result in liabilities or the suspension of production. In
addition, these laws and regulations could restrict our ability to expand our
facilities or require us to acquire costly equipment or incur other significant
costs to comply with regulations.

We own and lease some contaminated sites (for some of which we have been
indemnified by third parties for required remediation), sites for which there
is a risk of the presence of contamination, and sites with some levels of
contamination for which we may be liable and which may or may not ultimately
require any remediation. We have obtained environmental insurance to reduce
potential environmental liability exposures posed by some of our operations and
facilities. We believe, based on our current knowledge, that the cost of any
groundwater or soil clean up that may be required at our facilities would not
materially harm our business, financial condition and results of operations.
Nevertheless, the process of remediating contamination in soil and groundwater
at facilities is costly and cannot be estimated with high levels of confidence,
and there can be no assurance that the costs of such activities would not harm
our business, financial condition and results of operations in the future.

OUR RATING DOWNGRADES MAKE IT MORE EXPENSIVE FOR US TO BORROW MONEY.

On December 18, 2001, Moodys Investors Service and Standard & Poors
downgraded our senior unsecured debt rating to Ba1 and BB+, respectively,
with a negative outlook. On March 22, 2002, Standard and Poors downgraded our
senior unsecured debt rating to BB with a negative outlook. On May 14, 2002,
Moodys Investors Services downgraded our senior unsecured debt rating to Ba3
with a stable outlook. On March 21, 2003, Standard and Poors downgraded our
senior unsecured debt rating to BB- with a negative outlook. On June 20,
2003, Standard and Poors placed our corporate credit and other ratings on
Credit Watch with negative implications. On June 20, 2003, Moodys placed our
ratings under review for possible downgrade. These rating downgrades increase
our cost of capital should we borrow under our revolving lines of credit, and
may make it more expensive for us to raise additional capital in the future on
terms that are acceptable to us or at all, which may have other negative
implications on our business, many of which are beyond our control.

FAILURE TO ATTRACT AND RETAIN KEY PERSONNEL AND SKILLED ASSOCIATES COULD HURT
OUR OPERATIONS.

Our continued success depends to a large extent upon the efforts and abilities
of key managerial and technical associates. Losing the services of key
personnel could harm us. Our business also depends upon our ability to continue
to attract key executives and retain senior managers and skilled associates.
Failure to do so could harm our operations.

37



---



##### Table of Contents









ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Managements Discussion and Analysis of Financial Condition and Results of
Operations for factors related to fluctuations in the exchange rates of foreign
currency and fluctuations in interest rates under Risk Factors -We are exposed
to fluctuations in foreign currency exchange rates, and We are exposed to
interest rate fluctuations.







ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by Item 8 of Form 10-K is presented here in the
following order:

PageUnaudited Quarterly Financial Information
    
    
    39Consolidated Balance Sheets
    
    
    40Consolidated Statement of Operations
    
    
    41Consolidated Statements of Stockholders Equity
    
    
    42Consolidated Statements of Comprehensive Loss
    
    
    43Consolidated Statement of Cash Flows
    
    
    44Notes to the Consolidated Financial Statements
    
    
    46Independent Auditors Report
    
    
    74Financial
Statement Schedule II  Valuation and Qualifying Accounts
    
    
    78


38



---



##### Table of Contents



Unaudited Quarterly Financial Information

For each fiscal quarter during the two fiscal years ended August 31, 2003 (in
millions, except percentages and per-share data):

Fiscal 2003
    
    First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth QuarterNet sales
    
    $
    2,943.3
    
    
    $
    2,637.3
    
    
    $
    2,655.4
    
    
    $
    2,778.0Gross profit
    
    $
    195.8
    
    
    $
    94.0
    
    
    $
    136.4
    
    
    $
    155.8Gross margin
    
    
    6.7
    %
    
    
    3.6
    %
    
    
    5.1
    %
    
    
    5.6
    %Loss from continuing operations
    
    $
    (74.8
    )
    
    $
    (115.0
    )
    
    $
    (2,739.8
    )
    
    $
    (175.3
    )Income (loss) from discontinued
operations, net of tax
    
    $
    3.9
    
    
    $
    4.2
    
    
    $
    (361.4
    )
    
    $
    (3.8
    )Net loss
    
    $
    (70.9
    )
    
    $
    (110.8
    )
    
    $
    (3,101.2
    )
    
    $
    (179.1
    )Basic and diluted net loss per share
    
    $
    (0.09
    )
    
    $
    (0.14
    )
    
    $
    (3.31
    )
    
    $
    (0.21
    )Fiscal 2002Net sales
    
    $
    3,052.9
    
    
    $
    2,757.5
    
    
    $
    2,832.7
    
    
    $
    2,928.1Gross profit
    
    $
    194.2
    
    
    $
    140.7
    
    
    $
    170.1
    
    
    $
    51.5Gross margin
    
    
    6.4
    %
    
    
    5.1
    %
    
    
    6.0
    %
    
    
    1.8
    %Loss from continuing operations
    
    $
    (52.8
    )
    
    $
    (137.4
    )
    
    $
    (291.2
    )
    
    $
    (2,656.7
    )Income from discontinued operations,
net of tax
    
    $
    0.3
    
    
    $
    11.4
    
    
    $
    6.8
    
    
    $
    9.4Net loss
    
    $
    (52.5
    )
    
    $
    (126.0
    )
    
    $
    (284.4
    )
    
    $
    (2,647.3
    )Basic and diluted net loss per share
    
    $
    (0.08
    )
    
    $
    (0.17
    )
    
    $
    (0.35
    )
    
    $
    (3.22
    )


39



---



##### Table of Contents



SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)

August 312003
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,426.1
    
    
    $
    1,749.7Restricted cash and cash equivalents
    
    
    45.6
    
    
    
    135.7Short-term investments
    
    
    27.5
    
    
    
    232.5Restricted short-term investments
    
    
    19.9
    
    
    
    99.7Accounts receivable, less allowance for doubtful accounts of
$44.7 and $76.0, respectively
    
    
    1,570.0
    
    
    
    1,670.2Inventories
    
    
    1,414.9
    
    
    
    1,822.1Prepaid expenses and other current assets
    
    
    281.4
    
    
    
    728.6Current assets of discontinued operations
    
    
    168.4
    
    
    
    221.5Total current assets
    
    
    4,953.8
    
    
    
    6,660.0Net property and equipment
    
    
    829.0
    
    
    
    1,081.3Goodwill
    
    
    185.9
    
    
    
    1,806.8Other assets
    
    
    386.8
    
    
    
    931.1Long-term assets of discontinued operations
    
    
    174.0
    
    
    
    534.8Total assets
    
    $
    6,529.5
    
    
    $
    11,014.0LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    977.9
    
    
    $
    636.8Accounts payable
    
    
    1,404.9
    
    
    
    1,471.3Accrued employee compensation
    
    
    178.9
    
    
    
    196.9Accrued expenses
    
    
    346.5
    
    
    
    475.9Other current liabilities
    
    
    200.3
    
    
    
    98.8Current liabilities of discontinued operations
    
    
    126.4
    
    
    
    125.5Total current liabilities
    
    
    3,234.9
    
    
    
    3,005.2Long-term debt
    
    
    1,817.6
    
    
    
    3,181.2Other long-term liabilities
    
    
    40.4
    
    
    
    45.1Long-term liabilities of discontinued operations
    
    
    14.6
    
    
    
    9.8Total liabilities
    
    $
    5,107.5
    
    
    $
    6,241.3Commitments and contingenciesStockholders equity:Preferred stock, $0.001 par value; 1.2 shares authorized;
one share issued
    
    $
    
    
    
    $
    Common stock, $0.001 par value; 1,600.0 shares authorized;
832.6 and 824.8 shares issued and outstanding, respectively
    
    
    0.8
    
    
    
    0.8Additional paid-in capital
    
    
    6,658.2
    
    
    
    6,635.9Accumulated deficit
    
    
    (5,040.6
    )
    
    
    (1,578.6
    )Accumulated other comprehensive losses
    
    
    (196.4
    )
    
    
    (285.4
    )Total stockholders equity
    
    
    1,422.0
    
    
    
    4,772.7Total liabilities and stockholders equity
    
    $
    6,529.5
    
    
    $
    11,014.0


See accompanying notes to consolidated financial statements.

40



---



##### Table of Contents



SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share data)

Years Ended August 312003
    
    2002
    
    2001Net sales
    
    $
    11,014.0
    
    
    $
    11,571.2
    
    
    $
    18,569.0Cost of sales
    
    
    10,432.0
    
    
    
    11,014.7
    
    
    
    17,137.1Gross profit
    
    
    582.0
    
    
    
    556.5
    
    
    
    1,431.9Operating expenses:Selling, general and administrative
    
    
    631.5
    
    
    
    744.9
    
    
    
    799.0Research and development
    
    
    69.1
    
    
    
    59.7
    
    
    
    65.9Restructuring and impairment costs
    
    
    641.3
    
    
    
    807.1
    
    
    
    517.3Goodwill impairment
    
    
    1,639.2
    
    
    
    2,500.0
    
    
    
    Acquisition costs
    
    
    
    
    
    
    
    
    
    
    23.9Goodwill amortization expense
    
    
    
    
    
    
    
    
    
    
    139.9Operating loss
    
    
    (2,399.1
    )
    
    
    (3,555.2
    )
    
    
    (114.1
    )Interest income
    
    
    31.2
    
    
    
    69.3
    
    
    
    116.9Interest expense
    
    
    (210.3
    )
    
    
    (241.6
    )
    
    
    (175.6
    )Other income  net
    
    
    54.3
    
    
    
    106.4
    
    
    
    62.6Operating loss from continuing operations
before income taxes
    
    
    (2,523.9
    )
    
    
    (3,621.1
    )
    
    
    (110.2
    )Income tax expense (benefit)
    
    
    581.0
    
    
    
    (483.0
    )
    
    
    (34.2
    )Net loss from continuing operations
    
    $
    (3,104.9
    )
    
    $
    (3,138.1
    )
    
    $
    (76.0
    )Discontinued operations:Income (loss) from discontinued operations
    
    
    (293.8
    )
    
    
    43.7
    
    
    
    (47.5
    )Income tax expense
    
    
    63.3
    
    
    
    15.8
    
    
    
    Income (loss) from discontinued operations
    
    
    (357.1
    )
    
    
    27.9
    
    
    
    (47.5
    )Net loss
    
    $
    (3,462.0
    )
    
    $
    (3,110.2
    )
    
    $
    (123.5
    )Basic and diluted net income (loss) per shareContinuing operations
    
    $
    (3.75
    )
    
    $
    (4.02
    )
    
    $
    (0.12
    )Discontinued operations
    
    
    (0.43
    )
    
    
    0.04
    
    
    
    (0.07
    )Basic and diluted net loss per share
    
    $
    (4.18
    )
    
    $
    (3.98
    )
    
    $
    (0.19
    )Shares used to compute basic and diluted net loss per share
    
    
    827.7
    
    
    
    780.9
    
    
    
    641.8


See accompanying notes to consolidated financial statements.

41



---



##### Table of Contents



SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in millions)

Retained
      
      AccumulatedAdditional
      
      Earnings
      
      Other
      
      TotalCommon
        Stock
      
      Paid-In
      
      (Accumulated
      
      Comprehensive
      
      Stockholders'Shares
      
      Amount
      
      Capital
      
      Deficit)
      
      Losses
      
      EquityBalances
          as of August 31, 2000
      
      
      605.0
      
      
      $
      0.6
      
      
      $
      2,259.1
      
      
      $
      1,656.8
      
      
      $
      (114.4
      )
      
      $
      3,802.1Net
          loss
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (123.5
      )
      
      
      
      
      
      
      (123.5
      )Adjustment
          to conform Texas site year end
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (1.7
      )
      
      
      
      
      
      
      (1.7
      )Foreign
          currency translation
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (139.8
      )
      
      
      (139.8
      )Unrealized
          loss on investments
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (5.0
      )
      
      
      (5.0
      )Stock
          issued under stock option and
          employee purchase plans
      
      
      8.6
      
      
      
      
      
      
      
      97.7
      
      
      
      
      
      
      
      
      
      
      
      97.7Stock
          and stock options issued in business combinations
      
      
      2.5
      
      
      
      
      
      
      
      69.8
      
      
      
      
      
      
      
      
      
      
      
      69.8Issuance
          of common stock
      
      
      42.1
      
      
      
      0.1
      
      
      
      1,410.5
      
      
      
      
      
      
      
      
      
      
      
      1,410.6Tax
          benefit associated with exercise of stock options
      
      
      
      
      
      
      
      
      
      
      40.5
      
      
      
      
      
      
      
      
      
      
      
      40.5Balances
          as of August 31, 2001
      
      
      658.2
      
      
      $
      0.7
      
      
      $
      3,877.6
      
      
      $
      1,531.6
      
      
      $
      (259.2
      )
      
      $
      5,150.7Net
          loss
      
      
      
      
      
      $
      
      
      
      $
      
      
      
      $
      (3,110.2
      )
      
      $
      
      
      
      $
      (3,110.2
      )Foreign
          currency translation
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (36.3
      )
      
      
      (36.3
      )Unrealized
          gain on investments
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      10.1
      
      
      
      10.1Stock
          issued under stock option and employee purchase plans
      
      
      6.7
      
      
      
      
      
      
      
      38.8
      
      
      
      
      
      
      
      
      
      
      
      38.8Stock
          and stock options issued in business combinations
      
      
      160.4
      
      
      
      0.1
      
      
      
      2,676.1
      
      
      
      
      
      
      
      
      
      
      
      2,676.2Repurchase
          of common stock
      
      
      (0.5
      )
      
      
      
      
      
      
      (4.5
      )
      
      
      
      
      
      
      
      
      
      
      (4.5
      )ACES
          stock purchase contracts
      
      
      
      
      
      
      
      
      
      
      46.9
      
      
      
      
      
      
      
      
      
      
      
      46.9Deferred
          stock-based compensation from business combination
      
      
      
      
      
      
      
      
      
      
      (7.2
      )
      
      
      
      
      
      
      
      
      
      
      (7.2
      )Other
      
      
      
      
      
      
      
      
      
      
      8.2
      
      
      
      
      
      
      
      
      
      
      
      8.2Balances
          as of August 31, 2002
      
      
      824.8
      
      
      $
      0.8
      
      
      $
      6,635.9
      
      
      $
      (1,578.6
      )
      
      $
      (285.4
      )
      
      $
      4,772.7Net
          loss
      
      
      
      
      
      $
      
      
      
      $
      
      
      
      $
      (3,462.0
      )
      
      $
      
      
      
      $
      (3,462.0
      )Foreign
          currency translation
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      109.0
      
      
      
      109.0Unrealized
          loss on investments
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (20.0
      )
      
      
      (20.0
      )Stock
          issued under stock option and employee purchase plans
      
      
      5.1
      
      
      
      
      
      
      
      15.5
      
      
      
      
      
      
      
      
      
      
      
      15.5Other
      
      
      2.7
      
      
      
      
      
      
      
      6.8
      
      
      
      
      
      
      
      
      
      
      
      6.8Balances
          as of August 31, 2003
      
      
      832.6
      
      
      $
      0.8
      
      
      $
      6,658.2
      
      
      $
      (5,040.6
      )
      
      $
      (196.4
      )
      
      $
      1,422.0


See accompanying notes to consolidated financial statements.

42



---



##### Table of Contents



SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in millions)

Years Ended August
        312003
      
      2002
      
      2001Net
          loss
      
      $
      (3,462.0
      )
      
      $
      (3,110.2
      )
      
      $
      (123.5
      )Other
          comprehensive income (loss):Foreign
          currency translation adjustments net of income tax expense of $1.7 in
          2003 income tax benefit of $6.3 in 2002 and income tax expense of $13.5
          in 2001
      
      
      109.0
      
      
      
      (36.3
      )
      
      
      (139.8
      )Unrealized
          gain (loss) on investmentsnet
          of income tax benefit of $0.3 in 2003, income tax expense of $0.1 in
          2002, and income tax benefit of $3.1 in 2001
      
      
      (20.0
      )
      
      
      10.1
      
      
      
      (5.0
      )Comprehensive
          loss
      
      $
      (3,373.0
      )
      
      $
      (3,136.4
      )
      
      $
      (268.3
      )


Accumulated foreign currency translation losses were $186.7 million at August
31, 2003, $295.7 million at August 31, 2002 and $259.4 million at August 31,
2001. Foreign currency translation adjustments consist of adjustments to
consolidate subsidiaries that use the local currency as their functional
currency and transaction gains and losses related to intercompany
dollar-denominated debt that is not expected to be repaid in the foreseeable
future.

See accompanying notes to consolidated financial statements.

43



---



##### Table of Contents



SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)

Years Ended August 312003
    
    2002
    
    2001Cash flows from operating activities of continuing operations:Net loss from continuing operations
    
    $
    (3,104.9
    )
    
    $
    (3,138.1
    )
    
    $
    (76.0
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    263.9
    
    
    
    353.1
    
    
    
    531.5Amortization of debt issuance costs and accretion
of discount on notes payable
    
    
    84.6
    
    
    
    137.5
    
    
    
    146.5Tax benefit associated with exercise
of stock options
    
    
    
    
    
    
    3.6
    
    
    
    40.5Inventory charge
    
    
    76.3
    
    
    
    97.0
    
    
    
    Gain on retirement of debt
    
    
    (39.4
    )
    
    
    (75.7
    )
    
    
    Deferred tax charge
    
    
    667.2
    
    
    
    
    
    
    
    Adjustment to conform fiscal year ends
    
    
    
    
    
    
    
    
    
    
    (1.7
    )Loss (gain) on disposal of property and equipment
    
    
    5.1
    
    
    
    (1.9
    )
    
    
    (10.0
    )Impairment of property and equipment, goodwill and other
long-term assets
    
    
    1,985.2
    
    
    
    3,062.5
    
    
    
    268.1Other
    
    
    (5.1
    )
    
    
    22.2
    
    
    
    78.5Changes in operating assets and liabilities:Accounts receivable, net of allowance
    
    
    89.7
    
    
    
    1,031.3
    
    
    
    18.5Inventories
    
    
    346.2
    
    
    
    1,605.9
    
    
    
    1,001.3Prepaid expenses and other current assets
    
    
    36.0
    
    
    
    (521.1
    )
    
    
    (79.6
    )Accounts payable
    
    
    (107.3
    )
    
    
    (425.3
    )
    
    
    (1,271.6
    )Accrued expenses and other current liabilities
    
    
    9.8
    
    
    
    (55.9
    )
    
    
    (2.4
    )Net cash provided by operating activities of continuing
operations
    
    
    307.3
    
    
    
    2,095.1
    
    
    
    643.6Cash flows from investing activities of continuing operations:Change in restricted cash, cash equivalents and short-term
investments
    
    
    169.8
    
    
    
    (235.4
    )
    
    
    Sales and maturities of short-term investments
    
    
    252.5
    
    
    
    665.4
    
    
    
    1,354.3Purchases of short-term investments
    
    
    (56.1
    )
    
    
    (589.9
    )
    
    
    (702.0
    )Acquisition of businesses, net of cash acquired
    
    
    (3.8
    )
    
    
    (336.0
    )
    
    
    (2,482.5
    )Acquisition of manufacturing assets and locations
    
    
    (45.5
    )
    
    
    (102.2
    )
    
    
    (84.0
    )Capital expenditures
    
    
    (136.5
    )
    
    
    (216.1
    )
    
    
    (531.3
    )Purchase of facilities previously under synthetic leases
    
    
    
    
    
    
    (179.3
    )
    
    
    Proceeds from sale of property and equipment
    
    
    60.1
    
    
    
    129.8
    
    
    
    98.7Advances to/from discontinued operations
    
    
    69.6
    
    
    
    (102.5
    )
    
    
    Other
    
    
    48.3
    
    
    
    (46.4
    )
    
    
    (149.9
    )Net cash provided by (used in) investing activities of
continuing operations
    
    
    358.4
    
    
    
    (1,012.6
    )
    
    
    (2,496.7
    )


See accompanying notes to consolidated financial statements.

44



---



##### Table of Contents



SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in millions)

Years Ended August
        312003
      
      2002
      
      2001Cash
          flows from financing activities of continuing operations:Net
          repayment of bank lines of credit and other debt
arrangements
      
      
      (91.2
      )
      
      
      (203.7
      )
      
      
      (53.5
      )Proceeds
          from issuance of ACES and Senior Notes
      
      
      
      
      
      
      1,553.8
      
      
      
      Net
          proceeds from long-term debt
      
      
      
      
      
      
      153.4
      
      
      
      1,540.7Repurchase
          of LYONS
      
      
      (967.5
      )
      
      
      (2,835.9
      )
      
      
      Principal
          payments on long-term debt
      
      
      
      
      
      
      (471.6
      )
      
      
      (18.3
      )Common
          stock repurchase
      
      
      
      
      
      
      (4.5
      )
      
      
      Net
          proceeds from stock issued underoption
          and employee purchase plans
      
      
      7.8
      
      
      
      38.8
      
      
      
      97.7Net
          proceeds from issuance of common stock
      
      
      
      
      
      
      
      
      
      
      1,381.4Other
      
      
      28.4
      
      
      
      (17.3
      )
      
      
      20.6Net
          cash provided by (used in) financing activities of continuing operations
      
      
      (1,022.5
      )
      
      
      (1,787.0
      )
      
      
      2,968.6Effect
          of exchange rate changes on cash and cash equivalents
      
      
      33.2
      
      
      
      (24.7
      )
      
      
      (112.1
      )Net
          increase (decrease) in cash and cash equivalents
      
      
      (323.6
      )
      
      
      (729.2
      )
      
      
      1,003.4Cash
          and cash equivalents at beginning of period  continuing operations
      
      
      1,749.7
      
      
      
      2,478.9
      
      
      
      1,475.5Cash
          and cash equivalents at end of period  continuing operations
      
      $
      1,426.1
      
      
      $
      1,749.7
      
      
      $
      2,478.9SUPPLEMENTAL
          DISCLOSURES Cash paid (received) during the period:Income
          taxes
      
      $
      (199.6
      )
      
      $
      (70.5
      )
      
      $
      151.4Interest
      
      $
      133.4
      
      
      $
      70.9
      
      
      $
      11.0Non-cash
          investing and financing activities:Issuance
          of common stock for business combination, net of cash acquired
      
      $
      
      
      
      $
      2,528.8
      
      
      $
      61.7Cash
          and cash equivalents of discontinued operations at beginning of period
      
      $
      31.6
      
      
      $
      3.4
      
      
      $
      Cash
          provided by acquisition of discontinued operations
      
      
      
      
      
      
      39.7
      
      
      
      23.8Cash used in discontinued operations
      
      
      (0.5
      )
      
      
      (11.5
      )
      
      
      (20.4
      )Cash
          and cash equivalents of discontinued operations at end of period
      
      $
      31.1
      
      
      $
      31.6
      
      
      $
      3.4


See accompanying notes to consolidated financial statements.

45



---



##### Table of Contents



NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The accompanying consolidated financial statements
include the accounts of Solectron Corporation and its subsidiaries after
elimination of intercompany accounts and transactions.

Year End: Solectrons financial reporting year ends on the last Friday in
August. All fiscal years presented contained 52 weeks. For purposes of
presentation in the accompanying financial statements and notes, Solectron has
indicated its accounting years as ending on August 31.

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 disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Cash Equivalents and Short-Term Investments: Cash equivalents are highly liquid
investments purchased with an original maturity at the date of purchase of less
than three months. Short-term investments are investment grade short-term debt
instruments with original maturities greater than three months. These debt
securities are classified as available-for-sale securities. Such investments
are recorded at fair value as determined from quoted market prices, and the
cost of securities sold is determined based on the specific identification
method. Unrealized gains or losses are reported as a component of
comprehensive income or loss, net of related tax effect.

Restricted Cash, Cash Equivalents and Short-Term Investments: These assets are
carried at fair values and are restricted as collateral for specified
obligations under certain lease agreements and certain interest payments on the
7.25% subordinated ACES debentures due November 15, 2006.

Allowance for Doubtful Accounts: Solectron evaluates the collectibility of
accounts receivable based on a combination of factors. In cases where Solectron
is aware of circumstances that may impair a specific customers ability to meet
its financial obligations, Solectron records a specific allowance against
amounts due, and thereby reduces the net recognized receivable to the amount
management reasonably believes will be collected. For all other customers,
Solectron recognizes allowances for doubtful accounts based on the length of
time the receivables are outstanding, industry and geographic concentrations,
the current business environment and historical experience.

Inventories: Inventories are stated at the lower of weighted average cost or
market. Solectrons industry is characterized by rapid technological change,
short-term customer commitments and rapid changes in demand, as well as any
other lower of cost or market considerations. Solectron makes provisions for
estimated excess and obsolete inventory based on regular reviews of inventory
quantities on hand and the latest forecasts of product demand and production
requirements from customers. Provisions for excess and obsolete inventory are
also impacted by Solectrons contractual arrangements with their customers
including their ability or inability to re-sell such inventory to them.

Property and Equipment: Property and equipment are recorded at cost.
Depreciation and amortization are computed based on the shorter of the
estimated useful lives or the related lease terms, using the straight-line
method. Estimated useful lives are presented below.

|                                           |  |                              |  | 
|------------------------------------------ |  | ---------------------------- |  | 
|Machinery, equipment and computer software |  | 2-7 years                   
|Furniture and fixtures                     |  | 3-5 years                   
|Leasehold improvements                     |  | estimated life or lease term
|Buildings                                  |  | 15-50 years                 

Certain depreciation lives were changed from four to five years beginning March
2, 2001. Consequently, the depreciation charges on these assets were lower by
$19.8 million in fiscal 2001 than it would have been using a four-year life.

Property and equipment are evaluated for impairment whenever events or changes
in circumstances indicate the carrying value of an asset may not be
recoverable. An impairment loss is recognized when estimated undiscounted cash
flows expected to result from the use of the asset plus net proceeds expected
from disposition of the asset (if any) are less than the carrying value of the
asset when an impairment loss is recognized, the carrying amount of the asset
is reduced to its estimated fair value.

Goodwill and Intangible Assets: In July 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires
goodwill to be tested for impairment on an annual basis and between annual
tests in certain circumstances, and written down when impaired, rather than
being amortized as previous accounting standards required. Furthermore, SFAS
No. 142 requires purchased intangible assets other than goodwill to be
amortized over their useful lives unless these lives are determined to be
indefinite.

SFAS No. 142 was effective for fiscal years beginning after December 15, 2001;
however, Solectron elected to early adopt the accounting standard effective in
fiscal 2002. In accordance with SFAS No. 142, Solectron ceased amortizing
goodwill, beginning in fiscal 2002.

46



---



##### Table of Contents



The following table presents the impact of adopting SFAS No.142 on net loss and
net loss per share had the standard been in effect for the all years presented:

2003
    
    2002
    
    2001(in millions, except per-share data)Continuing Operations:Reported net loss
    
    $
    (3,104.9
    )
    
    $
    (3,138.1
    )
    
    $
    (76.0
    )Amortization of goodwill, net of tax
    
    
    
    
    
    
    
    
    
    
    127.0Adjusted net income (loss)
    
    $
    (3,104.9
    )
    
    $
    (3,138.1
    )
    
    $
    51.0Reported basic and diluted net loss per share
    
    $
    (3.75
    )
    
    $
    (4.02
    )
    
    $
    (0.12
    )Adjusted basic and diluted net income (loss) per share
    
    $
    (3.75
    )
    
    $
    (4.02
    )
    
    $
    0.08Discontinued Operations:Reported net income (loss)
    
    $
    (357.1
    )
    
    $
    27.9
    
    
    $
    (47.5
    )Amortization of goodwill, net of tax
    
    
    
    
    
    
    
    
    
    
    Adjusted net income (loss)
    
    $
    (357.1
    )
    
    $
    27.9
    
    
    $
    (47.5
    )Reported basic and diluted net income (loss) per share
    
    $
    (0.43
    )
    
    $
    0.04
    
    
    $
    (0.07
    )Adjusted basic and diluted net income (loss) per share
    
    $
    (0.43
    )
    
    $
    0.04
    
    
    $
    (0.07
    )


Solectron performs goodwill impairment tests annually during the fourth quarter
of their fiscal year and more frequently if an event or circumstance indicates
that an impairment loss has occurred. Such events or circumstances may include
significant adverse changes in the general business climate, among others.
Solectron performs the impairment tests at the reporting unit level, which was
determined to be consistent with their business units (as defined in Note 12,
Segment and Geographic Information, to the consolidated financial statements)
except for Technology Solutions and Global Services, which were disaggregated
further into two reporting units each resulting in a total of six reporting
units. The tests are performed by determining the fair values of the reporting
units using a discounted future cash flow model and comparing those fair values
to the carrying values of the reporting units, including goodwill. If the fair
value of a reporting unit is less than its carrying value, Solectron then
allocates the fair value of the unit to all the assets and liabilities of that
unit (including any unrecognized intangible assets) as if the reporting units
fair value was the purchase price to acquire the reporting unit. The excess of
the fair value of the reporting unit over the amounts assigned to its assets
and liabilities is the implied fair value of the goodwill. If the carrying
amount of the reporting units goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to that excess.

Intangible assets consist primarily of supply agreements and intellectual
property obtained in asset purchase transactions. These assets are included
within other assets within the consolidated balance sheets and are carried at
cost less accumulated amortization. Amortization is computed over the estimated
useful lives of the respective assets. Intangible assets are evaluated for
impairment whenever events or changes in circumstances indicate the carrying
value of an asset may not be recoverable. An impairment loss is recognized when
estimated undiscounted cash flows expected to result from the use of the asset
plus net proceeds expected from disposition of the asset (if any) are less than
the carrying value of the asset when an impairment loss is recognized, the
carrying amount of the asset is reduced to its estimated fair value.

Income Taxes: Solectron uses the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized for the future
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. When necessary, a valuation allowance is recorded to reduce tax assets
to an amount for which realization is more likely than not. The effect of
changes in tax rates is recognized in the period in which the rate change
occurs.

Net Loss Per Share: Basic net loss per share is calculated using the
weighted-average number of common shares outstanding during the period. Diluted
net loss per share is calculated using the weighted-average number of common
shares plus dilutive potential common shares outstanding during the period.
Anti-dilutive potential common shares are excluded. Potential common shares
consist of stock options that are computed using the treasury stock method and
shares issuable upon conversion of Solectrons outstanding convertible debt
computed using the as-if-converted method. Share and per-share data presented
reflect all stock splits.

Revenue Recognition: Solectrons net sales are primarily derived from full
product manufacturing services including, but not limited to, printed circuit
board, sub-system and complete system assembly, and manufacturing of memory
products and embedded systems. Solectron also offers services consisting of
repair, warranty and end-customer technical support services. Revenue from
manufacturing services and product sales is generally recognized upon shipment
of the manufactured product. Revenue from other services is recognized as the
services are performed.

47



---



##### Table of Contents



Employee Stock Plans: As it is permitted by SFAS No. 123, Accounting for
Stock-Based Compensation, amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, Solectron accounts for its employee
stock plans, which generally consist of fixed stock option plans and an
employee stock purchase plan, using the intrinsic value method under APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. In general, as the exercise price of all options granted
under these plans is equal to the market price of the underlying common stock
on the grant date, no stock-based employee compensation expense is recognized.
In certain situations, under these plans, options to purchase shares of common stock
may be granted at less than fair market value, which results in compensation
expense equal to the difference between the market value on the date of grant
and the purchase price. This expense is recognized over the vesting period of
the options and included in operations. However, such expense amount has not
been significant. The table below sets out the pro forma amounts of net loss
and net loss per share from continuing operations that would have resulted for
all fiscal years presented, if Solectron accounted for its employee stock plans
under the fair value recognition provisions of SFAS No. 123.

2003
    
    2002
    
    2001(in millions, except per-share data)Net loss as reported
    
    $
    (3,462.0
    )
    
    $
    (3,110.2
    )
    
    $
    (123.5
    )Stock-based employee compensation
expense determined under fair value
method, net of tax
    
    
    (107.0
    )
    
    
    (94.7
    )
    
    
    (90.9
    )Pro forma net loss
    
    $
    (3,569.0
    )
    
    $
    (3,204.9
    )
    
    $
    (214.4
    )Net loss per shareBasic and diluted  as reported
    
    $
    (4.18
    )
    
    $
    (3.98
    )
    
    $
    (0.19
    )Basic and diluted  pro forma
    
    $
    (4.31
    )
    
    $
    (4.10
    )
    
    $
    (0.33
    )


For purposes of computing pro forma net loss, the fair value of each option
grant and Employee Stock Purchase Plan purchase right is estimated on the date
of grant using the Black-Scholes option pricing model. The assumptions used to
value the option grants and purchase rights are stated below.

2003
      
      2002
      
      2001Expected life of options
      
      3 years
      
      3 years
      
      3.5 yearsExpected life of purchase right
      
      6 months
      
      6 months
      
      6 monthsVolatility
      
      
      79
      %
      
      
      
      70%
      
      
      65
      %Risk-free interest rate
      
      0.94% to 2.44%
      
      
      
      1.64% to 4.14%
      
      3.40% to 6.34%Dividend yield
      
      zero
      
      zero
      
      zero




Foreign Currency: For foreign subsidiaries using the local currency as their
functional currency, assets and liabilities are translated at exchange rates in
effect at the balance sheet date and income and expenses are translated at
average exchange rates. In addition, Solectron records adjustments to remeasure
dollar denominated loans to subsidiaries that are permanent in nature. The
effects of these adjustments are reported in other comprehensive loss. Exchange
gains and losses arising from transactions denominated in a currency other than
the functional currency of the entity involved and remeasurement adjustments
for foreign operations where the U.S. dollar is the functional currency are
included in earnings. To date, the effects of such transaction gains and losses
and remeasurement adjustments on Solectrons operations have not been material.

Derivative Instruments: In September 2000, Solectron adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS No. 137, No. 138 and No. 149. All derivative instruments are recorded on
the balance sheet at fair value. If the derivative is designated as a cash flow
hedge, the effective portion of changes in the fair value of the derivative is
recorded in other comprehensive loss and is recognized in the statement of
operations when the hedged item affects earnings. Ineffective portions of
changes in the fair value of cash flow hedges are immediately recognized in
earnings. If the derivative is designated as a fair value hedge, the changes in
the fair value of the derivative and of the hedged item attributable to the
hedged risk are recognized in earnings in the current period. For derivative
instruments not designated as hedging instruments under SFAS No. 133, changes
in fair values are recognized in earnings in the current period.

Recent Accounting Pronouncements: In August 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS No. 143 requires that the
fair value of an asset retirement obligation be recorded as a liability in the
period in which it incurs the

48



---



##### Table of Contents



obligation. SFAS No. 143 is effective for fiscal years beginning after June
15, 2002. Adoption of SFAS No. 143 did not have a material impact on
Solectrons consolidated financial statements.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-lived Assets, which supersedes SFAS No. 121. The primary
objectives of SFAS No. 144 are to develop one accounting model based on the
framework established in SFAS No. 121 for long-lived assets to be disposed of
by sale, and to address significant implementation issues identified after the
issuance of SFAS No. 121. Adoption of SFAS No. 144 did not have a material
impact on Solectrons consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 requires that a liability for
costs associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. Adoption of SFAS No. 146 has primarily resulted in changes to the timing
of recognition of restructuring costs as previous accounting literature allowed
recognition upon committing to an exit plan.

In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which requires a guarantor to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantees. It also requires disclosure in
interim and annual financial statements of its obligations under certain
guarantees it has issued. The initial recognition and measurement provisions of
FIN No. 45 are to be applied prospectively to guarantees issued or modified
after December 31, 2002. The disclosure requirements are effective for
financial statements for periods ending after December 15, 2002. Adoption of
FIN No. 45 did not have a material impact on Solectrons consolidated financial
statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, which amends SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. Compensation costs attributable to Solectrons stock option plans and
employee stock purchase plan are recognized based on any excess of the quoted
market price of the stock on the date of grant over the amount the employee is
required to pay to acquire the stock, in accordance with the intrinsic-value
method under APB No. 25. Such amount, if any, is expensed over the related
time-based vesting period, as appropriate. APB No. 25 does not require options
to be expensed when granted with an exercise price equal to fair market value.
Solectron adopted the disclosure requirements of SFAS No. 148 during the third
quarter of fiscal 2003.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, which requires variable interest entities, previously
referred to as special-purpose entities or off-balance sheet structures, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the entitys activities or is entitled to receive a majority of
the entitys returns or both. The consolidation provisions of FIN No. 46 apply
immediately to variable interest entities created after January 31, 2003 and to
existing entities in the first fiscal year or interim period beginning after
December 15, 2003. Certain disclosure provisions apply in financial statements
issued after January 31, 2003. Solectron does not expect this interpretation to
have a material impact on its synthetic lease arrangements, as variable
interest entities were not used in the transactions.

In April 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133. This statement is effective for contracts
entered into or modified after June 30, 2003, with certain exceptions, and for
hedging relationships designated after June 30, 2003. Adoption of SFAS No. 149
did not have a material impact on Solectrons consolidated financial
statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
Financial instruments that are within the scope of the statement, which
previously were often classified as equity, must now be classified as
liabilities. This statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. Adoption
of SFAS No. 150 did not have a material impact on Solectrons consolidated
financial statements.

Reclassifications: Beginning in fiscal 2003, Solectron classified certain
expense items differently than in prior periods. Solectron has revised prior
period financial information to conform the expense classifications to the
current presentation. None of these reclassifications had any impact on net
loss or net loss per share for the periods presented. These reclassifications
are:



| | 1. |  | In fiscal 2003, Solectron began reporting other income and expense
items as a separate line item rather than including such items in
selling, general and administrative expenses. Accordingly, Solectron
reclassified other income of $30.5 million from selling, general and
administrative expenses to other income-net and $75.7 million of gains
on retirement of debt from a separate non-operating line item to other income-net in
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

49



---



##### Table of Contents





| |    |  | fiscal 2002. In fiscal 2001, Solectron also reclassified other income of
$61.1 million from selling, general and administrative expenses to other
income-net.                                                                                                                                                                            
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | In fiscal 2003, Solectron classified certain items in cost of sales
that in previous periods were included in selling, general and
administrative expenses. Accordingly, Solectron reclassified $23.2
million and $52.1 million from selling, general and administrative
expenses to cost of sales in fiscal 2002 and 2001, respectively.

NOTE 2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash, cash equivalents and short-term investments (related to continuing
operations and including restricted amounts) as of August 31, 2003 and 2002,
consisted of the following:

Cash andCash
      
      Short-TermEquivalents
      
      Investments(in millions)Fiscal
          2003Cash
      
      $
      717.3
      
      
      $
      19.9Money
          market funds
      
      
      543.5
      
      
      
      Certificates
          of deposit
      
      
      
      
      
      
      Market
          auction securities
      
      
      
      
      
      
      21.9U.S.
          government securities
      
      
      
      
      
      
      Corporate
          obligations
      
      
      210.9
      
      
      
      5.6Other
      
      
      
      
      
      
      Total
      
      $
      1,471.7
      
      
      $
      47.4Fiscal 2002Cash
      
      $
      937.7
      
      
      $
      Money
          market funds
      
      
      692.8
      
      
      
      Certificates
          of deposit
      
      
      24.8
      
      
      
      11.4Market
          auction securities
      
      
      157.8
      
      
      
      75.2U.S.
          government securities
      
      
      30.6
      
      
      
      130.4Corporate
          obligations
      
      
      
      
      
      
      73.0Other
      
      
      41.7
      
      
      
      42.2Total
      
      $
      1,885.4
      
      
      $
      332.2


Solectron had $65.5 and $235.4 million of restricted cash, cash equivalents and
short-term investment as of August 31, 2003 and 2002, respectively. Restricted
cash, cash equivalents and short-term investments are restricted as collateral
for specified obligations under certain lease agreements and certain interest
payments on the 7.25% subordinated ACES debentures due November 15, 2006.
Short-term investments are carried at fair market value, which approximates
cost. Realized and unrealized gains and losses for the fiscal years ended
August 31, 2003 and 2002 were not significant.

NOTE 3. INVENTORIES

Inventories related to continuing operations as of August 31, 2003 and 2002,
consisted of:

|                |  |               |         |      |  |   |         | 
|--------------- |  | ------------- | ------- | ---- |  | - | ------- | 
|                |  | 2003          |         | 2002
|                |  |               |         |     
|                |  | (in millions)
|Raw materials   |  | $             | 957.8   |      |  | $ | 1,298.5 | 
|Work-in-process |  |               | 236.1   |      |  |   | 228.2   | 
|Finished goods  |  |               | 221.0   |      |  |   | 295.4   | 
|                |  |               |         |      |  |   |         | 
|Total           |  | $             | 1,414.9 |      |  | $ | 1,822.1 | 
|                |  |               |         |      |  |   |         | 

50



---



##### Table of Contents



NOTE 4. PROPERTY AND EQUIPMENT

Property and equipment related to continuing operations as of August 31, 2003
and 2002, consisted of:

2003
    
    2002(in millions)Land
    
    $
    57.9
    
    
    $
    51.2Building and improvements
    
    
    370.2
    
    
    
    338.1Leasehold improvements
    
    
    112.3
    
    
    
    152.5Factory equipment
    
    
    896.5
    
    
    
    1,202.6Computer equipment and software
    
    
    331.1
    
    
    
    354.8Furniture, fixtures, and other
    
    
    106.1
    
    
    
    86.7Construction-in-process
    
    
    17.6
    
    
    
    34.01,891.7
    
    
    
    2,219.9Less accumulated depreciation
and amortization
    
    
    1,062.7
    
    
    
    1,138.6Net property and equipment
    
    $
    829.0
    
    
    $
    1,081.3


NOTE 5. LINES OF CREDIT

As of August 31, 2003, Solectron had available a $200 million revolving credit
facility that expires on February 11, 2004, and a $250 million revolving credit
facility that expires on February 14, 2005. Each of the revolving credit
facilities is guaranteed by certain domestic subsidiaries and secured by the
pledge of domestic accounts receivable, inventory and equipment, the pledge of
equity interests in certain subsidiaries and notes evidencing intercompany
debt. Borrowings under the credit facilities bear interest, at Solectrons
option, at the London Interbank offering rate (LIBOR) plus a margin of 1.75%
based on Solectrons current senior unsecured debt ratings, or the higher of
the Federal Funds Rate plus 1/2 of 1% or Bank of America N.A.s publicly
announced prime rate. As of August 31, 2003, there were no borrowings
outstanding under these facilities. Solectron is subject to compliance with
certain financial covenants set forth in these facilities including, but not
limited to, capital expenditures, consolidated tangible net worth, cash
interest coverage, leverage, liquidity, and minimum cash. Prior to the end of
the fourth quarter, Solectron obtained waivers to the minimum cash interest
coverage ratio covenants. As a result of these waivers, Solectron was in
compliance with all applicable covenants as of August 31, 2003.

In addition, Solectron had $41 million in committed and $245 million in
uncommitted foreign lines of credit and other bank facilities as of August 31,
2003 related to continuing operations. A committed line of credit obligates a
lender to loan Solectron amounts under the credit facility as long the terms of
the credit agreement are adhered to. An uncommitted line of credit is extended
to us at the sole discretion of a lender. The interest rates range from the
banks prime lending rate to the banks prime rate plus 2.0%. As of August 31,
2003, borrowings and guaranteed amounts were $18 million under committed and
$51 million under uncommitted foreign lines of credit. Borrowings are payable
on demand. The weighted-average interest rate was 5.4 % for committed and 0.7%
for uncommitted foreign lines of credit as of August 31, 2003.

51



---



##### Table of Contents



NOTE 6. LONG-TERM DEBT

Long-term debt related to continuing operations at August 31, 2003 and 2002,
consisted of:

2003
    
    2002(in millions)7.25% adjustable conversion-rate equity securities, face value of $1,100.0,
fair values of $723.6 and $545.6, due 2006
    
    $
    1,081.6
    
    
    $
    1,072.39.625% senior notes,
face value of $500.0,
fair values of $532.5 and $465.0, due 2009
    
    
    516.4
    
    
    
    497.17.375% senior notes,
face value of $150.0,
fair values of $152.3 and $150.0, due 2006
    
    
    149.9
    
    
    
    149.92.75% zero-coupon convertible senior notes,
face values of $15.9 and $852.5,
fair values of $9.0 in 2003 and $496.1 in 2002,
due 2020
    
    
    10.1
    
    
    
    
    *3.25% zero-coupon convertible senior notes,
face values of $1,622.6 and $2,557.1,
fair values of $912.7 in 2003 and $1,118.8 in 2002,
due 2020
    
    
    
    **
    
    
    1,419.7Other, fair values of $60.2 and $42.2
    
    
    59.6
    
    
    
    42.2Total long-term debt
    
    $
    1,817.6
    
    
    $
    3,181.2


*As of August 31, 2002, remaining carrying amount of $527 million was
classified in short-term debt as the holders of these notes had the right
to require Solectron to repurchase them on May 8, 2003. The principal
amount not repurchased was reclassified to long-term debt as of August 31,
2003 as the next repurchase date occurs in 2010.

**As of August 31, 2003, remaining carrying amount of $931 million was
classified in short-term debt as the holders of these notes have the right
to require Solectron to repurchase them on May 20, 2004.

Liquid Yield Option Notes (LYONs)

In November 2000, Solectron issued 2.9 million LYONs at an issue price of
$524.78 per note, which resulted in gross proceeds to Solectron of
approximately $1.5 billion. These notes are unsecured and unsubordinated
indebtedness of Solectron. Solectron will pay no interest prior to maturity.
Each note has a yield of 3.25% with a maturity value of $1,000 on November 20,
2020. Each note is convertible to common shares at any time by the holder at a
conversion rate of 11.7862 shares per note. Holders may require Solectron to
purchase all or a portion of their notes on May 20, 2004, November 20, 2005 and
2010, at prices of $587.46, $616.57 and $724.42 per note, respectively, payable
in cash or common stock at the option of Solectron. Also, each holder may
require Solectron to repurchase all or a portion of such holders notes if a
change in control of Solectron occurs on or before May 20, 2004. Solectron, at
its option, may redeem all or a portion of the notes at any time on or after
May 20, 2004. Solectron is amortizing the issuance cost through May 20, 2004.
During fiscal 2002, Solectron repurchased a portion of the LYONs with a
carrying amount totaling approximately $183 million for
approximately $156 million in cash which resulted in a gain of $27 million. During fiscal 2003,
Solectron repurchased a portion of these LYONs with a carrying amount totaling
$522 million for $483 million in cash, which resulted in a gain of $39 million.
The remaining accreted value of these notes was $931 million as of August 31,
2003 and Solectron may be obligated to purchase these notes on May 20, 2004 for
$953 million in cash or common stock or a combination of both.

In May 2000, Solectron issued 4.025 million LYONs at an issue price of $579.12
per note, which resulted in gross proceeds to Solectron of approximately $2.3
billion. These notes are unsecured and unsubordinated indebtedness of
Solectron. Solectron will pay no interest prior to maturity. Each note has a
yield of 2.75% with a maturity value of $1,000 on May 8, 2020. Each note is
convertible at any time by the

52



---



##### Table of Contents



holder to common shares at a conversion rate of 12.3309 shares per note.
Holders were able to require Solectron to purchase all or a portion of their
notes on May 8, 2003 and 2010, at prices of $628.57 and $761.00 per note,
respectively. Also, each holder was able to require Solectron to repurchase all
or a portion of such holders notes upon a change in control of Solectron
occurring on or before May 8, 2003. Solectron, at its option, may redeem all or
a portion of the notes at any time on or after May 8, 2003. Issuance costs were
fully amortized as of May 8, 2003. During the first quarter of fiscal 2003,
Solectron repurchased a portion of these LYONs with a carrying amount totaling
$11 million for $11 million in cash, which resulted in no gain or loss. On
March 31, 2003, Solectron announced its intention to repurchase any 2.75% LYONs
put to it with cash on May 8, 2003. Accordingly, Solectron repurchased $514
million of these LYONs with cash during the third quarter of fiscal 2003
resulting in no significant gain or loss. During fiscal 2002, Solectron
repurchased a portion of these LYONs with a carrying amount totaling
approximately $1.9 billion for approximately $1.8 billion in cash which
resulted in a gain of $63 million.

During fiscal 2002, Solectron repurchased LYONs,
which were issued in January 1999, with a carrying amount totaling
approximately $825.5 million for approximately
$839.5 million in cash which resulted in a loss of
$14.0 million.

Adjustable Conversion-Rate Equity Securities (ACES)

During the second quarter of fiscal 2002, Solectron closed its public offering
of $1.1 billion, or 44 million units, of 7.25% ACES. Each ACES unit has a
stated amount of $25.00 and consists of (a) a contract requiring the holder to
purchase, for $25.00, a number of shares of Solectron common stock to be
determined on November 15, 2004, based on the average trading price of
Solectrons common stock at that time and certain specified settlement rates
ranging from 2.1597 shares of Solectrons common stock per purchase contract to
2.5484 shares of Solectrons common stock per purchase contract (subject to
certain anti-dilution adjustments); and (b) a $25 principal amount of 7.25%
subordinated debenture due 2006. Solectron received gross proceeds of
approximately $1.1 billion from the transaction. Solectron allocated $47
million to the fair value of the stock purchase contracts and recorded this
amount in additional paid-in capital. The debentures are held and pledged for
Solectrons benefit to secure the holders obligation to purchase Solectrons
common stock on November 15, 2004. On or about August 15, 2004, the ACES
debentures will be remarketed and, if the remarketing is successful, the
interest rate will be reset at then current rates as described in the
indentures and the proceeds from the remarketing will be used to satisfy the
holders obligation to purchase Solectrons common stock in November 2004. If
the debentures are not successfully remarketed, the interest rate will not be
reset and Solectron may use the pledged debentures to satisfy the holders
obligation to purchase Solectrons common stock in November 2004. Approximately
$20 million of short-term investments as of August 31, 2003 were restricted as
collateral related to the obligations for the next quarterly interest payment.

9.625% Senior Notes

On February 8, 2002, Solectron issued an aggregate principal amount of $500
million of 9.625% senior notes due 2009. Solectron is required to pay interest
on the notes in cash on February 15 and August 15 of each year. The indenture
governing the terms of these notes contains restrictive provisions, which limit
Solectron and its subsidiaries from making distributions on their capital
stock, investments, incurring debt, issuing preferred stock and engaging in
assets sales, among other provisions.

7.375% Senior Notes

In March 1996, Solectron issued $150 million aggregate principal amount of
senior notes. These notes are in denominations and have a maturity value of
$1,000 each and are due on March 1, 2006. Interest is payable semiannually at a
rate of 7.375% per annum. The notes may not be redeemed prior to maturity.

The aggregate annual maturities of long-term debt related to continuing
operations are as follows (in millions):

Years Ending August 31:2005
    
    
    25.22006
    
    
    162.32007
    
    
    1,111.02008
    
    
    0.5Thereafter
    
    
    518.6Total
    
    $
    1,817.6


NOTE 7. FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

The fair value of Solectrons cash, cash equivalents, accounts receivable,
accounts payable and borrowings under lines of credit approximates the carrying
amount due to the relatively short maturity of these items. The fair value of
Solectrons short-term investments (see Note 2, Cash, Cash Equivalents and
Short-Term Investments) is determined based on quoted market prices. The fair
value of Solectrons long-term debt (see Note 6, Long-Term Debt) is
determined based on broker trading prices.

53



---



##### Table of Contents



Derivatives

Solectron enters into foreign exchange forward contracts intended to reduce the
short-term impact of foreign currency fluctuations on foreign currency
receivables, investments and payables. The gains and losses on the foreign
exchange forward contracts offset the transaction gains and losses on the
foreign currency receivables, investments, and payables recognized in earnings.
Solectron does not enter into foreign exchange forward contracts for
speculative purposes. Solectrons foreign exchange forward contracts related
to current assets and liabilities are generally three months or less in
original maturity.

Solectron also uses interest rate swaps to hedge its mix of short-term and
long-term interest rate exposures resulting from Solectrons debt obligations.
During the third quarter of fiscal 2002, Solectron entered into interest rate
swap transactions under which it pays variable rates and receives fixed rates.
The interest rate swaps have a total notional amount of $1 billion. $500
million relates to the Companys $1.1 billion ACES and expires on November 15,
2004 and $500 million relates to the 9.625% $500 million senior notes expiring
on February 15, 2009. Under each of these swap transactions, Solectron pays an
interest rate equal to the 3-month LIBOR rate plus a fixed spread. In exchange,
Solectron receives fixed interest rates of 7.25% on the first $500 million and
9.625% on the second $500 million. These swap transactions effectively replace
the fixed interest rates that the Company must pay on a portion of its ACES and
all its 9.625% senior notes with variable interest rates. These swaps are
designated as fair value hedges under SFAS No. 133. During fiscal 2003,
Solectron settled its swaps related to the senior notes and received cash
proceeds of approximately $26 million. This gain is being amortized over the
remaining life of the senior notes. Solectron also replaced these swaps with
similar instruments designated as fair value hedges under SFAS No. 133 during
fiscal 2003.

As of August 31, 2003, Solectron had outstanding foreign exchange forward
contracts with a total notional amount of approximately
$596 million related to continuing operations.

The fair values of the derivatives referred to above were not significant.

For all derivative transactions, Solectron is exposed to counterparty credit
risk to the extent that the counter parties may not be able to meet their
obligations towards Solectron. To manage the counterparty risk, Solectron
limits its derivative transactions to those with major financial institutions.
Solectron does not expect to experience any material adverse financial
consequences as a result of default by Solectrons counter parties.

Business and Credit Concentrations

Financial instruments that potentially subject Solectron to concentrations of
credit risk consist of cash, cash equivalents, short-term investments and trade
accounts receivable. Solectrons short-term investments are managed by
recognized financial institutions which follow Solectrons investment policy.
Such investment policy limits the amount of credit exposure in any one issue
and requires the investment securities to be investment grade short-term debt
instruments. Concentrations of credit risk in accounts receivable resulting
from sales to major customers are discussed in Note 13, Major Customers.
Solectron generally does not require collateral for sales on credit. However,
for customers that have limited financial resources, Solectron may require
coverage for this risk including standby letters of credit, prepayments and
consignment of inventories. Solectron also monitors extensions of credit and
the financial condition of its major customers.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Synthetic Leases

During fiscal 2002, Solectron restructured its synthetic lease agreements
relating to five manufacturing sites. The synthetic leases have expiration
dates in 2007. At the end of the lease term, Solectron has an option, subject
to certain conditions, to purchase or to cause a third party to purchase the
facilities subject to the synthetic leases for the Termination Value, which
approximates the lessors original cost, or may market the property to a third
party at a different price. Solectron is entitled to any proceeds from a sale
of the properties to third parties in excess of the Termination Value and
liable to the lessor for any shortfall. In connection with its restructuring of
these synthetic leases, Solectron provided loans to the lessor equaling
approximately 85% of its Termination Value. These loans are repayable solely
from the sale of the properties to third parties in the future, are
subordinated to the amounts payable to the lessor at the end of the synthetic
leases, and may be credited against the Termination Value payable if Solectron
purchases the properties. The approximate Termination Values and loan amounts
were $125 million and $106 million, respectively, as of August 31, 2003.

In addition, cash collateral of $19 million is pledged for the difference
between the Termination Values and the loan amounts. Each lease agreement
contains various affirmative and financial covenants. A default under a lease,
including violation of these covenants, may accelerate the termination date of
the arrangement. Prior to the end of fiscal 2003, Solectron obtained a waiver
to the minimum cash

54



---



##### Table of Contents



interest coverage ratio covenant. As a result of the waiver, Solectron was in
compliance with all applicable covenants as of August 31, 2003. Monthly lease
payments are generally based on the Termination Value and 30-day LIBOR index
(1.1% as of August 31, 2003) plus an interest-rate margin, which may vary
depending upon Solectrons Moodys Investors Services and Standard and Poors
ratings and are allocated between the lessor and Solectron based on the
proportion of the loan amount to the total Termination Value for each synthetic
lease.

Solectron accounts for these synthetic lease arrangements as operating leases
in accordance with SFAS No. 13, Accounting for Leases, as amended.
Solectrons loans to the lessor were included in other long-term assets in the
condensed consolidated balance sheet as of August 31, 2003.

If Solectron should determine that it is probable that the expected fair value
of the property at the end of the lease term will be less than the Termination
Value, any expected loss will be recognized on a straight-line basis over the
remaining lease term.

Future Minimum Lease Obligations

Future minimum payments related to continuing operations lease obligations,
including the synthetic leases discussed above, are $78 million,
$35 million, $23 million, $20 million and $17 million in each of the years in
the five-year period ending August 31, 2008, and $59 million for periods
after that date. Rent expense was $114 million,
$127 million and $94 million for the years ended August 31, 2003, 2002 and 2001, respectively.
Sublease income did not have a significant impact on these amounts.

Related Party Guarantees

Solectron extends guarantees of $65 million in favor of vendors that supply
the companys subsidiaries. These guarantees have various expiration terms. In
addition, Solectron guarantees used and unused lines of credits and debt for
its own subsidiaries totaling $286 million as of August 31, 2003. Solectron
also guarantees performance of certain subsidiaries in various transactions
such as leases totaling $250 million as of August 31, 2003.

Legal Proceedings

Solectron is from time to time involved in various litigation and legal
matters, including those described below. By describing the particular matters
set forth below, Solectron does not intend to imply that the Company or its
legal advisors have concluded or believe that the outcome of any of those
particular matters is or is not likely to have a material adverse impact upon
Solectrons business or financial condition.

On September 19, 2002, one of Solectrons former employees filed a complaint
against Solectron in the Superior Court of the State of California, Santa Clara
County, asserting two claims for wrongful termination. The case is encaptioned
Ronald Sorisho v. Solectron Corporation et al., Case No. CV811243. In the
complaint, plaintiff alleges that he was wrongfully terminated by Solectron in
supposed retaliation for his alleged efforts to ensure that Solectron timely
recognized a charge for excess, obsolete and slow moving inventory in the
Technology Solutions business unit. Plaintiff seeks compensatory damages in an
amount not less than $2.5 million as well as punitive damages. Solectron
believes Mr. Sorishos claims of wrongful termination are without merit and
intends to vigorously defend itself. Solectron filed a motion with the court
challenging the sufficiency of Mr. Sorishos complaint, and in response to this
motion, Mr. Sorisho filed an amended complaint in which he dropped one of his
two original wrongful termination claims, but added a new claim for purported
defamation based upon statements attributed to Solectron in a news article
regarding Mr. Sorishos allegations against Solectron. Solectron tendered the
defense of the defamation claim to its insurance carrier and the insurance
carrier has assumed the defense of the defamation claim, subject to a
reservation of rights. Solectron is also continuing to vigorously defend
against Mr. Sorishos wrongful termination claim.

On March 6, 2003, a putative shareholder class action lawsuit was filed against
Solectron and certain of its officers in the United States District Court for
the Northern District of California alleging claims under Section 10(b) and
20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated
thereunder. The case is entitled Abrams v. Solectron Corporation et al., Case
No. C-03-0986 CRB. The complaint alleged that the defendants issued false and
misleading statements in certain press releases and SEC filings issued between
September 17, 2001 and September 26, 2002. In particular, plaintiff alleged
that the defendants failed to disclose and to properly account for excess and
obsolete inventory in the Technology Solutions business unit during the
relevant time period. Additional complaints making similar allegations were
subsequently filed in the same court, and pursuant to an order entered June 2,
2003, the Court appointed lead counsel and plaintiffs to represent the putative
class in a single consolidated action. The Consolidated Amended Complaint,
filed September 8, 2003, alleges an expanded class period of June 18, 2001
through September 26, 2002, and purports to add a claim for violation of
Section 11 of the Securities Act of 1933 on behalf of a putative class of
former shareholders of C-MAC Industries, Inc., who acquired Solectron stock
pursuant to the October 19, 2001 Registration Statement filed in connection
with Solectrons acquisition of C-MAC Industries, Inc. In addition, while the
initial complaints focused on alleged inventory issues at the Technology
Solutions business unit, the Consolidated Amended Complaint adds allegations of
inadequate disclosure and failure to properly account for excess and obsolete
inventory at the Companys other business units. The complaint seeks an
unspecified amount of damages on behalf of the putative class. Solectron
intends to vigorously defend against the consolidated lawsuit. There can be no
assurance, however, that the outcome of the

55



---



##### Table of Contents



lawsuit will be favorable to Solectron or will not have a material adverse
effect on Solectrons business, financial condition and results of operations.
In addition, Solectron may be forced to incur substantial litigation expenses
in defending this litigation.

On March 21, 2003, Solectron, all of the current members of its Board of
Directors, and two former officers, were named as defendants in a shareholder
derivative lawsuit entitled Lifshitz v. Cannon et al.,Case No. CV815693, filed
in the Santa Clara County, California Superior Court. The plaintiff alleged
that he should be permitted to pursue litigation, purportedly for the benefit
of Solectron, against the individual director and officer defendants for
alleged mismanagement and waste of corporate assets during the period from May
2001 to the present, purported breaches of fiduciary duty, constructive
fraud, abuse of control, and alleged violations of the California
Corporations Code by certain of the individual defendants who sold some of
their Solectron stockholdings during the period from September 2001 through
September 2002. On May 19, 2003, Solectron and the individual defendants moved
to dismiss the Lifshitzcomplaint. In the meantime, two substantively
identical derivative lawsuits, entitled Schactner v. Cannon, et al., Case No.
CV817112, and Nims v. Cannon, et al.,Case No. CV817158, were filed in the same
Court on May 14 and May 15, respectively. Counsel for the plaintiffs in all
three suits subsequently advised the Court that they would be filing a
consolidated amended complaint, and accordingly, defendants motion to dismiss
was taken off calendar pending the filing of the consolidated amended complaint
combining the three lawsuits. On June 27, 2003, the plaintiffs served their
consolidated amended complaint now alleging that since January of 1999 all of
the current members of Solectrons Board of Directors, as well as four former
officers and directors, purportedly breached their fiduciary duties and
participated in or permitted constructive fraud, unjust enrichment, and
alleged violations of the California Corporations Code. The consolidated
complaint alleged an unspecified amount of compensatory and punitive damages,
and sought the relinquishment of all profits realized by those individual
defendants who sold Solectron stock during the relevant period, together with
statutory penalties under California Corporations Code section 25402 which
plaintiff alleged to be applicable to those sales of Solectron stock.
Solectron moved to dismiss the Consolidated Amended Complaint because Solectron
does not believe plaintiffs have adequately alleged a basis for plaintiffs to
appropriate for themselves the duties of Solectrons Board of Directors under
applicable Delaware law, and believes that the consolidated complaint contains
various factual errors and legal deficiencies. On October 7, 2003, the
California Superior Court granted Solectrons motion to dismiss, but granted
the plaintiffs an opportunity to try to cure the deficiencies in their
Consolidated Amended Complaint through a further amended complaint. Solectron
anticipates that the plaintiffs will file a further amended complaint within
the next 90 days, after which Solectron expects to seek dismissal of that
complaint because Solectron does not believe plaintiffs can show a sufficient
basis to allow them to appropriate for themselves the duties of Solectrons
Board of Directors under applicable Delaware law. Solectron may be forced to
incur substantial litigation expenses in defending this litigation.

NOTE 9. RETIREMENT PLANS

Solectron has various retirement plans that cover a significant number of its
eligible worldwide employees. The Company sponsors a 401(k) Plan to provide
retirement benefits for its United States employees. This Plan provides for
tax-deferred salary deductions for eligible employees. Employees may contribute
between 1% to 15% of their annual compensation to this Plan, limited by an
annual maximum amount as determined by the Internal Revenue Service. The
Company also makes discretionary matching contributions, which vest
immediately, as periodically determined by its Board of Directors. The
Companys matching contributions to this plan related to continuing operations
totaled $9 million, $10 million, and $13 million, respectively, in fiscal 2003,
2002 and 2001. In addition, certain of the Companys non-United States
employees are covered by various defined benefit and defined contribution
plans. Solectrons expenses for these plans related to continuing operations
totaled $4 million, $3 million and $6 million in fiscal 2003, 2002 and 2001,
respectively.

NOTE 10. INCOME TAXES

The components of income taxes (benefit) from continuing operations for the
fiscal periods included in this report are as follows:

2003
    
    2002
    
    2001Current:Federal
    
    $
    21.5
    
    
    $
    (186.6
    )
    
    $
    11.9State
    
    
    3.2
    
    
    
    3.5
    
    
    
    2.6Foreign
    
    
    17.9
    
    
    
    17.3
    
    
    
    39.242.6
    
    
    
    (165.8
    )
    
    
    53.7Deferred:Federal
    
    
    464.8
    
    
    
    (212.5
    )
    
    
    (78.9
    )State
    
    
    63.5
    
    
    
    (53.5
    )
    
    
    (14.3
    )Foreign
    
    
    10.1
    
    
    
    (51.2
    )
    
    
    5.3538.4
    
    
    
    (317.2
    )
    
    
    (87.9
    )Total
    
    $
    581.0
    
    
    $
    (483.0
    )
    
    $
    (34.2
    )


56



---



##### Table of Contents



The overall effective income tax rate (expressed as a percentage of financial
statement loss from continuing operations and before income taxes) varied from
the United States statutory income tax rate for all fiscal years presented as
follows:

2003
    
    2002
    
    2001Federal tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income tax, net of
federal tax benefit
    
    
    (1.7
    )
    
    
    0.9
    
    
    
    7.0Income of international
subsidiaries taxed at
different rates
    
    
    (1.9
    )
    
    
    (0.7
    )
    
    
    (47.1
    )Tax holiday
    
    
    0.5
    
    
    
    1.6
    
    
    
    59.4Tax exempt interest income
    
    
    
    
    
    
    
    
    
    
    4.0Nondeductible goodwill
and acquisition costs
    
    
    (15.9
    )
    
    
    (18.2
    )
    
    
    (11.1
    )Loss for which no benefit
is currently realized
    
    
    (22.3
    )
    
    
    (5.5
    )
    
    
    (10.6
    )Intercompany interest charges
    
    
    
    
    
    
    
    
    
    
    (4.9
    )Change in beginning valuation allowance
    
    
    (18.2
    )
    
    
    
    
    
    
    Other
    
    
    1.5
    
    
    
    0.2
    
    
    
    (0.7
    )Effective income tax rate
    
    
    (23.0)
    %
    
    
    13.3
    %
    
    
    31.0
    %


The tax effects of temporary differences from continuing operations that gave
rise to significant portions of deferred tax assets and liabilities as of
August 31, 2003 and 2002 were as follows (in millions):

2003
    
    2002Deferred tax assets:Accruals and allowances
    
    $
    86.4
    
    
    $
    240.2State income tax
    
    
    52.0
    
    
    
    60.6Acquired intangible assets
    
    
    487.4
    
    
    
    319.5Depreciation
    
    
    
    
    
    
    4.4Net operating loss carryforward and credits
    
    
    798.3
    
    
    
    227.3Restructuring accruals
    
    
    34.3
    
    
    
    70.7Other
    
    
    32.6
    
    
    
    Deferred tax assets
    
    
    1,491.0
    
    
    
    922.7Valuation allowance
    
    
    (1,433.6
    )
    
    
    (314.1
    )Total deferred tax assets
    
    $
    57.4
    
    
    $
    608.6Deferred tax liabilities:Foreign inventories expensed for tax
    
    $
    
    
    
    $
    (35.2
    )Depreciation
    
    
    (12.6
    )
    
    
    Realized translation gains
    
    
    
    
    
    
    (8.0
    )Other
    
    
    
    
    
    
    (5.7
    )Total deferred tax liabilities
    
    
    (12.6
    )
    
    
    (48.9
    )Net deferred tax assets
    
    $
    44.8
    
    
    $
    559.7


Net deferred tax assets were recorded in other
assets in the accompanying consolidated balance sheet.

The Company has U.S. federal net operating loss carryforwards arising from
continuing operations in its U.S. consolidated group of approximately $864
million. The net operating loss carryforwards, if not utilized, will expire in
2021 through 2023.

As a result of various business acquisitions, the Company had acquired
additional U.S. federal net operating loss carryforwards arising from
continuing operations from U.S. subsidiaries totaling approximately $105
million, which will expire if not utilized beginning in 2004 through 2021. The
annual utilization of these net operating losses is limited under the
ownership change provisions of the U.S. Internal Revenue Code.

The Company also has California state net operating losses in its unitary group
of approximately $367 million, which will expire if not utilized in 2011
through 2013.

57



---



##### Table of Contents



The Company has net operating loss carryforwards in various foreign
jurisdictions. A summary of significant foreign net operating loss
carryforwards follows (in millions):

Jurisdiction
    
    Amount
    
    ExpirationBrazil
    
    
    $120.6
    
    
    IndefiniteCanada
    
    
    218.6
    
    
    
    2004 - 2010France
    
    
    279.4
    
    
    
    2004 - 2008Germany
    
    
    83.9
    
    
    IndefiniteIreland
    
    
    62.7
    
    
    IndefiniteJapan
    
    
    82.7
    
    
    
    2006 - 2008Malaysia
    
    
    81.8
    
    
    IndefiniteSingapore
    
    
    71.5
    
    
    IndefiniteUnited Kingdom
    
    
    190.9
    
    
    IndefiniteOther
    
    
    240.8
    
    
    Various


Management has determined that a valuation allowance in the amount of
approximately $1.4 billion is required with respect to deferred tax assets.
Management believes that it is more likely than not that the remaining deferred
tax assets will be realized, principally through carrybacks to taxable income
in prior years. In the event the tax benefits relating to the valuation
allowance are realized, $14 million of such benefits would reduce goodwill and
$13 million would be credited to other comprehensive loss.

Worldwide income (loss) from continuing operations before taxes for all fiscal
years presented consisted of the following (in millions):

2003
    
    2002
    
    2001U.S
    
    
    
    
    
    $
    (305.0
    )
    
    $
    (3,872.8
    )
    
    $
    (239.7
    )Non-U.S
    
    
    
    
    
    
    (2,218.9
    )
    
    
    251.7
    
    
    
    129.5Total
    
    $
    (2,523.9
    )
    
    $
    (3,621.1
    )
    
    $
    (110.2
    )


Cumulative undistributed earnings of the international subsidiaries amounted to
$630 million as of August 29, 2003, all of which is intended to be permanently
reinvested. The amount of deferred income tax liability that would result had
such earnings been repatriated is estimated to be approximately $171 million
which would be absorbed by a corresponding reversal in valuation allowance.

Solectron has been granted a tax holiday for its Malaysian sites which is
effective through July 31, 2011, subject to certain conditions. In addition,
Solectron has been granted a tax holiday for certain manufacturing operations
in Singapore which is effective through March 2011, subject to certain
conditions. Solectron has also been granted various tax holidays in China,
which are effective for various terms and are subject to certain conditions.
The net impact of these tax holidays was to decrease local country taxes by $45
million ($0.05 per diluted share) in 2003, $37 million ($0.05 per diluted
share) in 2002, and $58 million ($0.09 per diluted share) in 2001.

NOTE 11. STOCKHOLDERS EQUITY

Stock Repurchase
On September 17, 2001, Solectrons board of directors authorized a $200 million
stock repurchase program. During the first fiscal quarter of 2002, Solectron
repurchased 442,200 shares of its common stock at an average price of $10.10
for approximately $4.5 million.

Restricted Stock Awards
During fiscal 2003, Solectron issued restricted stock awards up to 1.4 million
shares of common stock to certain eligible executives. These restricted shares
are not transferable until fully vested and are subject to the Company
Repurchase Option for all unvested shares upon certain early termination events
and also subject to accelerated vesting in certain circumstances. Compensation
expense resulting from the difference between the market value on the date of
the restricted stock award granted and the purchase price is being amortized
over the vesting period and is not significant.

Stock Option Plans
Solectrons stock option plans provide for grants of options to employees to
purchase common stock at the fair market value of such shares on the grant
date. The options vest over a four-year period beginning generally on the grant
date. The term of the options is five years for options granted prior to
January 12, 1994, seven years for options granted prior to September 20, 2001,
and ten years for options granted thereafter. In connection with the
acquisitions of Force, SMART, Bluegum, Centennial Technologies, C-MAC and
Iphotonics, Solectron assumed all options outstanding under the related
companies option plans. Options under these plans generally vest over periods
ranging from immediately to five years from the original grant date and have
terms ranging from two to ten years. In the table contained herein, these
options are considered granted in the year the acquisition occurred. No further
options may be granted under these plans.

58



---



##### Table of Contents



A summary of stock option activity under the plans for all fiscal years is
presented as follows (in millions, except per-share data):

2003
      
      2002
      
      2001Weighted
      
      
      
      
      
      
      
      
      Weighted
      
      
      
      
      
      
      
      
      
      
      
      
      
      WeightedNumber
      
      
      
      
      
      Average
      
      
      
      
      Number
      
      Average
      
      
      
      
      
      Number
      
      
      
      
      
      Averageof
      
      
      
      
      
      Exercise
      
      
      
      
      of
      
      Exercise
      
      
      
      
      
      of
      
      
      
      
      
      ExerciseShares
      
      
      
      
      
      Price
      
      
      
      
      Shares
      
      
      
      
      
      Price
      
      
      
      
      
      Shares
      
      
      
      
      
      PriceOutstanding,
          beginning of year
      
      
      63.2
      
      
      
      
      
      
      $
      18.50
      
      
      
      
      
      
      47.9
      
      
      
      
      
      
      $
      22.61
      
      
      
      
      
      
      
      44.1
      
      
      
      
      
      
      $
      17.72Granted
      
      
      21.3
      
      
      
      
      
      
      
      3.73
      
      
      
      
      
      
      26.1
      
      
      
      
      
      
      
      10.40
      
      
      
      
      
      
      
      14.4
      
      
      
      
      
      
      
      32.98Exercised
      
      
      (0.3
      )
      
      
      
      
      
      
      3.54
      
      
      
      
      
      
      (3.1
      )
      
      
      
      
      
      
      6.02
      
      
      
      
      
      
      
      (7.0
      )
      
      
      
      
      
      
      8.77Canceled
      
      
      (20.2
      )
      
      
      
      
      
      
      16.43
      
      
      
      
      
      
      (7.7
      )
      
      
      
      
      
      
      21.92
      
      
      
      
      
      
      
      (3.6
      )
      
      
      
      
      
      
      30.23Outstanding,
          end of year
      
      
      64.0
      
      
      
      
      
      
      $
      14.30
      
      
      
      
      
      
      63.2
      
      
      
      
      
      
      $
      18.50
      
      
      
      
      
      
      
      47.9
      
      
      
      
      
      
      $
      22.61Exercisable
          , end of year
      
      
      37.5
      
      
      
      
      
      
      $
      18.20
      
      
      
      
      
      
      36.4
      
      
      
      
      
      
      $
      17.64
      
      
      
      
      
      
      
      27.0
      
      
      
      
      
      
      $
      16.53Weighted-average
          fair value of options granted during the year
      
      
      
      
      
      
      
      
      
      $
      2.29
      
      
      
      
      
      
      
      
      
      
      
      
      
      $
      6.97
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      $
      17.91


Information regarding the stock options outstanding at August 31, 2003, is
summarized in the table below (in millions, except number of years and
per-share data).

Outstanding
    
    ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number of
    
    Contractual
    
    Exercise
    
    Number of
    
    ExerciseExercise Price
    
    Shares
    
    Life
    
    Price
    
    Shares
    
    Price$0.001 - $3.65
    
    
    5.0
    
    
    7.85 years
    
    $
    2.27
    
    
    
    1.8
    
    
    
    
    
    
    $
    1.693.77 - 3.77
    
    
    7.3
    
    
    9.02 years
    
    
    3.77
    
    
    
    1.6
    
    
    
    
    
    
    
    3.773.99 - 4.24
    
    
    6.5
    
    
    9.19 years
    
    
    4.07
    
    
    
    1.1
    
    
    
    
    
    
    
    4.094.30 - 9.75
    
    
    6.6
    
    
    4.61 years
    
    
    6.29
    
    
    
    4.4
    
    
    
    
    
    
    
    6.559.98 - 10.29
    
    
    11.3
    
    
    7.99 years
    
    
    10.29
    
    
    
    5.4
    
    
    
    
    
    
    
    10.2810.34 - 13.30
    
    
    7.8
    
    
    2.78 years
    
    
    12.19
    
    
    
    7.3
    
    
    
    
    
    
    
    12.2713.44 - 24.13
    
    
    7.7
    
    
    4.92 years
    
    
    18.57
    
    
    
    5.9
    
    
    
    
    
    
    
    18.9825.21 - 38.13
    
    
    6.4
    
    
    3.75 years
    
    
    33.04
    
    
    
    5.7
    
    
    
    
    
    
    
    33.4039.10 - 51.67
    
    
    5.4
    
    
    3.93 years
    
    
    44.83
    
    
    
    4.3
    
    
    
    
    
    
    
    44.78$0.001 - $51.67
    
    
    64.0
    
    
    6.09 years
    
    $
    14.30
    
    
    
    37.5
    
    
    
    
    
    
    $
    18.20


A total of 49.7 million shares of common stock were available for grant under
the plans as of August 31, 2003.

An initial option is granted to each new outside member of Solectrons Board of
Directors to purchase 15,000 shares of common stock at the fair value on the
date of the grant. On December 1 of each year, each outside member is granted
an additional option to purchase 8,000 shares of common stock at the fair
market value on such date. These options vest over one year and have a term of
seven years.

59



---



##### Table of Contents



Employee Stock Purchase Plan

Under Solectrons Employee Stock Purchase Plan, employees meeting specific
employment qualifications are eligible to participate and can purchase shares
semi-annually through payroll deductions at the lower of 85% of the fair market
value of the stock at the commencement or end of the offering period. The
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions for up to 10% of qualified compensation. As of August 31,
2003, approximately 18 million shares were available for issuance under the Purchase Plan.

The weighted average fair value of the purchase rights granted by Solectron in
fiscal 2003, 2002 and 2001 was $1.37, $5.13, and $12.90, respectively.

NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION

Through August 31, 2003 Solectron was operated and managed by business unit,
and the business units are further managed geographically. Each industry
segment had its own executive and support staff. Solectrons management used an
internal management reporting system, which provided financial data to evaluate
performance and allocate Solectrons resources on a business unit and
geographic basis. Certain corporate expenses were allocated to these operating
segments and were included for performance evaluation. Some amortization
expenses were also allocated to these operating segments, but the related
intangible assets were not allocated. The accounting policies for the segments
are the same as for Solectron taken as a whole. Solectron had four reportable
operating segments through August 31, 2003: Global Operations, Technology
Solutions, Global Services and MicroSystems.

Beginning in late 2003, Solectron began shifting from a business unit
organizational structure to a functionally aligned structure. Upon completion
in 2004, Solectron will be organized by key activities important to its
customers and its overall business  Worldwide Design and Engineering Services;
Worldwide Operations (which includes manufacturing and post-manufacturing
services); Worldwide Strategy and Marketing; and Worldwide Sales and Account
Management. As Solectrons existing structure was substantially in place as of
August 31, 2003, segments are reported consistent with prior periods. Solectron
expects to complete its shift to a functional structure in early fiscal 2004
and will revise its segment disclosures accordingly. Information about the
operating segments for continuing operations for all fiscal years presented,
was as follows:

60



---



##### Table of Contents



2003
      
      2002
      
      2001(in millions)Net
          sales:Global
          Operations
      
      $
      8,783.3
      
      
      $
      10,056.3
      
      
      $
      17,058.3Technology
          Solutions
      
      
      1,335.4
      
      
      
      809.1
      
      
      
      1,201.1Global
          Services
      
      
      657.1
      
      
      
      521.7
      
      
      
      309.6MicroSystems
      
      
      238.2
      
      
      
      184.1
      
      
      
      $
      11,014.0
      
      
      $
      11,571.2
      
      
      $
      18,569.0Depreciation
          and amortization:Global
          Operations
      
      $
      188.7
      
      
      $
      264.7
      
      
      $
      446.2Technology
          Solutions
      
      
      18.3
      
      
      
      25.4
      
      
      
      22.1Global
          Services
      
      
      21.5
      
      
      
      16.7
      
      
      
      10.0MicroSystems
      
      
      12.3
      
      
      
      5.1
      
      
      
      Corporate
      
      
      23.1
      
      
      
      41.2
      
      
      
      53.2$
      263.9
      
      
      $
      353.1
      
      
      $
      531.5Interest
          income:Global
          Operations
      
      $
      5.4
      
      
      $
      25.3
      
      
      $
      18.8Technology
          Solutions
      
      
      0.9
      
      
      
      1.3
      
      
      
      1.9Global
          Services
      
      
      0.4
      
      
      
      0.2
      
      
      
      0.1MicroSystems
      
      
      0.1
      
      
      
      0.3
      
      
      
      Corporate
      
      
      24.4
      
      
      
      42.2
      
      
      
      96.1$
      31.2
      
      
      $
      69.3
      
      
      $
      116.9Interest
          expense:Global
          Operations
      
      $
      8.7
      
      
      $
      19.0
      
      
      $
      19.3Technology
          Solutions
      
      
      0.3
      
      
      
      1.2
      
      
      
      0.8Global
          Services
      
      
      0.2
      
      
      
      0.5
      
      
      
      (0.1
      )MicroSystems
      
      
      1.4
      
      
      
      0.8
      
      
      
      Corporate
      
      
      199.7
      
      
      
      220.1
      
      
      
      155.6$
      210.3
      
      
      $
      241.6
      
      
      $
      175.6Income
          (loss) before income taxes from continuing operations:Global
          Operations
      
      $
      (2,183.2
      )
      
      $
      (3,346.3
      )
      
      $
      4.7Technology
          Solutions
      
      
      (10.6
      )
      
      
      (91.0
      )
      
      
      20.4Global
          Services
      
      
      (65.1
      )
      
      
      (14.6
      )
      
      
      38.8MicroSystems
      
      
      (36.8
      )
      
      
      (15.6
      )
      
      
      Corporate
      
      
      (228.2
      )
      
      
      (153.6
      )
      
      
      (174.1
      )$
      (2,523.9
      )
      
      $
      (3,621.1
      )
      
      $
      (110.2
      )Capital
          expenditures:Global
          Operations
      
      $
      89.8
      
      
      $
      318.2
      
      
      $
      448.8Technology
          Solutions
      
      
      7.8
      
      
      
      12.9
      
      
      
      22.7Global
          Services
      
      
      25.2
      
      
      
      24.6
      
      
      
      12.3MicroSystems
      
      
      7.2
      
      
      
      5.4
      
      
      
      0.0Corporate
      
      
      6.5
      
      
      
      34.3
      
      
      
      47.5$
      136.5
      
      
      $
      395.4
      
      
      $
      531.3Total
          assets:Global
          Operations
      
      $
      4,091.5
      
      
      $
      7,050.3Technology
          Solutions
      
      
      589.4
      
      
      
      437.0Global
          Services
      
      
      265.6
      
      
      
      383.2MicroSystems
      
      
      88.2
      
      
      
      104.8Corporate
      
      
      1,152.4
      
      
      
      2,282.4Discontinued
          operations
      
      
      342.4
      
      
      
      756.3$
      6,529.5
      
      
      $
      11,014.0


61



---



##### Table of Contents



The following enterprise-wide information for all fiscal years presented is
provided in accordance with SFAS No. 131. Geographic net sales information
reflects the destination of the product shipped. Long-lived assets information
is based on the physical location of the asset. The United States accounted for
more than 10% of total sales and total assets in the periods presented.
Malaysia accounted for more than 10% of total sales. For major customers
information, the Companys operating segments contributed various percentages
aggregating up to 10% or more of consolidated net sales for such customers
identified in Note 13, Major Customers.

2003
    
    2002
    
    2001(in millions)Net sales derived from:PCB assembly
    
    $
    6,455.1
    
    
    $
    6,645.7
    
    
    $
    13,738.3Systems build
    
    
    2,328.2
    
    
    
    3,410.6
    
    
    
    3,311.3Technology Solutions products
    
    
    1,335.4
    
    
    
    809.1
    
    
    
    1,207.9Global Services
    
    
    657.1
    
    
    
    521.7
    
    
    
    311.5MicroSystems
    
    
    238.2
    
    
    
    184.1
    
    
    
    $
    11,014.0
    
    
    $
    11,571.2
    
    
    $
    18,569.0Geographic net sales:United States
    
    $
    3,976.9
    
    
    $
    3,946.9
    
    
    $
    8,651.1Malaysia
    
    
    1,574.0
    
    
    
    1,452.5
    
    
    
    1,980.4Latin America and other North America
    
    
    1,374.1
    
    
    
    1,808.7
    
    
    
    2,807.7Europe
    
    
    1,879.4
    
    
    
    2,025.5
    
    
    
    3,398.8Other Asia Pacific
    
    
    2,209.6
    
    
    
    2,337.6
    
    
    
    1,731.0$
    11,014.0
    
    
    $
    11,571.2
    
    
    $
    18,569.0Long-lived assets:United States
    
    $
    490.0
    
    
    $
    1,308.8Europe
    
    
    260.9
    
    
    
    326.6Asia/Pacific and other
    
    
    650.8
    
    
    
    2,183.8Discontinued operations
    
    
    174.0
    
    
    
    534.8$
    1,575.7
    
    
    $
    4,354.0


NOTE 13. MAJOR CUSTOMERS

Net sales from continuing operations to major customers as a percentage of
consolidated net sales were as follows:

Years Ended August 312003
    
    2002
    
    2001Hewlett-Packard
    
    
    12.3
    %
    
    
    11.0
    %
    
    
    10.6
    %Nortel Networks
    
    
    11.5
    %
    
    
    14.5
    %
    
    
    11.9
    %Cisco Systems
    
    
    11.4
    %
    
    
    11.6
    %
    
    
    11.5
    %Ericsson
    
    
    *
    
    
    
    *
    
    
    
    13.7
    %


*less than 10%

Solectron has concentrations of credit risk due to sales to these and other of
Solectrons significant customers. In particular, Nortel Networks accounted for
approximately 10% and 16% of total accounts receivable related to continuing
operations at August 31, 2003 and 2002, respectively.

62



---



##### Table of Contents



NOTE 14. PURCHASE OF ASSETS

Fiscal 2003

On February 3, 2003 Solectron entered into a five-year supply agreement with HP
to assemble printed circuit boards and memory modules for HPs mid- and
high-end enterprise servers, as well as other products. In connection with this
supply agreement, Solectron paid approximately $5 million to acquire certain
operating assets. This transaction was treated as an asset purchase and
Solectron allocated the purchase price based on the fair values of the assets
acquired and liabilities assumed. The $5 million was allocated to inventory,
other assets, property, plant, equipment and intangible assets. In addition,
Solectron agreed to pay HP $52 million if HP meets certain minimum revenue
targets over the next five years. If and when HP meets these targets, the $52
million will be paid and recorded as a sales rebate.

Solectron also acquired an IBM asset recovery operation in North Carolina and a
call and technical support service center in Italy for an aggregate purchase
price of approximately $14 million in cash during the second quarter of fiscal
2003.

Fiscal 2002

On May 31, 2002, Solectron announced the completion of a three-year supply
agreement to produce optical networking equipment for Lucent. As part of the
three-year supply agreement, Solectron purchased equipment and inventory
related to Lucents optical product lines for approximately $99 million in
cash. This acquisition was accounted for as a purchase of assets. Subsequently,
as a result of significant changes in the marketplace and decreased demand,
both parties agreed in October 2002 to unwind this supply agreement. During the
first quarter of fiscal 2003, Solectron received approximately $48 million in
cash from Lucent to unwind this agreement. No gain or loss was realized with
respect to this unwind transaction as the cash received was equal to the
carrying value of the assets divested. Solectron ceased production under this
agreement in March 2003.

Fiscal 2001

During the second quarter of fiscal 2001, Solectron acquired IBMs European
Repair Center in Amsterdam, the Netherlands for approximately $10 million in
cash. In addition, Solectron assumed responsibility for IBMs European repair,
refurbishment and asset recovery services provided by the Amsterdam operations.

During the second quarter of fiscal 2001, Solectron completed the acquisition
of Sonys manufacturing facilities in Nakaniida, Japan, and Kaohsiung, Taiwan
for approximately $75 million in cash. The new sites provide a range of
electronics manufacturing services to Sony and other customers.

NOTE 15. BUSINESS COMBINATIONS

Fiscal 2002

C-MAC Industries, Inc. (C-MAC)

During the second quarter of 2002, Solectron completed its acquisition of 100%
of the outstanding common stock of C-MAC, which provides a comprehensive
portfolio of electronic manufacturing services and solutions to customers
worldwide. The Company attributes the goodwill in this transaction to
managements belief that the acquisition will enable Solectron to create a
diversified provider of integrated electronic manufacturing solutions that can
benefit from complementary high-end technology capabilities, selected vertical
integration and improved access to growth opportunities and meet the growing
demand by customers for complete supply-chain management solutions.

The Company issued approximately 98.8 million shares of its common stock, 52.5
million exchangeable shares of Solectron Global Services Canada Inc., which are
exchangeable on a one-to-one basis for Solectron Corporations common stock,
and 5 million options to purchase Solectron Corporations common stock in the
transaction. The purchase price was $2,567 million, consisting of stock
valued at $2,487 million, stock options valued at $63 million and direct
acquisition costs of $22 million reduced by the intrinsic value of unvested
stock options of $5 million. The value of the common stock issued was
determined based on the average market price of Solectrons common stock over
the five-day period before and after the terms of the acquisition were agreed
to and announced.

The Companys statements of operations include C-MACs results from the
acquisition date. The following unaudited pro forma financial information
presents the combined results of operations of Solectron and C-MAC as if the
acquisition had occurred as of the beginning of fiscal 2002 and 2001. The pro
forma financial information does not necessarily reflect the results of
operations that would have occurred if Solectron and C-MAC constituted a single
entity during such periods.

63



---



##### Table of Contents



2002
    
    2001(in millions, except per-share data)Net sales
    
    $
    12,518.7
    
    
    $
    20,475.9Net loss
    
    $
    (3,133.7
    )
    
    $
    (60.0
    )Basic loss per share
    
    $
    (3.82
    )
    
    $
    (0.08
    )Diluted loss per share
    
    $
    (3.82
    )
    
    $
    (0.08
    )


The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition (in millions):

Accounts receivable
    
    $
    277.4Inventory
    
    
    362.1Other current assets
    
    
    214.5Property and equipment
    
    
    186.2Goodwill
    
    
    2,143.5Other intangible assets
    
    
    25.6Other long-term assets
    
    
    44.2Total assets acquired
    
    $
    3,253.5Current liabilities
    
    $
    (316.5
    )Long-term debt
    
    
    (337.8
    )Other long-term liabilities
    
    
    (32.3
    )Total liabilities assumed
    
    $
    (686.6
    )


The intangible assets acquired had a fair value of approximately $26 million
based on an independent valuation. All the intangible assets resulting from the
acquisition are classified under the other category of the table of
intangible assets presented in Note 17, Goodwill and Other Intangible Assets.
The weighted-average useful life of these intangible assets is approximately
six years. Solectron does not expect these assets to have a residual value upon
full amortization.

The $2.1 billion of goodwill resulting from the C-MAC transaction was assigned
to the Global Operations, Technology Solutions and MicroSystems business units
in the amounts of $2.0 billion, $25 million and $68 million, respectively.
Approximately $300 million of these amounts is expected to be deductible for
tax purposes.

Other acquisitions

During the first quarter of 2002, Solectron completed its acquisition of
Iphotonics, Inc., an optical products manufacturer, for approximately 10.2
million shares of Solectron common stock and 428,000 options to purchase
Solectrons common stock. The purchase price was $125 million, consisting of
stock valued at $122 million, stock options valued at $3 million and direct
acquisition costs of $1 million. This transaction resulted in goodwill of
approximately $105 million within the Global Operations business unit. The
value of the common stock issued was determined based on the average market
price of Solectrons common stock over the five-day period before and after the
terms of the acquisition were agreed to and announced.

During the first quarter of 2002, Solectron completed its acquisition of Stream
International, Inc., a global customer relationship management provider, for
approximately $367 million in cash. This transaction resulted in goodwill of
approximately $271 million within the Global Services business unit.

During the second quarter of fiscal 2002, Solectron completed its acquisition
of Artesyn Solutions, Inc. for approximately $36 million in cash. Artesyn
Solutions, Inc. is a provider of extensive repair, refurbishment, logistics and
supply-chain management and end-of-life planning services for customers in the
computer, printer, storage, server, wireless and consumer electronics sector.
This transaction resulted in goodwill of approximately $33 million within the
Global Services business unit.

64



---



##### Table of Contents



During the third quarter of 2002, Solectron announced the completion of its
acquisition of NEC Ibaraki, a provider of manufacturing, fulfillment and demand
forecasting services. The purchase price of the acquisition was approximately
$17 million in cash. No goodwill resulted from this transaction.

During the fourth quarter of 2002, Solectron completed its acquisition of MDT,
a global provider of after-sales services for the communications, computer and
electronic storage markets for approximately $70 million in cash. This
transaction resulted in goodwill of approximately $86 million within the
Global Services business unit.

Pro forma financial information related to Iphotonics, Stream, Artesyn, NEC
Ibaraki, and MDT are not provided as their operations were not significant
individually or in the aggregate to Solectron as a whole.

Fiscal 2001

NatSteel Electronics Ltd (NEL)

During the second quarter of 2001, Solectron completed its acquisition of NEL,
a competitor. Solectron purchased all of the outstanding issued share capital
and convertible bonds for $2.3 billion and $122 million, respectively, in
cash. The acquisition was accounted for using the purchase method and resulted
in goodwill of approximately $2.0 billion within the Global Operations business
unit. As part of the acquisition, Solectron gained key manufacturing sites in
China, Hungary, Indonesia, Malaysia, Mexico, Singapore and United States.

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition (in millions):

Cash
    
    $
    55.3Accounts receivable
    
    
    357.3Inventory
    
    
    393.8Other current assets
    
    
    48.6Property and equipment
    
    
    242.4Goodwill
    
    
    1,974.9Other assets
    
    
    75.2Total assets acquired
    
    $
    3,147.5Short-term debt
    
    $
    (251.5
    )Accounts payable and accrued liabilities
    
    
    (428.9
    )Other liabilities
    
    
    (12.4
    )Total liabilities assumed
    
    $
    (692.8
    )


The following unaudited pro forma financial information presents the combined
results of operations of Solectron and NEL as if the acquisition had occurred
as of the beginning of fiscal 2001. The pro forma financial information does
not necessarily reflect the results of operations that would have occurred had
Solectron and NEL constituted a single entity during such period.

2001(in
          millions, except per-share data)Net Sales
      
      $
      19,734.7Net loss
    
    $
    (210.1
    )Basic loss per share
      
      $
      (0.33
      )Diluted loss per share
    
    $
    (0.33
    )


65



---



##### Table of Contents



Other acquisitions

During the third quarter of fiscal year 2001, Solectron issued approximately
2.2 million shares of common stock to acquire all of the outstanding capital
stock of Centennial. The acquisition, valued at approximately $65 million,
was accounted for using the purchase method and resulted in goodwill of
approximately $46 million within the Technology Solutions business unit. As a
result of the transaction, Solectron gained all of Centennials design,
manufacturing and marketing capabilities, which include memory module and
memory card solutions based on SRAM and flash technologies for OEMs and
end-users in markets such as telecommunications, data communications, mobile
computing and medical.

During the fourth quarter of fiscal 2001, Solectron completed the acquisition
of Shinei, a privately held manufacturer and designer of enclosures for
electronics products. The acquisition, valued at approximately $73 million,
was accounted for using the purchase method and resulted in goodwill of
approximately $63 million within the Global Operations business unit.

Pro forma financial information related to Centennial and Shinei is not
provided as their operations were not significant individually or in the
aggregate to Solectron as a whole.

NOTE 16. RESTRUCTURING

Beginning in the second quarter of fiscal 2001, Solectron recorded
restructuring and impairment costs as it has continued to rationalize
operations in light of customer demand declines and the current economic
downturn. The measures, which included reducing the workforce, consolidating
facilities and changing the strategic focus of a number of sites, was largely
intended to align Solectrons capacity and infrastructure to anticipated
customer demand as well as to rationalize its footprint worldwide. The
restructuring and impairment costs include employee severance and benefit
costs, costs related to leased facilities that will be abandoned and subleased,
owned facilities no longer used by us which will be disposed of, costs related
to leased equipment that has been or will be abandoned, and impairment of owned
equipment that will be disposed of. For owned facilities and equipment, the
impairment loss recognized was based on the fair value less costs to sell, with
fair value estimated based on existing market prices for similar assets.
Severance and benefit costs and other costs associated with restructuring
activities initiated prior to January 1, 2003 were recorded in compliance with
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity.
Severance and benefit costs associated with restructuring activities initiated
on or after January 1, 2003 are recorded in accordance with SFAS No. 112,
Employers Accounting for Postemployment Benefits, as Solectron concluded
that it had a substantive severance plan. For leased facilities that will be
abandoned and subleased, the estimated lease loss accrued represents future
lease payments subsequent to abandonment less any estimated sublease income. In
order to estimate future sublease income, Solectron works with an independent
broker to estimate the length of time until it can sublease a facility and the
amount of rent it can expect to receive. As of August 31, 2003, the majority of
the facilities Solectron plans to sublease have not been subleased and,
accordingly, estimates of expected sublease income could change based on
factors that affect Solectrons ability to sublease those facilities such as
general economic conditions and the real estate market, among others.

See also Note 17, Goodwill and Other Intangible Assets, for discussion of
intangible asset and goodwill impairment charges.

Fiscal 2003

The employee severance and benefit costs included in these restructuring
charges relate to the elimination of approximately 9,500 full-time positions
worldwide and all such positions have been eliminated under this plan.
Approximately 57% of the positions eliminated were in the Americas region, 31%
were in Europe and 12% were in Asia/Pacific. Facilities and equipment subject
to restructuring were primarily located in the Americas and Europe. For leased
facilities that will be abandoned and subleased, the lease costs represent
future lease payments subsequent to abandonment less estimated sublease income.
For owned facilities and equipment, the impairment loss recognized was based on
the fair value less costs to sell, with fair value based on estimates of
existing market prices for similar assets.

During fiscal 2003, Solecton recorded restructuring and impairment costs of
$469.6 million related to continuing operations. The following table summarizes
these charges (in millions):

66



---



##### Table of Contents



2003
    
    NatureImpairment of equipment
    
    $
    67.4
    
    
    non-cashImpairment of facilities
    
    
    80.0
    
    
    non-cashImpairment of other assets
    
    
    26.9
    
    
    non-cashImpairment of equipment, facilities and others
    
    $
    174.3Severance and benefit costs
    
    
    234.0
    
    
    cashLoss on leased equipment
    
    
    2.3
    
    
    cashLoss on leased facilities
    
    
    24.3
    
    
    cashOther exit costs
    
    
    34.7
    
    
    cashTotal
    
    $
    469.6


Fiscal 2002

The employee severance and benefit costs included in these restructuring
charges relate to the elimination of approximately 15,000 full-time positions
worldwide and all such positions have been eliminated under this plan.
Approximately 69% of the positions eliminated were in the Americas region, 20%
were in Europe and 11% were in Asia/Pacific. The employment reductions
primarily affected employees in manufacturing and back office support functions
within the Global Operations business unit. Facilities and equipment subject to
restructuring were primarily located in the Americas and Europe within the
Global Operations business unit. For leased facilities that will be abandoned
and subleased, the lease costs represent future lease payments subsequent to
abandonment less estimated sublease income. For owned facilities and equipment,
the impairment loss recognized was based on the fair value less costs to sell,
with fair value based on estimated of existing market prices for similar
assets.

During fiscal 2002, we recorded restructuring and impairment costs related to
this plan of $615.9 million related to continuing operations. The following
table summarizes these charges (in millions):

2002
    
    NatureImpairment of equipment
    
    $
    127.8
    
    
    non-cashImpairment of facilities
    
    
    81.0
    
    
    non-cashImpairment of IT software and other assets
    
    
    162.5
    
    
    non-cashImpairment of equipment, facilities and others
    
    $
    371.3Severance and benefit costs
    
    
    119.8
    
    
    cashLoss on leased equipment
    
    
    23.8
    
    
    cashLoss on leased facilities
    
    
    80.3
    
    
    cashOther exit costs
    
    
    20.7
    
    
    cashTotal
    
    $
    615.9


Fiscal 2001

The employee severance and benefit costs included in these restructuring
charges relate to the elimination of approximately 11,800 full-time positions
worldwide and all such positions have been eliminated under this plan.
Approximately 67% of the positions eliminated were in the Americas region, 23%
were in Europe and 10% were in Asia/Pacific. The employment reductions
primarily affected employees in manufacturing and back office support functions
within the Global Operations business unit. Facilities and equipment subject to
restructuring were primarily located in the Americas and Europe within the
Global Operations business unit. For leased facilities that will be abandoned
and subleased, the lease costs represent future lease payments subsequent to
abandonment less estimated sublease income. For owned facilities and equipment,
the impairment loss recognized was based on the fair value less costs to sell,
with fair value based on estimates of existing market prices for similar
assets.

During fiscal 2001, we recorded restructuring and impairment costs related to
this plan of $517.3 million related to continuing operations. The following
table summarizes these charges (in millions):

67



---



##### Table of Contents



2001
    
    NatureImpairment of equipment
    
    $
    188.2
    
    
    non-cashImpairment of facilities
    
    
    37.7
    
    
    non-cashImpairment of other assets
    
    
    42.2
    
    
    non-cashImpairment of equipment, facilities and others
    
    $
    268.1Severance and benefit costs
    
    
    70.0
    
    
    cashLoss on leased equipment
    
    
    117.5
    
    
    cashLoss on leased facilities
    
    
    56.4
    
    
    cashOther exit costs
    
    
    5.3
    
    
    cashTotal
    
    $
    517.3


The following table summarizes the continuing operations restructuring accrual
activity in all fiscal years presented (in millions):

Severance
    
    Lease Paymentsand
    
    on
    
    Lease
Payments onBenefits
    
    Facilities
    
    Equipment
    
    Other
    
    TotalBalance of accrual at September 1,
2000
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    FY2001 Provison
    
    
    70.0
    
    
    
    56.4
    
    
    
    117.5
    
    
    
    5.3
    
    
    
    249.2FY2001 Cash payments
    
    
    (70.0
    )
    
    
    (5.5
    )
    
    
    (5.0
    )
    
    
    (0.9
    )
    
    
    (81.4
    )Balance of accrual at August 31, 2001
    
    
    
    
    
    
    50.9
    
    
    
    112.5
    
    
    
    4.4
    
    
    
    167.8FY2002 Provison
    
    
    119.8
    
    
    
    84.2
    
    
    
    30.3
    
    
    
    20.7
    
    
    
    255.0FY2002 Provison adjustments
    
    
    
    
    
    
    (3.9
    )
    
    
    (6.5
    )
    
    
    
    
    
    
    (10.4
    )FY2002 Cash payments
    
    
    (113.7
    )
    
    
    (67.1
    )
    
    
    (51.9
    )
    
    
    (24.8
    )
    
    
    (257.5
    )Balance of accrual at August 31, 2002
    
    
    6.1
    
    
    
    64.1
    
    
    
    84.4
    
    
    
    0.3
    
    
    
    154.9FY2003 Provison
    
    
    234.0
    
    
    
    24.3
    
    
    
    2.3
    
    
    
    34.7
    
    
    
    295.3FY2003 Provison adjustments
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    1.0FY2003 Cash payments
    
    
    (166.0
    )
    
    
    (51.7
    )
    
    
    (57.3
    )
    
    
    (24.5
    )
    
    
    (299.5
    )Balance of accrual at August 31, 2003
    
    $
    74.1
    
    
    $
    37.7
    
    
    $
    29.4
    
    
    $
    10.5
    
    
    $
    151.7


Accruals related to restructuring activities were recorded in accrued expenses
in the accompanying consolidated balance sheet.

NOTE 17. GOODWILL AND OTHER INTANGIBLE ASSETS

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS No.142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated lives
to their estimated residual values, and be reviewed for impairment according to
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. Solectron adopted SFAS No. 142 on
September 1, 2001.

SFAS No. 142 required that Solectron evaluate existing intangible assets and
goodwill acquired in prior purchase business combinations, and to make any
necessary reclassifications in order to conform to the new criteria in SFAS No.
141, Business Combinations, for recognition apart from goodwill. Upon
adoption of SFAS No. 142, Solectron reassessed the useful lives and residual
values of all intangible assets acquired in purchase business combinations, and
no significant changes were deemed necessary. Solectron was also required to
test the intangible assets for impairment within the first interim period and
no impairment loss was deemed necessary.

For the transitional goodwill impairment evaluation, SFAS No. 142 required
Solectron to perform an assessment of whether there was an indication that
goodwill was impaired as of the date of adoption, or step one of the impairment
test. To accomplish this, Solectron identified the reporting units to be
consistent with the business units as defined in Note 12, Segment and
Geographical Information, except for the Technology Solutions and Global
Services business units which were disaggregated further. Solectron then
determined the

68



---



##### Table of Contents



carrying value of each reporting unit by allocating the assets and liabilities,
including the goodwill and intangible assets, to the units as of the date of
adoption. Solectron had up to six months from the date of adoption to
determine the fair value of each reporting unit and compare it to the reporting
units carrying value. If a reporting units carrying amount exceeds its fair
value, an indication exists that the reporting units goodwill is impaired and
Solectron was required to perform the second step of the transitional
impairment test. During the second quarter of fiscal 2002, Solectron performed
step one of the transitional test and concluded that there was no impairment
and no second step was necessary.

Fiscal 2002

During the fourth quarter of fiscal 2002, Solectron performed its annual
goodwill impairment test in accordance with SFAS No. 142 which included step
one as described above for each of the reporting units. Results of step one
indicated that an impairment existed within the Global Operations business unit
since the estimated fair value, based on expected future discounted cash flows
to be generated from the unit, was less than its carrying value. Pursuant to
the second step of the test, Solectron compared the implied fair value of the
units goodwill (determined by allocating the units fair value based on
expected future discounted cash flows, to all its assets, recognized and
unrecognized, and liabilities in a manner similar to a purchase price
allocation for an acquired business) to its carrying amount. In connection
with allocating the fair value of the Global Operations business unit,
Solectron also obtained independent valuations of certain unrecognized
intangible assets as well as fixed assets.

The discounted cash flow models used to determine the fair values of reporting
units in the tests were prepared using revenue and expense projections based on
Solectrons current operating plan. The revenue projections are managements
best estimates considering current and expected economic and industry
conditions. The discounted cash flow model also included a terminal value for
years six and beyond that assumes future free cash flow growth ranging from 3%
to 4% based on managements estimates and standard industry rates used by
analysts monitoring Solectrons industry. The cash flows were discounted using
a weighted average cost of capital ranging from 12% to 13% which is
managements best estimate considering the debt and equity structure of the
Company and external industry data. The discounted cash flows related to the
terminal value represents approximately 84% of total expected future discounted
cash flows.

Significant negative industry and economic trends affecting Solectrons current
and future operations as well as a significant decline in Solectrons stock
price contributed to the fourth quarter impairment test resulting in an
impairment of goodwill related to the Global Operations business unit of
approximately $2.5 billion.

In addition, Solectron performed an impairment test of other intangible assets
during the fourth quarter fiscal 2002. As a result, Solectron recorded an
impairment charge related to a supply agreement with a major customer of
approximately $191 million. This impairment occurred due to reduced
expectations of sales to be realized under the Companys supply agreement with
that customer and was measured by comparing the intangible assets carrying
amount to the fair value as determined using a discounted cash flow model.

Fiscal 2003

Primarily due to significant industry and economic trends that continued to
negatively affect Solectrons operations and stock price, Solectron performed a
goodwill impairment test according to the provisions of SFAS No. 142 during the
third quarter of fiscal 2003 in advance of the Companys annual test originally
scheduled for the fourth quarter of fiscal 2003. This impairment test resulted
in an impairment charge of approximately $1.6 billion related to
continuing operations and was performed using
the same methodology as the annual test performed in the fourth quarter of
fiscal 2002.

Upon concluding that a test was necessary, SFAS No. 142 required Solectron to
perform an assessment of whether there was an indication that goodwill was
impaired. Results of step one indicated that potential impairment existed
within the Global Operations reporting unit and one of the Global Services
reporting units. Step two of the impairment test resulted in impairments of the
entire goodwill balances remaining in both the Global Operations reporting unit
and one of the Global Services reporting units. Accordingly, Solectron recorded
goodwill impairment charges of approximately $1.6 billion related to Global
Operations and $275 million related to Global Services during the third quarter
of fiscal 2003. Approximately $293 million of this goodwill impairment is
related to discontinued operations for fiscal 2003.

In addition to Solectrons impairment test performed during the third quarter
of fiscal 2003, an additional impairment of approximately $15 million was
recognized during the fourth quarter of fiscal 2003. This impairment resulted
from a decision to sell an operation currently reported within the Microsystems
business unit. The impairment represents the entire amount of goodwill
allocated to this operation.

The discounted cash flow models used to determine the fair values of the
reporting units were prepared using revenue and expense projections based on
Solectrons current operating plan as of the date of the test. The revenue
projections were managements best estimates considering current and expected
economic and industry conditions as of the date of the test. The discounted
cash flow model also included a terminal value for years six and beyond that
assumes future free cash flow growth of 3% based on managements estimates and
standard industry rates used by analysts monitoring Solectrons industry. The
cash flows were discounted using a weighted average cost of capital of 12%
which is managements best estimate considering the debt and equity structure
of the Company and external industry data. The discounted cash flows related
to the terminal value represents approximately 72% of total expected future
discounted cash flows.

69



---



##### Table of Contents



Goodwill information for each reportable segment is as follows for the
continuing operations (in millions). Any goodwill established in connection
with an acquisition that was subsequently considered a discontinued operation
is now disclosed in discontinued operations (See Note 18, Discontinued
Operations).

Fiscal 2003

August 31,
    
    Goodwill
    
    Goodwill
    
    August 31,2002
    
    Adjustments*
    
    Impairment
    
    2003Global Operations
    
    $
    1,591.4
    
    
    $
    33.1
    
    
    $
    (1,624.5
    )
    
    $
    Technology Solutions
    
    
    55.1
    
    
    
    (0.3
    )
    
    
    
    
    
    
    54.8Global Services
    
    
    136.9
    
    
    
    (15.5
    )
    
    
    
    
    
    
    121.4MicroSystems
    
    
    23.4
    
    
    
    1.0
    
    
    
    (14.7
    )
    
    
    9.7$
    1,806.8
    
    
    $
    18.3
    
    
    $
    (1,639.2
    )
    
    $
    185.9


*Goodwill adjustments were primarily made based on the final appraisal received
during the first quarter of fiscal 2003 related to the acquisition of C-MAC. No
significant additions resulted from acquisitions during fiscal 2003.

Fiscal 2002

August 31,
    
    Goodwill
    
    Goodwill
    
    August 31,2001
    
    Acquired
    
    Impairment
    
    2002Global Operations
    
    $
    1,910.3
    
    
    $
    2,181.1
    
    
    $
    (2,500.0
    )
    
    $
    1,591.4Technology Solutions
    
    
    50.7
    
    
    
    4.4
    
    
    
    
    
    
    
    55.1Global Services
    
    
    8.7
    
    
    
    128.2
    
    
    
    
    
    
    
    136.9MicroSystems
    
    
    
    
    
    
    23.4
    
    
    
    
    
    
    
    23.4$
    1,969.7
    
    
    $
    2,337.1
    
    
    $
    (2,500.0
    )
    
    $
    1,806.8


Other Intangible Assets

The Companys intangible assets are categorized into three main classes: supply
agreements, intellectual property agreements and other. The supply agreements
primarily resulted from Solectrons acquisitions of several Nortel
manufacturing facilities. The second class primarily consists of intellectual
property agreements resulting from Solectrons acquisitions of various IBM
facilities. The third class, other, consists of miscellaneous acquisition
related costs from Solectrons various asset purchases.

Solectron performed impairment tests of other intangible assets in conjunction
with its goodwill impairment tests in fiscal 2003 and 2002. As a result,
Solectron recorded impairment charges related to supply agreements with major
customers of approximately $172 million and $191 million in fiscal 2003 and
2002, respectively. These impairments occurred due to reduced expectations of
sales to be realized under Solectrons supply agreements with these customers
and were measured by comparing the intangible assets carrying amounts to the
fair values as determined using discounted cash flow models.

70



---



##### Table of Contents



The following tables summarize the gross amounts and accumulated amortization
for each major class as of August 31, 2003 and 2002:

Fiscal 2003

IntellectualSupply
    
    PropertyAgreements
    
    Agreements
    
    Other
    
    TotalGross amount
    
    $
    228.1
    
    
    $
    108.5
    
    
    $
    126.1
    
    
    $
    462.7Accumulated amortization
    
    
    (85.7
    )
    
    
    (45.6
    )
    
    
    (71.5
    )
    
    
    (202.8
    )Impairment
    
    
    (140.4
    )
    
    
    
    
    
    
    (31.3
    )
    
    
    (171.7
    )Carrying value
    
    $
    2.0
    
    
    $
    62.9
    
    
    $
    23.3
    
    
    $
    88.2


Fiscal 2002

IntellectualSupply
    
    PropertyAgreements
    
    Agreements
    
    Other
    
    TotalGross amount
    
    $
    445.1
    
    
    $
    106.4
    
    
    $
    148.9
    
    
    $
    700.4Accumulated amortization
    
    
    (80.7
    )
    
    
    (34.6
    )
    
    
    (57.8
    )
    
    
    (173.1
    )Impairment
    
    
    (191.2
    )
    
    
    
    
    
    
    (40.5
    )
    
    
    (231.7
    )Carrying value
    
    $
    173.2
    
    
    $
    71.8
    
    
    $
    50.6
    
    
    $
    295.6


Amortization expense related to continuing
operations was $31 million, $60 million and $81 million, respectively, in fiscal 2003, 2002 and 2001. The
Company expects that its annual amortization expense as required by SFAS No.
142 for these intangibles would be approximately $19 million for each of the
next three fiscal years and $17 million for each of the two subsequent fiscal
years. Intangible assets are included in other assets in the consolidated
balance sheets.

NOTE 18. DISCONTINUED OPERATIONS

During the fourth quarter of fiscal 2003, as a result of a full review of its
portfolio of businesses, Solectron committed to a plan to divest a number of
business operations that are outside its core competencies and not part of its
new strategic plan for the future. Solectron expects to complete the sale of
these businesses to third parties within the next fiscal year.

These businesses each qualify as a component of Solectron under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-lived Assets. Solectron has
reported the results of operations and financial position of these businesses
in discontinued operations within the statements of operations and the balance
sheets for all periods presented. Each of Solectrons four reportable segments
included one of these businesses. After these businesses are sold, Solectron
will not have any significant continuing involvement in these operations.

71



---



##### Table of Contents



The results from discontinued operations were as follows:

Years Ended August 312003
    
    2002
    
    2001Net sales
    
    $
    686.4
    
    
    $
    705.0
    
    
    $
    123.2Cost of sales
    
    
    552.8
    
    
    
    554.7
    
    
    
    121.1Gross profit
    
    
    133.6
    
    
    
    150.3
    
    
    
    2.1Operating expenses
    
    
    427.2
    
    
    
    104.7
    
    
    
    47.7Operating income (loss)
    
    
    (293.6
    )
    
    
    45.6
    
    
    
    (45.6
    )Interest income
    
    
    0.9
    
    
    
    0.8
    
    
    
    Interest expense
    
    
    (0.6
    )
    
    
    (2.5
    )
    
    
    (0.4
    )Other expense  net
    
    
    (0.5
    )
    
    
    (0.2
    )
    
    
    (1.5
    )Income (loss) before income taxes
    
    
    (293.8
    )
    
    
    43.7
    
    
    
    (47.5
    )Income tax expense
    
    
    63.3
    
    
    
    15.8
    
    
    
    Income (loss) from discontinued operations, net of tax
    
    $
    (357.1
    )
    
    $
    27.9
    
    
    $
    (47.5
    )


In fiscal 2003, approximately $293 million of
goodwill impairment included in operating expenses determined in
connection with Solectrons impairment test performed during the third quarter
of fiscal 2003 was related to discontinued operations. See Note 17, Goodwill
and Other Intangible Assets, for further discussion of this impairment test.
This goodwill was established in conjunction with acquisitions of businesses in
fiscal 2002. See Note 15, Business Combinations, for additional information.

Also in fiscal 2003, approximately $54 million was recorded in discontinued
operations related to establishing valuation reserves for deferred tax assets.
See Note 10 Income Taxes, for further discussion of income taxes.

72



---



##### Table of Contents



The current and non-current assets and liabilities of discontinued operations
as of August 31, 2003 and 2002, were as follows:

August 31
    
    August 312003
    
    2002Cash, cash equivalents and short-term investments
    
    $
    32.3
    
    
    $
    32.2Accounts receivable, net
    
    
    95.3
    
    
    
    118.0Inventories
    
    
    33.8
    
    
    
    47.9Prepaid expenses and other current assets
    
    
    7.0
    
    
    
    23.4Total current assets of discontinued operations
    
    $
    168.4
    
    
    $
    221.5Net property and equipment
    
    $
    71.4
    
    
    $
    91.7Goodwill
    
    
    68.9
    
    
    
    357.1Other assets
    
    
    33.7
    
    
    
    86.0Total non-current assets of discontinued operations
    
    $
    174.0
    
    
    $
    534.8Short-term debt
    
    $
    2.0
    
    
    $
    6.2Accounts payable
    
    
    29.8
    
    
    
    38.2Accrued employee compensation
    
    
    23.5
    
    
    
    21.6Accrued expenses
    
    
    43.6
    
    
    
    51.4Other current liabilities
    
    
    27.5
    
    
    
    8.1Total current liabilities of discontinued operations
    
    $
    126.4
    
    
    $
    125.5Total non-current liabilities of discontinued
operations
    
    $
    14.6
    
    
    $
    9.8


NOTE 19. NET LOSS PER SHARE

Common shares issuable upon exercise of stock options of 1.2 million, 3.5
million and 14.8 million, respectively, were excluded from the diluted
calculation for fiscal years 2003, 2002 and 2001 because the effect was
anti-dilutive. The calculations of loss per share for the years ended August
31, 2003, 2002 and 2001 did not include 31.7 million, 57.6 million and 100.5
million common shares, respectively, issuable upon conversion of the LYONs as
they would have been anti-dilutive.

In addition, the calculations of loss per share for the years ended August 31,
2003 and 2002 did not include 112.1 million and 78.0 million common shares
issuable upon conversion of the Companys ACES, as the effect would have been
anti-dilutive.

73



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders
Solectron Corporation:

We have audited the accompanying consolidated balance sheets of Solectron
Corporation and subsidiaries as of August 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders equity, comprehensive
loss, and cash flows for each of the years in the three-year period ended
August 31, 2003. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule. These
consolidated financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the financial position of Solectron
Corporation and subsidiaries as of August 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the years in the three-year
period ended August 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets on September 1, 2001.

/S/ KPMG LLP
Mountain View, California
November 10, 2003

74



---



##### Table of Contents









ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.







ITEM 9a. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Based on their evaluation, as
of the end of the period covered by this report, our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, (the Exchange Act)) are
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.

Changes in internal control over financial reporting. There were no changes in
our internal control over financial reporting occurred during the fourth
quarter of fiscal year 2003 that have materially affected or are reasonably
likely to materially affect our internal control over financial reporting.







PART III







ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 regarding our directors, audit committee
and audit committee financial expert is incorporated by reference from the
information under the captions Proposal  Election of Directors and
Corporate Governance in our definitive Proxy Statement (Notice of Annual
Meeting of Stockholders) for the fiscal year ended August 29, 2003 to be held
on January 7, 2004 which we will file with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by this
Report. The information required by Item 10 regarding our executive officers
appears immediately following Item 4 under Part I of this Report.

We have adopted a code of ethics that applies to our principal executive
officer and all members of our finance department, including the principal
financial officer and principal accounting officer. This code of ethics, which
consists of the Special Ethics Obligations for Employees with Financial
Reporting Responsibilities section of our Code of Business Conduct and
Corporate Governance that applies to employees generally, is posted on our
Website. The Internet address for our Website is http://www.solectron.com, and
the code of ethics may be found as follows:



| | 1. |  | From our main Web page, first click on About Solectron,     
| | -- |  | --------------------------------------------------------------
|
| | 2. |  | Next, click on Corporate Governance.                        
|
| | 3. |  | Finally, click on Code of Business Conduct and Ethics Guide.

We intend to satisfy the disclosure requirement under Item 10 of Form 8-K
regarding an amendment to, or waiver from, a provision of this code of ethics
by posting such information on our website, at the address and location
specified above.







ITEM 11: EXECUTIVE COMPENSATION

The information required by Item 11 of Form 10-K is incorporated by reference
to the information contained in the section captioned Executive Officer
Compensation of Solectrons definitive Proxy Statement.







ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding this item is incorporated herein by reference from the
section entitled Security Ownership of Certain Beneficial Owners and
Management, Securities Authorized for Issuance under Equity Compensation
Plans, and Change-in-Control Agreements in Solectrons definitive Proxy
Statement.







ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to this item is incorporated herein by reference from
the section entitled Certain Relationships and Related Transactions in
Solectrons definitive Proxy Statement.

75



---



##### Table of Contents









ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is included under the captions Proposal
No. 3:Ratification of Independent AuditorsPrincipal Accountant Fees and
Services and Policy on Audit Committee Pre-Approval of Audit and Permissible
Non-Audit Services of Independent Auditors in our Proxy Statement related to
the 2003 Annual Meeting of Shareholders and is incorporated herein by
reference.







PART IV







ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



| | (a)(1) |  | Financial Statements. The financial statements listed in Item 8:
Financial Statements and Supplementary Data, above are filed as
part of this Annual Report on Form 10-K, beginning on page 35.
| | ------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (a)(2) |  | Financial Statement Schedule. See Schedule II on page 78                                                                                                                                         
|
| | (a)(3) |  | Exhibits. The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Annual Report on Form 10-K.                                                                      
|
| | (b)    |  | Reports on Form 8-K.                                                                                                                                                                             
|
| |        |  | 8-K filed on June 19, 2003 relating to Solectron Corporations
appointment of former GE executive Marc Onetto to executive vice
president of worldwide operations.                               

76



---



##### Table of Contents









SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on November 14, 2003.



| |                       |                                       |  | 
| | --------------------- | ------------------------------------- |  | 
| | SOLECTRON CORPORATION |                                       | 
|
| | By:                   | /S/ Michael Cannon                    |  | 
| |                       |                                       |  | 
| |                       | Michael Cannon                        |  | 
| |                       | President and Chief Executive Officer |  | 

Pursuant to the requirements of the Exchange Act of 1934, this report has been
signed by the following persons in the capacities and on the dates indicated:

|                           |  |                                       |  |                  
|-------------------------- |  | ------------------------------------- |  | -----------------
|Signature                  |  | Title                                 |  | Date             
|                           |  |                                       |  |                  
|                           |  | President
        and Chief           |  |                  
|/S/ Michael Cannon         |  | Executive
        Officer (Principal  |  |                  
|                           |  | Executive
        Officer)            |  | November 14, 2003
|Michael Cannon             |  |                                       |  |                  
|                           |  |                                       |  |                  
|                           |  | Executive
        Vice President and  |  |                  
|/S/ Kiran Patel            |  | Chief Financial
        Officer       |  |                  
|                           |  | (Principal
        Financial Officer) |  | November 14, 2003
|Kiran Patel                |  |                                       |  |                  
|                           |  |                                       |  |                  
|/S/ Warren J. Ligan        |  | Corporate
        Vice President and  |  |                  
|                           |  | Chief Accounting
        Officer      |  | November 14, 2003
|Warren J. Ligan            |  |                                       |  |                  
|                           |  |                                       |  |                  
|/S/ Richard A. DAmore     |  |                                       |  |                  
|                           |  | Director                              |  | November 14, 2003
|Richard A. DAmore         |  |                                       |  |                  
|                           |  |                                       |  |                  
|/S/ Charles A. Dickinson   |  |                                       |  |                  
|                           |  | Director                              |  | November 14, 2003
|Charles A. Dickinson       |  |                                       |  |                  
|                           |  |                                       |  |                  
|/S/ Heinz Fridrich         |  |                                       |  |                  
|                           |  | Director                              |  | November 14, 2003
|Heinz Fridrich             |  |                                       |  |                  
|                           |  |                                       |  |                  
|/S/ William A. Hasler      |  |                                       |  |                  
|                           |  | Director                              |  | November 14, 2003
|William A. Hasler          |  |                                       |  |                  
|                           |  |                                       |  |                  
|/S/ Kenneth E. Haughton    |  |                                       |  |                  
|                           |  | Director                              |  | November 14, 2003
|Kenneth E. Haughton, Ph.D. |  |                                       |  |                  
|                           |  |                                       |  |                  
|/S/ Paul R. Low            |  |                                       |  |                  
|                           |  | Director                              |  | November 14, 2003
|Paul R. Low, Ph.D.         |  |                                       |  |                  
|                           |  |                                       |  |                  
|/S/ C. Wesley M. Scott     |  |                                       |  |                  
|                           |  | Director                              |  | November 14, 2003
|C. Wesley M. Scott         |  |                                       |  |                  
|                           |  |                                       |  |                  
|/S/ Osamu Yamada           |  |                                       |  |                  
|                           |  | Director                              |  | November 14, 2003
|Osamu Yamada               |  |                                       |  |                  

77



---



##### Table of Contents



FINANCIAL STATEMENT SCHEDULE

The financial statement Schedule II-VALUATION AND QUALIFYING ACCOUNTS is filed
as part of this Form 10-K.

SOLECTRON CORPORATION AND SUBSIDIARIES

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

(amounts in millions)

AdditionsBalance at
    
    Charged
    
    
    
    
    
    Balance atBeginning
    
    To
    
    
    
    
    
    Endof Period
    
    Operations
    
    Acquisitions
    
    (Deductions)
    
    of PeriodDescription
Year ended August 31, 2003:
Allowance for doubtful
accounts receivable
    
    $
    86.7
    
    
    $
    15.2
    
    
    $
    
    
    
    $
    (54.0
    )
    
    $
    47.9Year ended August 31, 2002:
Allowance for doubtful
accounts receivable
    
    $
    40.8
    
    
    $
    9.2
    
    
    $
    47.6
    
    
    $
    (10.9
    )
    
    $
    86.7Year ended August 31, 2001:
Allowance for doubtful
accounts receivable
    
    $
    8.6
    
    
    $
    33.6
    
    
    $
    44.1
    
    
    $
    (45.5
    )
    
    $
    40.8


78



---



##### Table of Contents



INDEX TO EXHIBITS

ExhibitNumber
    
    Exhibit Title3.1 [A]
    
    Certificate of Incorporation of the Registrant, as amended.3.2
    
    Bylaws of the Registrant, as amended.3.3 [B]
    
    Certificate of Designation Rights, Preferences and Privileges of Series A Participating Preferred Stock of
the Registrant.4.1 [C]
    
    Supplemental Indenture, dated as of May 8, 2000, by and between the Registrant and State Street Bank
and Trust Company of California N.A., as Trustee.4.2 [D]
    
    Supplemental Indenture, dated as of November 20, 2000, by and between the Registrant and State Street
Bank and Trust Company of California N.A., as Trustee.4.3 [E]
    
    Preferred Stock Rights Agreement, dated as of June 29, 2001, as amended December 3, 2001, by and
between the Registrant and EquiServe Trust Company, N.A., as Rights Agent.4.4 [F]
    
    Senior Debt Securities Indenture, dated as of February 6, 2002, by and between the Registrant and State
Street and Trust Company of California, N.A., as Trustee.4.5 [G]
    
    Subordinated Debt Securities Indenture, dated as of December 27, 2001, by and between the Registrant
and State Street Bank and Trust Company of California, N.A., as Trustee.4.6 [F]
    
    First Supplemental Indenture, dated as of February 6, 2002, by and between the Registrant and State
Street Bank and Trust Company of California, N.A., as Trustee.4.7 [G]
    
    First Supplemental Indenture, dated as of December 27, 2001, by and between the Registrant and State
Street Bank and Trust Company of California, N.A., as Trustee.4.8 [F]
    
    Purchase Contract Agreement, dated as of December 27, 2001, by and between the Registrant and State
Street Bank and Trust Company of California, N.A., as purchase contract agent.4.9 [F]
    
    Pledge Agreement, dated as of December 27, 2001, among the Registrant, U.S. Bank Trust, N.A., as
collateral agent, custodial agent, and securities intermediary, and State Street Bank and Trust Company
of California, N.A., as purchase contract agent.4.10 [F]
    
    Pledge Agreement, dated as of December 27, 2001, between the Registrant and State Street Bank and
Trust Company of California, N.A., as the Trustee for the holders of the Debentures.4.11 [H]
    
    Amendment No. 1 made and entered into as of January 8, 2002 to Pledge Agreement dated as of
December 27, 2001 between the Registrant and State Street Bank and Trust Company of California,
N.A., as the Trustee for the holders of the Debentures.4.12 [F]
    
    Control Agreement, dated as of December 27, 2001, by and between the Registrant and State Street Bank
and Trust Company of California, N.A., as Trustee and as securities intermediary and depository bank.4.13 [H]
    
    Amendment No. 1 made and entered into as of January 8, 2002 to Control Agreement dated as of
December 27, 2001 between the Registrant and State Street Bank and Trust Company of California,
N.A., as Trustee and as securities intermediary and depository bank.10.1 [I]
    
    Form of Indemnification Agreement by and between the Registrant and its officers, directors and certain
other employees.10.2
    
    2003 Employee Stock Purchase Plan.10.3 [J]
    
    Amended and Restated 1992 Stock Option Plan.


79



---



##### Table of Contents



INDEX TO EXHIBITS

ExhibitNumber
    
    Exhibit Title10.4 [J]
    
    2002 Stock Option Plan.10.5 [K]
    
    Three-Year facility Credit Agreement, dated as of February 14, 2002, as amended June 18, 2002, August
19, 2003, February 13, 2003 and May 30, 2003, among the Registrant and Goldman, Sachs Credit
Partners, L.P., Bank of America, N.A., JP Morgan Chase Bank and The Bank of Nova Scotia.10.6 [K]
    
    Amended and Restated 364-Day Facility Credit Agreement, dated as of February 13, 2003, as amended
M ay 30, 2003, among the Registrant and Goldman, Sachs Credit Partners, L.P., Bank of America, N.A.,
JP Morgan Chase Bank and The Bank of Nova Scotia.10.7 [L]
    
    Waiver Agreement, dated as of May 30, 2003, among the Registrant, Goldman Sachs Credit Partners
L.P., JP Morgan Chase Bank, The Bank of Novia Scotia, Bank of America, N.A. and certain other
lenders.10.8 [L]
    
    Waiver Agreement, dated as of May 30, 2003, among the Registrant, Bank of America Securities LLC,
Goldman Sachs Credit Partners L.P., JP Morgan Chase Bank, The Bank of Novia Scotia, Bank of
America, N.A. and other certain lenders.10.9 [M]
    
    Solectron Corporation Michael Cannon Employment Agreement, entered into as of January 6, 2003.10.10 [M]
    
    Solectron Corporation StandAlone Stock Option Agreement (Michael Cannon), entered into as of
January 6, 2003.10.11 [M]
    
    Solectron Corporation Restricted Stock Purchase Agreement (Michael Cannon), entered into as of
January 6, 2003.10.12
    
    Solectron Corporation Marc Onetto Employment Agreement, entered into as of June 18, 2003.10.13 [N]
    
    Solectron Corporation Stand-Alone Stock Option Agreement (Marc Onetto), entered into as of June 18,
2003.10.14 [N]
    
    Solectron Corporation Restricted Stock Purchase Agreement (Marc Onetto), entered into as of July 17,
2003.10.15
    
    Second Amendment and Waiver, dated as of August 27, 2003, among the Registrant, Bank of America
Securities LLC, Goldman Sachs Credit Partners L.P., JP Morgan Chase Bank, The Bank of Nova Scotia,
Bank of America, N.A. and other credit lenders.10.16
    
    Fifth Amendment and Waiver, dated as of August 27, 2003, among the Registrant, Goldman Sachs
Credit Partners, L.P., Bank of America, N.A., JP Morgan Chase Bank and the Bank of Nova Scotia.12.1
    
    Computation of ratios of earnings to fixed charges.21.1
    
    Subsidiaries of the Registrant.23.1
    
    Consent of KPMG LLP, Independent Auditors.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the SarbanesOxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.


Footnotes:

[A]
    
    Incorporated by reference from Exhibit 3.1 filed with the
Registrants Form 10-Q for the quarter ended February 28, 2001,
Exhibit 3.1 filed with the Registrants Form 10-Q for the quarter
ended February 25,


80



---



##### Table of Contents



INDEX TO EXHIBITS

ExhibitNumber
    
    Exhibit Title2000, and Exhibit 3.1 filed with the Registrants Form 10-Q for the quarter ended February 26, 1999.[B]
    
    Incorporated by reference from Exhibit 3.3 filed with the Registrants Annual Report on Form 10-K for
the fiscal year ended August 31, 2001.[C]
    
    Incorporated by reference from Exhibit 1.1 of Registrants Form 8-K, filed with the Commission on May
16, 2000 (File No. 001-11098)[D]
    
    Incorporated by reference from Exhibits of Registrants Form 8-K, filed with the Commission on
November 21, 2000 (File No. 001-11098)[E]
    
    Incorporated by reference from Exhibit 4.1 of Registrants Registration Statement on Form 8-A filed
with the Commission on July 13, 2001 (File No. 001-11098), and Exhibit 4.2 to Amendment No. 1 of
Form 8-A filed with the Commission on December 4, 2001 (File No. 001-11098)[F]
    
    Incorporated by reference from Exhibits of Registrants Form 8-K, filed with the Commission on
February 8, 2002 (File No. 001-11098)[G]
    
    Incorporated by reference from Exhibits of Registrants Form 8-K, filed with the Commission on January
7, 2002 (File No. 001-11098)[H]
    
    Incorporated by reference from Exhibits of Registrants Amendment No. 1 to Form 8-K, filed with the
Commission on January 10, 2002 (File No. 001-11098)[I]
    
    Incorporated by reference from Exhibits of Registrants Form 10-K for the year ended August 31, 1997.[J]
    
    Incorporated by reference from the Exhibit 4.2 of the Registrants Registration Statement on Form S8,
filed with the Commission March 8, 2002 (File No. 333-84076)[K]
    
    Incorporated by reference from Exhibits of Registrants Form 10-Q for the quarter ended February 28,
2002, Form 10-Q for the quarter ended May 31, 2002 and Form 10-Q for the quarter ended February 29,
2003.[L]
    
    Incorporated by reference from Exhibits of Registrants Form 10-Q for the quarter ended May 30, 2003.[M]
    
    Incorporated by reference from Exhibits of Registrants Form 10-Q for the quarter ended February 28,
2003.[N]
    
    Incorporated by reference from Exhibits of Registrants Form S-8 filed with the Commission on July 17,
2003.


81