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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(MARK ONE)

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

For the quarterly period ended May 30, 2003

OR

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

FOR THE TRANSITION PERIOD FROM          TO

Commission file number 1-11098

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 Drive
Milpitas, California 95035
(Address of principal executive offices including zip code)

(408) 957-8500
(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES   [x]   NO   [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)

YES   [x]   NO   [  ]

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.

At June 30, 2003, 829,814,306 shares of Common Stock of the Registrant
were outstanding (including approximately 32 million shares of Solectron Global
Services Canada, Inc., which are exchangeable on a one-to-one basis for the
Registrants common stock).





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TABLE OF CONTENTS



|                              |                                                                                               |                                                         |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                  
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements   
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    
|INDEX TO EXHIBITS            
|EXHIBIT 10.1                 
|EXHIBIT 10.2                 
|EXHIBIT 10.3                 
|EXHIBIT 10.4                 
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 
|EXHIBIT 99.3                 
|EXHIBIT 99.4                 



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SOLECTRON CORPORATION

INDEX TO FORM 10-Q

|                                                                                              |                                                                                                                   |  |    |   | 
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- |  | -- | - | 
|PART I. FINANCIAL INFORMATION                                                                 |                                                                                                                   |  |    |  
|Item 1. Financial Statements                                                                  |                                                                                                                   |  |    |  
|                                                                                              | Condensed Consolidated Balance Sheets at May 31, 2003 and August 31, 2002                                         |  |    | 3 | 
|                                                                                              | Condensed Consolidated Statements of Operations for the three and nine months
ended May 31, 2003 and 2002         |  |    | 4 | 
|                                                                                              | Condensed Consolidated Statements of Comprehensive Loss for the three and nine
months ended May 31, 2003 and 2002 |  |    | 5 | 
|                                                                                              | Condensed Consolidated Statements of Cash Flows for the nine months ended May
31, 2003 and 2002                   |  |    | 6 | 
|                                                                                              | Notes to Condensed Consolidated Financial Statements                                                              |  |    | 7 | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations |                                                                                                                   |  | 22 |  
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                   |  | 42 |  
|Item 4. Controls and Procedures                                                               |                                                                                                                   |  | 42 |  
|PART II. OTHER INFORMATION                                                                    |                                                                                                                   |  |    |  
|Item 1. Legal Proceedings                                                                     |                                                                                                                   |  | 43 |  
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                   |  | 45 |  
|Signature                                                                                     |                                                                                                                   |  | 46 |  

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Financial Statements

SOLECTRON CORPORATION AND SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(unaudited)


|                                           |                                                   |                            |         |          |         |           |          |          |         | 
|------------------------------------------ | ------------------------------------------------- | -------------------------- | ------- | -------- | ------- | --------- | -------- | -------- | ------- | 
|                                           |                                                   |                            |         | May 31   |         | August 31
|                                           |                                                   |                            |         | 2003     |         | 2002     
|                                           |                                                   |                            |         |          |         |          
|ASSETS                                     |                                                   |                            |         |          |         |           |          |         
|Current assets:                            |                                                   |                            |         |          |         |           |          |         
|                                           | Cash, cash equivalents and short-term investments |                            | $       | 1,690.7  |         |           | $        | 2,249.8  |        
|                                           | Accounts receivable, net                          |                            | 1,641.9 |          |         |           | 1,788.2  |         
|                                           | Inventories                                       |                            |         | 1,551.3  |         |           |          | 1,870.0  |        
|                                           | Prepaid expenses and other current assets         |                            |         | 414.9    |         |           |          | 752.0    |        
|                                           |                                                   |                            |         |          |         |           |          |         
|                                           |                                                   | Total current assets       |         |          | 5,298.8 |           |          |          | 6,660.0 | 
|Net property and equipment                 |                                                   |                            | 936.2   |          |         |           | 1,173.0  |         
|Goodwill                                   |                                                   |                            | 277.9   |          |         |           | 2,163.9  |         
|Other assets                               |                                                   |                            | 450.1   |          |         |           | 1,017.1  |         
|                                           |                                                   |                            |         |          |         |           |          |         
|Total assets                               |                                                   | $                          | 6,963.0 |          |         | $         | 11,014.0 |         
|                                           |                                                   |                            |         |          |         |           |          |         
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                   |                            |         |          |         |           |          |         
|Current liabilities:                       |                                                   |                            |         |          |         |           |          |         
|                                           | Short-term debt                                   |                            | $       | 1,146.4  |         |           | $        | 643.0    |        
|                                           | Accounts payable                                  |                            |         | 1,310.7  |         |           |          | 1,509.5  |        
|                                           | Accrued employee compensation                     |                            |         | 205.7    |         |           |          | 218.5    |        
|                                           | Accrued expenses                                  |                            |         | 464.9    |         |           |          | 527.3    |        
|                                           | Other current liabilities                         |                            |         | 219.2    |         |           |          | 106.9    |        
|                                           |                                                   |                            |         |          |         |           |          |         
|                                           |                                                   | Total current liabilities  |         |          | 3,346.9 |           |          |          | 3,005.2 | 
|Long-term debt                             |                                                   |                            | 1,884.4 |          |         |           | 3,183.9  |         
|Other long-term liabilities                |                                                   |                            | 76.2    |          |         |           | 52.2     |         
|                                           |                                                   |                            |         |          |         |           |          |         
|                                           |                                                   | Total liabilities          |         | $        | 5,307.5 |           |          | $        | 6,241.3 | 
|                                           |                                                   |                            |         |          |         |           |          |         
|Commitments and contingencies              |                                                   |                            |         |          |         |           |          |         
|Stockholders equity:                      |                                                   |                            |         |          |         |           |          |         
|                                           | Common stock                                      |                            | $       | 0.8      |         |           | $        | 0.8      |        
|                                           | Additional paid-in capital                        |                            |         | 6,652.1  |         |           |          | 6,635.9  |        
|                                           | Accumulated deficit                               |                            |         | (4,861.5 | )       |           |          | (1,578.6 | )      
|                                           | Accumulated other comprehensive losses            |                            |         | (135.9   | )       |           |          | (285.4   | )      
|                                           |                                                   |                            |         |          |         |           |          |         
|                                           |                                                   | Total stockholders equity |         |          | 1,655.5 |           |          |          | 4,772.7 | 
|                                           |                                                   |                            |         |          |         |           |          |         
|Total liabilities and stockholders equity |                                                   | $                          | 6,963.0 |          |         | $         | 11,014.0 |         
|                                           |                                                   |                            |         |          |         |           |          |         

See accompanying notes to condensed consolidated financial statements.

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

|                                                            |                                     |                |          |                           |          |                          |         |       |        |      |          |         |          |   |         |       |        |  
|----------------------------------------------------------- | ----------------------------------- | -------------- | -------- | ------------------------- | -------- | ------------------------ | ------- | ----- | ------ | ---- | -------- | ------- | -------- | - | ------- | ----- | ------ | -
|                                                            |                                     |                |          | Three Months Ended May 31 |          | Nine Months Ended May 31
|                                                            |                                     |                |          |                           |          |                         
|                                                            |                                     |                |          | 2003                      |          | 2002                     |         | 2003  |        | 2002
|                                                            |                                     |                |          |                           |          |                          |         |       |        |     
|Net sales                                                   |                                     | $              | 2,815.5  |                           |          | $                        | 3,032.8 |       |        | $    | 8,769.7  |         |          | $ | 9,159.6 |      
|Cost of sales                                               |                                     |                | 2,651.9  |                           |          |                          | 2,821.6 |       |        |      | 8,241.9  |         |          |   | 8,545.8 |      
|                                                            |                                     |                |          |                           |          |                          |         |       |        |      |          |         |          |   |         |      
|Gross profit                                                |                                     |                | 163.6    |                           |          |                          | 211.2   |       |        |      | 527.8    |         |          |   | 613.8   |      
|Operating expenses:                                         |                                     |                |          |                           |          |                          |         |       |        |      |          |         |          |   |         |      
|                                                            | Selling, general and administrative |                |          | 172.3                     |          |                          |         | 217.6 |        |      |          | 549.9   |          |   |         | 626.8 |       
|                                                            | Research and development            |                |          | 22.7                      |          |                          |         | 20.4  |        |      |          | 66.2    |          |   |         | 54.1  |       
|                                                            | Restructuring and impairment costs  |                |          | 384.1                     |          |                          |         | 313.4 |        |      |          | 542.8   |          |   |         | 561.0 |       
|                                                            | Goodwill impairment                 |                |          | 1,917.0                   |          |                          |         |      |        |      |          | 1,917.0 |          |   |         |      |       
|                                                            |                                     |                |          |                           |          |                          |         |       |        |      |          |         |          |   |         |      
|                                                            |                                     | Operating loss |          |                           | (2,332.5 | )                        |         |       | (340.2 | )    |          |         | (2,548.1 | ) |         |       | (628.1 | )
|Interest income                                             |                                     |                | 8.0      |                           |          |                          | 14.0    |       |        |      | 26.0     |         |          |   | 55.3    |      
|Interest expense                                            |                                     |                | (51.9    | )                         |          |                          | (72.2   | )     |        |      | (163.4   | )       |          |   | (177.4  | )    
|Other income (expense)-net                                  |                                     |                | (4.0     | )                         |          |                          | (3.5    | )     |        |      | 46.9     |         |          |   | 73.9    |      
|                                                            |                                     |                |          |                           |          |                          |         |       |        |      |          |         |          |   |         |      
|Loss before income taxes                                    |                                     |                | (2,380.4 | )                         |          |                          | (401.9  | )     |        |      | (2,638.6 | )       |          |   | (676.3  | )    
|Income tax expense (benefit)                                |                                     |                | 720.8    |                           |          |                          | (117.5  | )     |        |      | 644.3    |         |          |   | (213.4  | )    
|                                                            |                                     |                |          |                           |          |                          |         |       |        |      |          |         |          |   |         |      
|                                                            |                                     | Net loss       |          | $                         | (3,101.2 | )                        |         | $     | (284.4 | )    |          | $       | (3,282.9 | ) |         | $     | (462.9 | )
|                                                            |                                     |                |          |                           |          |                          |         |       |        |      |          |         |          |   |         |      
|Basic and diluted net loss per share                        |                                     | $              | (3.74    | )                         |          | $                        | (0.35   | )     |        | $    | (3.97    | )       |          | $ | (0.60   | )    
|Shares used to compute basic and diluted net
loss per share |                                     |                | 828.8    |                           |          |                          | 823.2   |       |        |      | 827.1    |         |          |   | 768.4   |      

See accompanying notes to condensed consolidated financial statements.

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SOLECTRON CORPORATION AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in millions)
(unaudited)


|                                         |  |                           |          |                          |  |      |        |      |  |   |          |   |  |   |        |  
|---------------------------------------- |  | ------------------------- | -------- | ------------------------ |  | ---- | ------ | ---- |  | - | -------- | - |  | - | ------ | -
|                                         |  | Three Months Ended May 31 |          | Nine Months Ended May 31
|                                         |  |                           |          |                         
|                                         |  | 2003                      |          | 2002                     |  | 2003 |        | 2002
|                                         |  |                           |          |                          |  |      |        |     
|Net loss                                 |  | $                         | (3,101.2 | )                        |  | $    | (284.4 | )    |  | $ | (3,282.9 | ) |  | $ | (462.9 | )
|Other comprehensive income (loss):       |  |                           |          |                          |  |      |        |      |  |   |          |   |  |   |        |  
|Foreign currency translation adjustments |  |                           | 115.4    |                          |  |      | 83.3   |      |  |   | 157.9    |   |  |   | (35.3  | )
|Unrealized gain (loss) on investments    |  |                           | (8.5     | )                        |  |      | 4.7    |      |  |   | (8.4     | ) |  |   | 2.3    |  
|                                         |  |                           |          |                          |  |      |        |      |  |   |          |   |  |   |        |  
|Comprehensive loss                       |  | $                         | (2,994.3 | )                        |  | $    | (196.4 | )    |  | $ | (3,133.4 | ) |  | $ | (495.9 | )
|                                         |  |                           |          |                          |  |      |        |      |  |   |          |   |  |   |        |  

Accumulated unrealized foreign currency translation losses were $137.8 million
at May 31, 2003 and $295.7 million at August 31, 2002. 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. Accumulated unrealized gains on
investments were $1.9 million at May 31, 2003, and $10.3 million at August 31,
2002.

See accompanying notes to condensed consolidated financial statements.

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SOLECTRON CORPORATION AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)


|                                                             |                                                                                 |                                                                                 |                                                                |          |                          |       |         |          |          |         |  
|------------------------------------------------------------ | ------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------------------------------- | -------- | ------------------------ | ----- | ------- | -------- | -------- | ------- | -
|                                                             |                                                                                 |                                                                                 |                                                                |          | Nine Months Ended May 31
|                                                             |                                                                                 |                                                                                 |                                                                |          |                         
|                                                             |                                                                                 |                                                                                 |                                                                |          | 2003                     |       | 2002   
|                                                             |                                                                                 |                                                                                 |                                                                |          |                          |       |        
|Cash flows from operating activities:                        |                                                                                 |                                                                                 |                                                                |          |                          |       |         |         
|                                                             | Net loss                                                                        |                                                                                 | $                                                              | (3,282.9 | )                        |       | $       | (462.9   | )       
|                                                             | Adjustments to reconcile net loss to net cash
provided by operating activities: |                                                                                 |                                                                |          |                          |       |         |          |         
|                                                             |                                                                                 | Depreciation and amortization                                                   |                                                                |          | 228.0                    |       |         |          | 299.5    |        
|                                                             |                                                                                 | Amortization of debt issuance costs and accretion
of discount on long-term debt |                                                                |          | 67.9                     |       |         |          | 105.7    |        
|                                                             |                                                                                 | Inventory charge                                                                |                                                                |          | 76.3                     |       |         |          |         |        
|                                                             |                                                                                 | Gain on retirement of debt                                                      |                                                                |          | (38.3                    | )     |         |          | (31.7    | )      
|                                                             |                                                                                 | Deferred tax asset allowance                                                    |                                                                |          | 720.8                    |       |         |          |         |        
|                                                             |                                                                                 | Gain on sale of property and equipment                                          |                                                                |          | (2.2                     | )     |         |          | (2.3     | )      
|                                                             |                                                                                 | Impairment of long-lived assets                                                 |                                                                |          | 2,211.7                  |       |         |          | 334.3    |        
|                                                             |                                                                                 | Changes in operating assets and liabilities:                                    |                                                                |          |                          |       |         |          |          |        
|                                                             |                                                                                 |                                                                                 | Accounts receivable, net                                       |          |                          | 144.8 |         |          |          | 797.6   |  
|                                                             |                                                                                 |                                                                                 | Inventories                                                    |          |                          | 258.9 |         |          |          | 1,501.2 |  
|                                                             |                                                                                 |                                                                                 | Prepaid expenses and other current assets                      |          |                          | 68.1  |         |          |          | (264.3  | )
|                                                             |                                                                                 |                                                                                 | Trade accounts payable, accrued expenses and other liabilities |          |                          | (96.2 | )       |          |          | (296.0  | )
|                                                             |                                                                                 |                                                                                 |                                                                |          |                          |       |         |          |         
|                                                             |                                                                                 | Net cash provided by operating activities                                       |                                                                | $        | 356.9                    |       |         | $        | 1,981.1  |        
|                                                             |                                                                                 |                                                                                 |                                                                |          |                          |       |         |          |         
|Cash flows from investing activities:                        |                                                                                 |                                                                                 |                                                                |          |                          |       |         |         
|                                                             | Change in restricted cash, cash equivalents and short-term investments          |                                                                                 |                                                                | 133.7    |                          |       |         | (425.7   | )       
|                                                             | Sales and maturities of short-term investments                                  |                                                                                 |                                                                | 246.7    |                          |       |         | 534.8    |         
|                                                             | Purchases of short-term investments                                             |                                                                                 |                                                                | (55.1    | )                        |       |         | (533.6   | )       
|                                                             | Acquisitions of businesses                                                      |                                                                                 |                                                                | (3.8     | )                        |       |         | (231.3   | )       
|                                                             | Acquisitions of manufacturing assets                                            |                                                                                 |                                                                | (45.5    | )                        |       |         | (102.2   | )       
|                                                             | Capital expenditures                                                            |                                                                                 |                                                                | (112.4   | )                        |       |         | (189.0   | )       
|                                                             | Purchase of facilities under synthetic leases                                   |                                                                                 |                                                                |         |                          |       |         | (179.3   | )       
|                                                             | Proceeds from sale of property and equipment                                    |                                                                                 |                                                                | 38.7     |                          |       |         | 100.0    |         
|                                                             | Supply agreement and other                                                      |                                                                                 |                                                                | 48.3     |                          |       |         | (31.6    | )       
|                                                             |                                                                                 |                                                                                 |                                                                |          |                          |       |         |          |         
|                                                             |                                                                                 | Net cash provided by (used in) investing activities                             |                                                                | $        | 250.6                    |       |         | $        | (1,057.9 | )      
|                                                             |                                                                                 |                                                                                 |                                                                |          |                          |       |         |          |         
|Cash flows from financing activities:                        |                                                                                 |                                                                                 |                                                                |          |                          |       |         |         
|                                                             | Repayment of other short-term debt obligations                                  |                                                                                 |                                                                | (88.3    | )                        |       |         | (101.2   | )       
|                                                             | Proceeds from issuance of ACES and Senior Notes                                 |                                                                                 |                                                                |         |                          |       |         | 1,553.8  |         
|                                                             | Net proceeds from issuance of long-term debt                                    |                                                                                 |                                                                |         |                          |       |         | 152.4    |         
|                                                             | Principal payments on long-term debt                                            |                                                                                 |                                                                |         |                          |       |         | (603.0   | )       
|                                                             | Retirement of LYONs                                                             |                                                                                 |                                                                | (823.1   | )                        |       |         | (1,861.0 | )       
|                                                             | Common stock repurchase                                                         |                                                                                 |                                                                |         |                          |       |         | (4.5     | )       
|                                                             | Settlement of derivative and other                                              |                                                                                 |                                                                | 28.4     |                          |       |         | 8.3      |         
|                                                             |                                                                                 |                                                                                 |                                                                |          |                          |       |         |          |         
|                                                             |                                                                                 | Net cash used in financing activities                                           |                                                                | $        | (883.0                   | )     |         | $        | (855.2   | )      
|                                                             |                                                                                 |                                                                                 |                                                                |          |                          |       |         |          |         
|Effect of exchange rate changes on
cash and cash equivalents |                                                                                 | $                                                                               | 48.7                                                           |          |                          | $     | (53.8   | )       
|                                                             |                                                                                 |                                                                                 |                                                                |          |                          |       |         |          |         
|Net increase (decrease) in cash and cash equivalents         |                                                                                 | $                                                                               | (226.8                                                         | )        |                          | $     | 14.2    |         
|Cash and cash equivalents at beginning of period             |                                                                                 |                                                                                 | 1,781.9                                                        |          |                          |       | 2,482.3 |         
|                                                             |                                                                                 |                                                                                 |                                                                |          |                          |       |         |          |         
|Cash and cash equivalents at end of period                   |                                                                                 | $                                                                               | 1,555.1                                                        |          |                          | $     | 2,496.5 |         
|                                                             |                                                                                 |                                                                                 |                                                                |          |                          |       |         |          |         

See accompanying notes to condensed consolidated financial statements.

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SOLECTRON CORPORATION AND SUBSIDIARIES




Notes to Condensed Consolidated Financial Statements

NOTE 1  Basis of Presentation and Recent Accounting Pronouncements

Basis of Presentation

The accompanying financial data as of May 31, 2003 and for the three and nine
months ended May 31, 2003 and 2002 has been prepared by Solectron, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The August 31, 2002 condensed consolidated balance sheet was
derived from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. However, Solectron
believes that the disclosures are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto included in Solectrons Annual Report on Form 10-K for the fiscal year
ended August 31, 2002.

In the opinion of management, all adjustments (which include normal recurring
adjustments) necessary to present a fair statement of financial position as of
May 31, 2003, the results of operations, and comprehensive loss for the three
and nine months ended May 31, 2003 and 2002, and cash flows for the nine months
ended May 31, 2003 and 2002, have been made. The results of operations for the
three and nine months ended May 31, 2003 are not necessarily indicative of the
operating results for the full fiscal year or any future periods.

Solectrons third quarters of fiscal 2003 and 2002 ended on May 30, 2003 and
May 31, 2002, respectively. Solectrons fiscal year ended on August 30, 2002.
For clarity of presentation, Solectron has indicated its third quarters as
having ended on May 31 and its fiscal year as having ended on August 31.

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. |  | Solectron adopted FASB Statement of Financial Accounting Standards
(SFAS) No. 145 during the fourth quarter of fiscal 2002, which required
that gains and losses on extinguishment of debt no longer be classified
as an extraordinary item. Accordingly, Solectron reclassified gains on
retirement of debt of $4.0 million and $50.7 million, respectively, for
the three and nine months ended May 31, 2002 from extraordinary to other
income (expense)-net. Solectron also reclassified the income tax expense
related to these gains of $1.4 million and $19.0 million, respectively,
for the three and nine months ended May 31, 2002 from extraordinary to
income tax benefit.                        
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | 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 expense of $7.5 million and other income of $23.2
million, respectively, for the three and nine months ended May 31, 2002
from selling, general and administrative expenses to other income
(expense)-net. The reclassification for the nine months ended May 31,
2002 included the $24 million originally reclassified from cost of sales
to selling, general and administrative expenses described in our Annual
Report on Form 10-K for the fiscal year ended August 31, 2002.
|
| | 3. |  | 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 for the nine months ended May 31, 2002 from selling, general and
administrative expenses to cost of sales.                                                                                                                                                                                                                                                                                                                                                                                      

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 the obligation is
incurred. Solectron adopted SFAS No. 143 on September 1, 2002 and such adoption
did not have a material impact on these condensed consolidated financial
statements.

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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. Solectron adopted SFAS No. 144 on September 1, 2002
and such adoption did not have a material impact on these condensed
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 these condensed 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
its 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 Accounting Principles Board Opinion (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, which has been Solectrons
policy. Solectron has 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
June 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. Solectron does not expect
adoption of SFAS No. 149 to have a material impact on its condensed
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. Solectron
does not expect adoption of SFAS No. 150 to have a material impact on its
condensed consolidated financial statements.

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NOTE 2  Stock-Based Compensation

SFAS No. 123, as amended by SFAS No. 148, permits companies to (i) recognize as
expense the fair value of stock-based awards, or (ii) continue to apply the
provisions of APB No. 25 and related interpretations, and provide pro forma net
income and earnings per share disclosures for employee stock compensation as if
the fair-value-based method defined in SFAS No. 123 had been applied.
Solectron continues to apply the provisions of APB No. 25 and provide the pro
forma disclosures with respect to its stock-based compensation plans in
accordance with the provisions of SFAS Nos. 123 and 148.

Solectron accounts for its employee stock plans, which consist of fixed stock
option plans and an employee stock purchase plan, using the intrinsic value
method under APB No. 25. No compensation expense related to these plans has
been recognized in Solectrons financial statements. Solectron uses the
Black-Scholes option-pricing model to determine the pro forma impact under SFAS
Nos. 123 and 148 on the Solectrons net loss and loss per share. The model
utilizes certain information, such as the interest rate on a risk-free security
maturing generally at the same time as the option being valued, and requires
certain assumptions, such as the expected amount of time an option will be
outstanding until it is exercised or expires, to calculate the fair value of
stock options granted. The assumptions used for the three and nine months
ended May 31, 2003 and 2002 are presented below.

|                                |  |                    |    |                   |  |                |    |                |  |  |    |   |  |  |    |  
|------------------------------- |  | ------------------ | -- | ----------------- |  | -------------- | -- | -------------- |  |  | -- | - |  |  | -- | -
|                                |  | Three Months Ended |    | Nine Months Ended
|                                |  | May 31             |    | May 31           
|                                |  |                    |    |                  
|                                |  | 2003               |    | 2002              |  | 2003           |    | 2002          
|                                |  |                    |    |                   |  |                |    |               
|Expected life of options        |  | 3 years            |    | 3 years           |  | 3 years        |    | 3 years       
|Expected life of purchase right |  | 6 months           |    | 6 months          |  | 6 months       |    | 6 months      
|Volatility                      |  |                    | 78 | %                 |  |                | 67 | %              |  |  | 79 | % |  |  | 66 | %
|Risk-free interest rate         |  | 1.11% to 2.06%     |    | 1.91% to 4.14%    |  | 1.11% to 2.32% |    | 1.77% to 4.14%
|Dividend yield                  |  | zero               |    | zero              |  | zero           |    | zero          

Solectron has several stock option plans, which are described in the Companys
annual report on Form 10-K. The table below sets out the pro forma amounts of
net loss and net loss per share that would have resulted for the three and nine
months ended May 31, 2003 and 2002, if Solectron accounted for its employee
stock plans under the fair value recognition provisions of SFAS Nos. 123 and
148.

|                    |                                                                                          |  |                    |          |                   |  |      |        |      |  |   |          |   |  |   |        |  
|------------------- | ---------------------------------------------------------------------------------------- |  | ------------------ | -------- | ----------------- |  | ---- | ------ | ---- |  | - | -------- | - |  | - | ------ | -
|                    |                                                                                          |  | Three Months Ended |          | Nine Months Ended
|                    |                                                                                          |  | May 31             |          | May 31           
|                    |                                                                                          |  |                    |          |                  
|                    |                                                                                          |  | 2003               |          | 2002              |  | 2003 |        | 2002
|                    |                                                                                          |  |                    |          |                   |  |      |        |     
|Net loss:           |                                                                                          |  |                    |          |                   |  |      |        |      |  |   |          |   |  |   |       
|                    | As reported                                                                              |  | $                  | (3,101.2 | )                 |  | $    | (284.4 | )    |  | $ | (3,282.9 | ) |  | $ | (462.9 | )
|                    | Stock-based employee compensation
expense determined under fair value
method, net of tax |  |                    | (25.3    | )                 |  |      | (23.3  | )    |  |   | (85.2    | ) |  |   | (72.5  | )
|                    |                                                                                          |  |                    |          |                   |  |      |        |      |  |   |          |   |  |   |        |  
|                    | Pro forma                                                                                |  | $                  | (3,126.5 | )                 |  | $    | (307.7 | )    |  | $ | (3,368.1 | ) |  | $ | (535.4 | )
|                    |                                                                                          |  |                    |          |                   |  |      |        |      |  |   |          |   |  |   |        |  
|Net loss per share: |                                                                                          |  |                    |          |                   |  |      |        |      |  |   |          |   |  |   |       
|                    | Basic and diluted - as reported                                                          |  | $                  | (3.74    | )                 |  | $    | (0.35  | )    |  | $ | (3.97    | ) |  | $ | (0.60  | )
|                    | Basic and diluted - pro forma                                                            |  | $                  | (3.77    | )                 |  | $    | (0.37  | )    |  | $ | (4.07    | ) |  | $ | (0.70  | )

9



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NOTE 3  Inventories

Inventories consisted of:

|                |  |        |         |           |  |   |         | 
|--------------- |  | ------ | ------- | --------- |  | - | ------- | 
|                |  | May 31 |         | August 31
|                |  | 2003   |         | 2002     
|                |  |        |         |          
|Raw materials   |  | $      | 1,036.3 |           |  | $ | 1,308.5 | 
|Work-in-process |  |        | 235.5   |           |  |   | 236.5   | 
|Finished goods  |  |        | 279.5   |           |  |   | 325.0   | 
|                |  |        |         |           |  |   |         | 
|Total           |  | $      | 1,551.3 |           |  | $ | 1,870.0 | 
|                |  |        |         |           |  |   |         | 

NOTE 4  Commitments and Contingencies

Lease Obligations

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 May 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 the third quarter, Solectron obtained an
amendment to the minimum cash interest coverage ratio covenant. Subsequent to
the end of the third quarter, Solectron received its lenders consent,
effective May 31, 2003, to amend the definition of the consolidated tangible
net worth covenant to include the impact of the deferred tax asset valuation
allowance charge. As a result of these amendments, Solectron was in compliance
with all applicable covenants as of May 31, 2003. Monthly lease payments are
generally based on the Termination Value and 30-day LIBOR index (1.32% as of
May 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 May 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 payments related to operating lease obligations, including the
synthetic leases discussed above, are $45 million (for the remaining three
months of fiscal 2003), $94 million, $54 million, $39 million, and $31 million
for each of the years in the four-year period ending August 31, 2007 and an
aggregate of $117 million for all years subsequent to August 31, 2007 combined.

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

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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 August 29, 2002, ATEL Leasing Corporation, a lessor of manufacturing
equipment to Solectron, filed suit against Solectron in the California Superior
Court for the City and County of San Francisco (ATEL Leasing Corporation v.
Solectron Corporation, Case No. 412011), alleging that ATEL is entitled to
recover as liquidated damages and not as a penalty amounts equal to the
stipulated loss value of all of the equipment leased to Solectron by ATEL
under two equipment lease agreements. ATELs complaint sought liquidated
damages of approximately $26 million, plus additional interest allegedly
accruing thereon, and litigation expenses. Solectron contended that ATELs
claims were without merit, and that Solectron had meritorious defenses,
including that the liquidated damages provision upon which ATEL relied is an
unenforceable penalty under California law. In fact, the United States
District Court for the Northern District of California had ruled in a March
2001 opinion (ATEL Financial Corp. v. Quaker Coal Company, 132 F.Supp.2d 1233)
that a liquidated damages provision, which ATEL had attempted to enforce in
that case, was an unenforceable penalty under California law. ATEL appealed
that ruling, but on March 5, 2003, the Ninth Circuit Court of Appeals affirmed
the District Courts judgment against ATEL. In response to this adverse ruling,
ATEL dismissed its complaint against Solectron on or about May 15, 2003.
Despite this dismissal, ATEL has continued to threaten litigation in an effort
to induce Solectron to renegotiate the equipment leases, and while Solectron
continues to believe ATELs claims to be without merit, there can be no
assurance that ATEL will not file a new lawsuit against Solectron.

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.

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. The lawsuit seeks an unspecified amount of damages on
behalf of the putative class. 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. Pursuant to the Courts
consolidation orders, a consolidated amended complaint is anticipated to be
filed within the next few weeks. Solectron intends to vigorously defend
against the consolidated lawsuit. There can be no assurance, however, that the
outcome of the 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. The complaint seeks an unspecified amount of compensatory and
punitive damages, and 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 alleges to be applicable to those sales of Solectron
stock. On May 19, 2003, Solectron and the individual defendants moved to
dismiss the Lifshitz complaint. 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

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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 three former officers, purportedly
breached their fiduciary duties and participated in or permitted constructive
fraud, unjust enrichment, and alleged violations of the California
Corporations Code. 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 amended complaint contains various factual errors and legal
deficiencies. Solectron intends to seek dismissal of the consolidated amended
complaint. Solectron may be forced to incur substantial litigation expenses in
defending this litigation.

NOTE 5  Segment Information

As a result of its acquisition of C-MAC on December 3, 2001, Solectron made
organizational changes and created the MicroSystems business unit. Solectron
now has the following four business units: Global Operations, Technology
Solutions, Global Services and MicroSystems. Each business unit has its own
executive management and support staff. Solectrons management uses an internal
management reporting system, which provides financial data to evaluate
performance and allocate resources for the four business units. Certain
corporate expenses have been allocated to Solectrons business units and were
included for performance evaluation. The accounting policies for the segments
were the same as for Solectron taken as a whole.

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|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|------------------------------ |  | ------------------------- | -------- | ------------------------ |  | ---- | ------- | ---- |  | - | -------- | - |  | - | ------- | -
|                               |  | Three Months Ended May 31 |          | Nine Months Ended May 31
|                               |  |                           |          |                         
|                               |  | 2003                      |          | 2002                     |  | 2003 |         | 2002
|                               |  |                           |          |                          |  |      |         |     
|Net sales:                     |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|Global Operations              |  | $                         | 2,095.2  |                          |  | $    | 2,447.5 |      |  | $ | 6,763.7  |   |  | $ | 7,766.3 |  
|Technology Solutions           |  |                           | 381.6    |                          |  |      | 257.8   |      |  |   | 969.3    |   |  |   | 599.7   |  
|Global Services                |  |                           | 241.3    |                          |  |      | 221.4   |      |  |   | 740.3    |   |  |   | 586.3   |  
|MicroSystems                   |  |                           | 97.4     |                          |  |      | 106.1   |      |  |   | 296.4    |   |  |   | 207.3   |  
|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|                               |  | $                         | 2,815.5  |                          |  | $    | 3,032.8 |      |  | $ | 8,769.7  |   |  | $ | 9,159.6 |  
|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|Depreciation and amortization: |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|Global Operations              |  | $                         | 44.4     |                          |  | $    | 64.9    |      |  | $ | 153.8    |   |  | $ | 215.7   |  
|Technology Solutions           |  |                           | 6.0      |                          |  |      | 6.3     |      |  |   | 17.3     |   |  |   | 18.6    |  
|Global Services                |  |                           | 7.9      |                          |  |      | 7.9     |      |  |   | 25.3     |   |  |   | 19.8    |  
|MicroSystems                   |  |                           | 5.3      |                          |  |      | 5.1     |      |  |   | 14.4     |   |  |   | 6.2     |  
|Corporate                      |  |                           | 6.1      |                          |  |      | 6.4     |      |  |   | 17.2     |   |  |   | 39.2    |  
|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|                               |  | $                         | 69.7     |                          |  | $    | 90.6    |      |  | $ | 228.0    |   |  | $ | 299.5   |  
|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|Interest income:               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|Global Operations              |  | $                         | 1.5      |                          |  | $    | 3.0     |      |  | $ | 4.1      |   |  | $ | 19.4    |  
|Technology Solutions           |  |                           | 0.3      |                          |  |      | 0.4     |      |  |   | 1.1      |   |  |   | 1.2     |  
|Global Services                |  |                           | 0.2      |                          |  |      | 0.1     |      |  |   | 0.7      |   |  |   | 0.4     |  
|MicroSystems                   |  |                           |         |                          |  |      |        |      |  |   | 0.1      |   |  |   | 0.3     |  
|Corporate                      |  |                           | 6.0      |                          |  |      | 10.5    |      |  |   | 20.0     |   |  |   | 34.0    |  
|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|                               |  | $                         | 8.0      |                          |  | $    | 14.0    |      |  | $ | 26.0     |   |  | $ | 55.3    |  
|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|Interest expense:              |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|Global Operations              |  | $                         | 2.5      |                          |  | $    | 4.8     |      |  | $ | 6.9      |   |  | $ | 13.7    |  
|Technology Solutions           |  |                           | 0.1      |                          |  |      | 0.2     |      |  |   | 0.2      |   |  |   | 0.6     |  
|Global Services                |  |                           |         |                          |  |      | 0.3     |      |  |   |         |   |  |   | 1.5     |  
|MicroSystems                   |  |                           | 0.3      |                          |  |      | 0.3     |      |  |   | 1.3      |   |  |   | 0.8     |  
|Corporate                      |  |                           | 49.0     |                          |  |      | 66.6    |      |  |   | 155.0    |   |  |   | 160.8   |  
|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|                               |  | $                         | 51.9     |                          |  | $    | 72.2    |      |  | $ | 163.4    |   |  | $ | 177.4   |  
|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|Loss before income taxes:      |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|Global Operations              |  | $                         | (1,930.1 | )                        |  | $    | (214.6  | )    |  | $ | (2,065.3 | ) |  | $ | (598.3  | )
|Technology Solutions           |  |                           | (4.3     | )                        |  |      | (15.4   | )    |  |   | (12.0    | ) |  |   | (33.9   | )
|Global Services                |  |                           | (346.2   | )                        |  |      | (7.6    | )    |  |   | (331.9   | ) |  |   | 17.2    |  
|MicroSystems                   |  |                           | 2.8      |                          |  |      | (0.4    | )    |  |   |         |   |  |   | (2.0    | )
|Corporate                      |  |                           | (102.6   | )                        |  |      | (163.9  | )    |  |   | (229.4   | ) |  |   | (59.3   | )
|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|                               |  | $                         | (2,380.4 | )                        |  | $    | (401.9  | )    |  | $ | (2,638.6 | ) |  | $ | (676.3  | )
|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|Capital expenditures:          |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|Global Operations              |  | $                         | 15.9     |                          |  | $    | 215.1   |      |  | $ | 62.5     |   |  | $ | 281.0   |  
|Technology Solutions           |  |                           | 2.4      |                          |  |      | 1.9     |      |  |   | 8.4      |   |  |   | 9.0     |  
|Global Services                |  |                           | 11.1     |                          |  |      | 14.9    |      |  |   | 30.2     |   |  |   | 41.6    |  
|MicroSystems                   |  |                           | 4.0      |                          |  |      | 0.8     |      |  |   | 6.6      |   |  |   | 4.2     |  
|Corporate                      |  |                           | 1.0      |                          |  |      | 18.0    |      |  |   | 4.7      |   |  |   | 32.5    |  
|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|                               |  | $                         | 34.4     |                          |  | $    | 250.7   |      |  | $ | 112.4    |   |  | $ | 368.3   |  
|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|Geographic net sales:          |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|United States                  |  | $                         | 1,013.6  |                          |  | $    | 1,181.4 |      |  | $ | 3,136.5  |   |  | $ | 3,585.7 |  
|Other North and Latin America  |  |                           | 336.4    |                          |  |      | 395.1   |      |  |   | 1,090.7  |   |  |   | 1,058.9 |  
|Europe                         |  |                           | 435.8    |                          |  |      | 506.5   |      |  |   | 1,397.0  |   |  |   | 1,534.5 |  
|Malaysia                       |  |                           | 446.5    |                          |  |      | 323.5   |      |  |   | 1,100.0  |   |  |   | 1,052.1 |  
|Other Asia Pacific             |  |                           | 583.2    |                          |  |      | 626.3   |      |  |   | 2,045.5  |   |  |   | 1,928.4 |  
|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  
|                               |  | $                         | 2,815.5  |                          |  | $    | 3,032.8 |      |  | $ | 8,769.7  |   |  | $ | 9,159.6 |  
|                               |  |                           |          |                          |  |      |         |      |  |   |          |   |  |   |         |  

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|                              |  |        |         |           |  |   |          | 
|----------------------------- |  | ------ | ------- | --------- |  | - | -------- | 
|                              |  | May 31 |         | August 31
|                              |  | 2003   |         | 2002     
|                              |  |        |         |          
|Total Assets:                 |  |        |         |           |  |   |          | 
|Global Operations             |  | $      | 4,233.5 |           |  | $ | 7,150.2  | 
|Technology Solutions          |  |        | 608.5   |           |  |   | 499.7    | 
|Global Services               |  |        | 517.0   |           |  |   | 808.2    | 
|MicroSystems                  |  |        | 241.6   |           |  |   | 273.5    | 
|Corporate                     |  |        | 1,362.4 |           |  |   | 2,282.4  | 
|                              |  |        |         |           |  |   |          | 
|                              |  | $      | 6,963.0 |           |  | $ | 11,014.0 | 
|                              |  |        |         |           |  |   |          | 
|Total Assets:                 |  |        |         |           |  |   |          | 
|United States                 |  | $      | 2,671.9 |           |  | $ | 4,624.1  | 
|Other North and Latin America |  |        | 1,354.0 |           |  |   | 1,594.8  | 
|Europe                        |  |        | 1,476.6 |           |  |   | 1,575.2  | 
|Malaysia                      |  |        | 522.9   |           |  |   | 1,213.2  | 
|Other Asia Pacific            |  |        | 937.6   |           |  |   | 2,006.7  | 
|                              |  |        |         |           |  |   |          | 
|                              |  | $      | 6,963.0 |           |  | $ | 11,014.0 | 
|                              |  |        |         |           |  |   |          | 

NOTE 6  Long-Term Debt

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 the first quarter of fiscal 2003, Solectron repurchased a portion of
these LYONs with a carrying amount totaling $205 million for $171 million in
cash, which resulted in a gain of $34 million. During the second quarter of
fiscal 2003, Solectron repurchased an additional portion of these LYONs with a
carrying amount of $131 million for $127 million in cash, which resulted in a
gain of $4 million. The remaining accreted value of these notes was
approximately $1.1 billion as of May 31, 2003 and Solectron may be obligated to
purchase these notes on May 20, 2004 for approximately $1.1 billion in cash or
common stock or a combination of both. As of May 31, 2003, these LYONs are
included in short-term debt in the accompanying condensed consolidated balance
sheet.

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 holder to common shares at a conversion rate of
12.3309 shares per note. Holders may 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 may have required 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 material gain or loss. Approximately $10 million of
these LYONs remain in long-term debt within the condensed consolidated balance
sheet as of May 31, 2003.

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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 $46.9
million to the fair value of the purchase contracts and recorded this amount in
additional paid-in capital. The debentures initially were 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
$40 million of cash, cash equivalents and short-term investments as of May 31,
2003 were restricted as collateral related to the obligations for the next two
quarterly interest payments.

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.

NOTE 7  Derivative Instruments

Solectron periodically enters 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 offset the transaction gains and losses
on the foreign currency cash, 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 periodically hedges foreign currency forecasted transactions with
foreign exchange forward contracts. These transactions are treated as cash flow
hedges in accordance with SFAS No. 133. As of May 31, 2003, these foreign
exchange forward contracts have maturities of less than three months.

As of May 31, 2003, Solectron had outstanding foreign exchange forward
contracts with a total notional amount of $657 million.

Solectron also uses interest rate swaps to hedge its mix of short- 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 paid variable rates and received fixed rates.
The interest rate swaps had a total notional amount of $1.0 billion; $500
million related to Solectrons $1.1 billion ACES and expires on November 15,
2004 and $500 million related to the 9.625% $500 million senior notes and was
scheduled to expire on February 15, 2009. Under each of these swap
transactions, Solectron paid an interest rate equal to the 3-month LIBOR rate
plus a fixed spread. In exchange, Solectron received 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. These swap transactions effectively replaced 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 were
designated as fair value hedges under SFAS No. 133. On November 15, 2002, the
original $500 million of 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 an additional $500 million of swaps
with

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similar terms and designated the swaps as fair value hedges of the senior notes
under SFAS No. 133. During the third quarter of fiscal 2003, the swaps related
to ACES were not effective as required by SFAS No. 133. Accordingly, Solectron
ceased accounting for the instruments as hedges as of the beginning of the
quarter. The impact of this change was not significant and Solectron expects
the swaps to be effective during future quarters.

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

For all derivative transactions, Solectron is exposed to counterparty credit
risk to the extent that the counterparties 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 counterparties.

NOTE 8  Goodwill and Intangible Assets

The following is provided in accordance with Solectrons adoption of the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets, during
fiscal 2002. 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. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Primarily due to significant industry and economic trends that have 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 $1.9 billion.
The following discussion provides details regarding the two-step impairment
test, which resulted in the impairment charge.

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. Solectron determined the carrying value of each of its six reporting
units by allocating the assets and liabilities, including the goodwill and
intangible assets, to the units as of March 1, 2003, the date of the test.
Solectron then determined the fair value of each reporting unit and compared it
to the reporting units carrying value. If a reporting units carrying amount
exceeded its fair value, an indication existed that the reporting units
goodwill was impaired and Solectron was required to perform the second step of
the impairment test.

Results of step one indicated that potential impairment existed within the
Global Operations reporting unit and one of the Global Services reporting units
since the estimated fair values, based on expected future discounted cash flows
to be generated from the units, were less than the units carrying values.
Pursuant to the second step of the test, Solectron compared the implied fair
value of each units goodwill (determined by allocating each units fair value
based on expected future discounted cash flows, to all the assets, recognized
and unrecognized, and liabilities in a manner similar to a purchase price
allocation for an acquired business) to each units carrying amount. Solectron
also obtained independent valuations of certain unrecognized intangible assets
and certain fixed assets in connection with this assessment.

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.

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.

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Goodwill information for each reportable segment is as follows:

|                     |  |           |         |              |  |            |      |        |  |   |          |   |  |   |       | 
|-------------------- |  | --------- | ------- | ------------ |  | ---------- | ---- | ------ |  | - | -------- | - |  | - | ----- | 
|                     |  | August 31 |         | Goodwill     |  | Goodwill   |      | May 31
|                     |  | 2002      |         | Adjustments* |  | Impairment |      | 2003  
|                     |  |           |         |              |  |            |      |       
|Global Operations    |  | $         | 1,608.9 |              |  | $          | 33.1 |        |  | $ | (1,642.0 | ) |  | $ |      | 
|Technology Solutions |  |           | 79.5    |              |  |            | (0.3 | )      |  |   |         |   |  |   | 79.2  | 
|Global Services      |  |           | 407.6   |              |  |            | (2.8 | )      |  |   | (275.0   | ) |  |   | 129.8 | 
|MicroSystems         |  |           | 67.9    |              |  |            | 1.0  |        |  |   |         |   |  |   | 68.9  | 
|                     |  |           |         |              |  |            |      |        |  |   |          |   |  |   |       | 
|                     |  | $         | 2,163.9 |              |  | $          | 31.0 |        |  | $ | (1,917.0 | ) |  | $ | 277.9 | 
|                     |  |           |         |              |  |            |      |        |  |   |          |   |  |   |       | 



---

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

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.

During the third quarter of fiscal 2003, Solectron concluded that sufficient
indicators existed to require it to perform an analysis to assess whether a
portion of other intangible assets was impaired. SFAS No. 144 states that
impairment is deemed to have occurred if the sum of the forecasted undiscounted
future cash flows related to the asset grouping tested are less than the
carrying value of the assets. If the forecasted cash flows are less than the
carrying value, then the assets must be written down to estimated fair value.
As a result of this analysis, Solectron recorded an impairment charge of $161
million primarily related to its intangible assets acquired in a transaction
with a large customer. This intangible asset impairment was recorded within
Restructuring and Impairment Costs in the accompanying condensed consolidated
statements of operations during the third quarter of fiscal 2003.

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

May 31, 2003:

|                         |  |            |        |                       |  |       |       |       |  |   |       |   |  |   |        |  
|------------------------ |  | ---------- | ------ | --------------------- |  | ----- | ----- | ----- |  | - | ----- | - |  | - | ------ | -
|                         |  | Supply     |        | Intellectual Property |  |       |       |       |  |   |       |  
|                         |  | Agreements |        | Agreements            |  | Other |       | Total
|                         |  |            |        |                       |  |       |       |      
|Gross amount             |  | $          | 228.1  |                       |  | $     | 108.5 |       |  | $ | 140.8 |   |  | $ | 477.4  |  
|Accumulated amortization |  |            | (85.5  | )                     |  |       | (42.8 | )     |  |   | (75.1 | ) |  |   | (203.4 | )
|Impairment               |  |            | (140.4 | )                     |  |       |      |       |  |   | (20.7 | ) |  |   | (161.1 | )
|                         |  |            |        |                       |  |       |       |       |  |   |       |   |  |   |        |  
|Carrying value           |  | $          | 2.2    |                       |  | $     | 65.7  |       |  | $ | 45.0  |   |  | $ | 112.9  |  
|                         |  |            |        |                       |  |       |       |       |  |   |       |   |  |   |        |  

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August 31, 2002:

|                         |  |            |        |                       |  |       |       |       |  |   |       |   |  |   |        |  
|------------------------ |  | ---------- | ------ | --------------------- |  | ----- | ----- | ----- |  | - | ----- | - |  | - | ------ | -
|                         |  | Supply     |        | Intellectual Property |  |       |       |       |  |   |       |  
|                         |  | Agreements |        | Agreements            |  | Other |       | Total
|                         |  |            |        |                       |  |       |       |      
|Gross amount             |  | $          | 445.1  |                       |  | $     | 106.4 |       |  | $ | 163.5 |   |  | $ | 715.0  |  
|Accumulated amortization |  |            | (80.7  | )                     |  |       | (34.6 | )     |  |   | (61.7 | ) |  |   | (177.0 | )
|Impairment               |  |            | (191.2 | )                     |  |       |      |       |  |   | (40.5 | ) |  |   | (231.7 | )
|                         |  |            |        |                       |  |       |       |       |  |   |       |   |  |   |        |  
|Carrying value           |  | $          | 173.2  |                       |  | $     | 71.8  |       |  | $ | 61.3  |   |  | $ | 306.3  |  
|                         |  |            |        |                       |  |       |       |       |  |   |       |   |  |   |        |  

Amortization expense for the third quarter of fiscal 2003 was $6.5 million. The
Company expects that its annual amortization expense reportable as required by
SFAS No. 142 for these intangibles would be approximately $22 million for each
of the next three fiscal years and $18 million for each of the two subsequent
fiscal years.

NOTE 9  Acquisitions and Divestiture

Acquisitions

On February 3, 2003 Solectron entered into a five-year supply agreement with HP
to produce 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.

Divestiture

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.

NOTE 10  Restructuring and Impairment

In the second quarter of fiscal 2001, Solectron initiated a series of
restructuring of its operations 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
Solectrons capacity and infrastructure to the reduced level of customer
demand, transition its operations to lower cost regions, and rationalize its
footprint worldwide. Additional charges have been incurred as more was learned
about the extent and depth of the economic downturn and Solectron initiated
activities to reduce its costs to more competitive industry levels. For leased
facilities that will be abandoned and subleased, the lease costs accrued
represent future lease payments subsequent to abandonment less estimated
sublease income. For facilities and equipment held for disposal, 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. These
restructuring charges are based on estimates that are subject to change. The
following summarizes Solectrons restructuring charges since the activities
were initiated in fiscal 2001.

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Three and nine months ended May 31, 2003 and 2002

Solectron continued its restructuring activities in the third quarter of fiscal
2003. The following table summarizes restructuring charges included in the
accompanying condensed consolidated statements of operations:

|                                              |  |                           |       |                          |  |      |       |      |  |        |       |  |  |   |       |  |  |          |  | 
|--------------------------------------------- |  | ------------------------- | ----- | ------------------------ |  | ---- | ----- | ---- |  | ------ | ----- |  |  | - | ----- |  |  | -------- |  | 
|                                              |  | Three Months Ended May 31 |       | Nine Months Ended May 31 |  |      |       |     
|                                              |  |                           |       |                          |  |      |       |     
|                                              |  | 2003                      |       | 2002                     |  | 2003 |       | 2002 |  | Nature
|                                              |  |                           |       |                          |  |      |       |      |  |       
|Impairment of equipment                       |  | $                         | 48.6  |                          |  | $    | 61.7  |      |  | $      | 69.5  |  |  | $ | 127.8 |  |  | non-cash
|Impairment of facilities                      |  |                           | 53.0  |                          |  |      | 47.8  |      |  |        | 53.6  |  |  |   | 61.7  |  |  | non-cash
|Impairment of IT software and other assets    |  |                           | 3.1   |                          |  |      | 131.5 |      |  |        | 10.5  |  |  |   | 144.8 |  |  | non-cash
|                                              |  |                           |       |                          |  |      |       |      |  |        |       |  |  |   |       |  |  |          |  | 
|Impairment of equipment, facilities and other |  | $                         | 104.7 |                          |  | $    | 241.0 |      |  | $      | 133.6 |  |  | $ | 334.3 |  |  |          |  | 
|Severance and benefit costs                   |  | $                         | 107.7 |                          |  | $    | 31.8  |      |  | $      | 222.0 |  |  | $ | 100.5 |  |  | cash    
|Loss on leased equipment                      |  |                           | 5.9   |                          |  |      | 12.5  |      |  |        | 1.7   |  |  |   | 30.3  |  |  | cash    
|Loss on leased facilities                     |  |                           |      |                          |  |      | 28.1  |      |  |        | 7.9   |  |  |   | 84.2  |  |  | cash    
|Other exit costs                              |  |                           | 4.7   |                          |  |      |      |      |  |        | 16.5  |  |  |   | 11.7  |  |  | cash    
|                                              |  |                           |       |                          |  |      |       |      |  |        |       |  |  |   |       |  |  |          |  | 
|Total                                         |  | $                         | 223.0 |                          |  | $    | 313.4 |      |  | $      | 381.7 |  |  | $ | 561.0 |  |  |          |  | 
|                                              |  |                           |       |                          |  |      |       |      |  |        |       |  |  |   |       |  |  |          |  | 

The employee severance and benefit costs included in the restructuring charges
recorded in the third quarter of fiscal 2003 related to approximately 9,000
full time positions worldwide, of which approximately 2,000 have been
eliminated. Approximately 69% of the positions are in the Americas region, 25%
are in Europe and 6% are in Asia/Pacific. The employment reductions primarily
affected employees in manufacturing and back office support functions within
the Global Operations and Global Services business units. Facilities and
equipment subject to restructuring were also primarily located in the Americas
and Europe within the Global Operations and Global Services business units.

The employee severance and benefit costs included in the restructuring charges
recorded in the second quarter of fiscal 2003 related to approximately 2,400
full time positions worldwide, all of which have been eliminated. Approximately
60% of the positions were in the Americas region, 37% were in Europe and 3%
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 also
primarily located in the Americas and Europe within the Global Operations
business unit.

The employee severance and benefit costs included in the restructuring charges
recorded in the first quarter of fiscal 2003 related to approximately 2,500
full-time positions worldwide, all of which have been eliminated. Approximately
46% of the positions were in the Americas region, 36% were in Europe and 18%
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 also
primarily located in the Americas and Europe within the Global Operations
business unit.

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Fiscal 2002 and 2001

The following table summarizes restructuring charges recorded in fiscal years
2002 and 2001:

|                                              |  |                       |       |      |  |        |       |  |  |          |  | 
|--------------------------------------------- |  | --------------------- | ----- | ---- |  | ------ | ----- |  |  | -------- |  | 
|                                              |  | Years Ended August 31 |       |      |  |       
|                                              |  |                       |       |      |  |       
|                                              |  | 2002                  |       | 2001 |  | Nature
|                                              |  |                       |       |      |  |       
|Impairment of equipment                       |  | $                     | 127.8 |      |  | $      | 188.2 |  |  | non-cash
|Impairment of facilities                      |  |                       | 81.0  |      |  |        | 37.7  |  |  | non-cash
|Impairment of other long-lived assets         |  |                       | 142.3 |      |  |        | 42.2  |  |  | non-cash
|                                              |  |                       |       |      |  |        |       |  |  |          |  | 
|Impairment of equipment, facilities and other |  | $                     | 351.1 |      |  | $      | 268.1 |  |  |          |  | 
|Severance and benefit costs                   |  | $                     | 119.8 |      |  | $      | 70.0  |  |  | cash    
|Loss on leased equipment                      |  |                       | 23.8  |      |  |        | 117.5 |  |  | cash    
|Loss on leased facilities                     |  |                       | 80.3  |      |  |        | 56.4  |  |  | cash    
|Other exit costs                              |  |                       | 40.5  |      |  |        | 5.3   |  |  | cash    
|                                              |  |                       |       |      |  |        |       |  |  |          |  | 
|Total                                         |  | $                     | 615.5 |      |  | $      | 517.3 |  |  |          |  | 
|                                              |  |                       |       |      |  |        |       |  |  |          |  | 

The employee severance and benefit costs included in the restructuring charges
recorded in fiscal 2002 related to approximately 15,000 full-time positions
worldwide, all of which have been eliminated. Approximately 69% of the
positions 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.

The employee severance and benefit costs included in the restructuring charges
recorded in fiscal 2001 related to approximately 11,800 full-time positions
worldwide, all of which have been eliminated. Approximately 67% of the
positions 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.

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The following table summarizes the restructuring accrual activity from
initiation of Solectrons activities through May 31, 2003:

|                                        |  |              |        |                |  |                |       |       |  |       |       |   |  |   |       |   |  |   |        |  
|--------------------------------------- |  | ------------ | ------ | -------------- |  | -------------- | ----- | ----- |  | ----- | ----- | - |  | - | ----- | - |  | - | ------ | -
|                                        |  | Severance    |        | Lease Payments |  | Lease Payments |       |       |  |       |       |   |  |  
|                                        |  | and Benefits |        | on Facilities  |  | on Equipment   |       | Other |  | Total
|                                        |  |              |        |                |  |                |       |       |  |      
|Balance of accrual at September 1, 2000 |  | $            |       |                |  | $              |      |       |  | $     |      |   |  | $ |      |   |  | $ |       |  
|FY2001 Provision                        |  |              | 70.0   |                |  |                | 56.4  |       |  |       | 117.5 |   |  |   | 5.3   |   |  |   | 249.2  |  
|FY2001 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   |   |  | $ | 167.8  |  
|FY2002 Provision                        |  |              | 119.8  |                |  |                | 84.2  |       |  |       | 30.3  |   |  |   | 40.5  |   |  |   | 274.8  |  
|FY2002 Provision adjustments            |  |              |       |                |  |                | (3.9  | )     |  |       | (6.5  | ) |  |   |      |   |  |   | (10.4  | )
|FY2002 Cash payments                    |  |              | (113.7 | )              |  |                | (67.1 | )     |  |       | (51.9 | ) |  |   | (44.6 | ) |  |   | (277.3 | )
|                                        |  |              |        |                |  |                |       |       |  |       |       |   |  |   |       |   |  |   |        |  
|Balance of accrual at August 31, 2002   |  | $            | 6.1    |                |  | $              | 64.1  |       |  | $     | 84.4  |   |  | $ | 0.3   |   |  | $ | 154.9  |  
|Q1-FY03 Provision                       |  |              | 61.4   |                |  |                | 6.9   |       |  |       | 2.9   |   |  |   | 11.8  |   |  |   | 83.0   |  
|Q1-FY03 Cash payments                   |  |              | (61.0  | )              |  |                | (9.1  | )     |  |       | (37.8 | ) |  |   | (0.6  | ) |  |   | (108.5 | )
|                                        |  |              |        |                |  |                |       |       |  |       |       |   |  |   |       |   |  |   |        |  
|Balance of accrual at November 30, 2002 |  | $            | 6.5    |                |  | $              | 61.9  |       |  | $     | 49.5  |   |  | $ | 11.5  |   |  | $ | 129.4  |  
|Q2-FY03 Provision                       |  |              | 52.9   |                |  |                |      |       |  |       |      |   |  |   |      |   |  |   | 52.9   |  
|Q2-FY03 Provision adjustments           |  |              |       |                |  |                | 1.0   |       |  |       |      |   |  |   |      |   |  |   | 1.0    |  
|Q2-FY03 Cash payments                   |  |              | (42.4  | )              |  |                | (6.3  | )     |  |       | (5.7  | ) |  |   | (10.7 | ) |  |   | (65.1  | )
|                                        |  |              |        |                |  |                |       |       |  |       |       |   |  |   |       |   |  |   |        |  
|Balance of accrual at February 28, 2003 |  | $            | 17.0   |                |  | $              | 56.6  |       |  | $     | 43.8  |   |  | $ | 0.8   |   |  | $ | 118.2  |  
|Q3-FY03 Provision                       |  |              | 107.7  |                |  |                |      |       |  |       | 5.9   |   |  |   | 4.7   |   |  |   | 118.3  |  
|Q3-FY03 Cash payments                   |  |              | (40.5  | )              |  |                | (9.4  | )     |  |       | (20.5 | ) |  |   | (2.5  | ) |  |   | (72.9  | )
|                                        |  |              |        |                |  |                |       |       |  |       |       |   |  |   |       |   |  |   |        |  
|Balance of accrual at May 31, 2003      |  | $            | 84.2   |                |  | $              | 47.2  |       |  | $     | 29.2  |   |  | $ | 3.0   |   |  | $ | 163.6  |  
|                                        |  |              |        |                |  |                |       |       |  |       |       |   |  |   |       |   |  |   |        |  

The remaining severance and benefit cash expenditures are expected to be paid
by the second quarter of fiscal 2004. The current estimates accrued for lease
payments on facilities and equipment will be paid over their respective lease
terms and Solectron plans to attempt to terminate these leases, if favorable
terms are available. Cash expenditures for other costs are expected to be paid
by the first quarter of fiscal 2004. Solectron expects to fund cash
expenditures related to restructuring activities from cash generated from
operations.

NOTE 11  Loss Per Share Calculation

The calculation of loss per share for the three and nine months ended May 31,
2003 did not include the weighted average impact of the 23.2 million common
shares issuable upon conversion of Solectrons LYONs, 112.1 million common
shares issuable upon conversion of the Companys ACES and 66.4 million options
to purchase common stock, as the effect would have been antidilutive.

The calculation of loss per share for the three and nine months ended May 31,
2002 did not include the weighted average impact of the 61.2 million common
shares issuable upon conversion of Solectrons LYONs, 112.1 million common
shares issuable upon conversion of the Companys ACES and 64.7 million options
to purchase common stock, as the effect would have been antidilutive.

NOTE 12  Income Taxes

SFAS No. 109, Accounting for Income Taxes, requires that 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. A review of all available
positive and negative evidence needs to be considered, including a companys
performance, the market environment in which the company operates, the
utilization of past tax credits, length of carryback and carryforward periods,
and existing contracts or sales backlog that will result in future profits,
among other factors. It further states that forming a conclusion that a
valuation allowance is not needed is difficult when there is negative evidence
such as cumulative losses in recent years in the jurisdictions to which the
deferred tax assets relate. Therefore, cumulative losses weigh heavily in the
overall assessment. As a result of the review undertaken after the end of the
third quarter, Solectron concluded that it was appropriate to establish a full
valuation allowance for most of the net deferred tax assets arising from its
operations in the jurisdictions to which the deferred tax assets relate. As a
result, the total valuation allowances for deferred tax assets
in all jurisdictions worldwide increased from $335 million at August 31, 2002,
to approximately $1.2 billion at May 31, 2003, resulting in income tax expense
during the quarter ended May 31, 2003 of $721 million. In addition, Solectron
expects to provide a full valuation allowance on future tax benefits until it
can demonstrate a sustained level of profitability that establishes its ability
to

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utilize the assets in the jurisdictions to which the assets relate. For
additional information see Critical Accounting Policies in Managements
Discussion and Analysis of Financial Condition and Results of Operations.

NOTE 13  Subsequent Events

Solectron was not in compliance with its minimum tangible net worth covenants
of its undrawn $200 million and $250 million revolving credit facilities, its
synthetic leases and certain other operating leases due to the deferred tax
valuation allowance charge recorded during the third quarter. Subsequent to the
end of the third quarter, Solectron obtained amendments, effective May 30,
2003, to the definitions of the consolidated tangible net worth covenants. As a
result of these amendments, Solectron was in compliance with all applicable
covenants as of May 31, 2003.




Item 2. 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
quarterly 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 created by that statute. These forward-looking statements
relate to matters including, but not limited to:



| |  |  | our ability to realize the benefits of our deferred tax assets in the jurisdictions to which those assets relate;                                                          
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the anticipated financial impact of recent and future acquisitions;                                                                                                        
|
| |  |  | the timing and amount of our planned restructuring activities and related estimated cost savings;                                                                          
|
| |  |  | the anticipated percentage of our sales from systems-build projects
in our Global Operations business unit and turn-key projects in our
Technology Solutions business unit;
|
| |  |  | 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 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, including the agreement with HP
announced on February 3, 2003;       
|
| |  |  | the potential impact of, and our strategies for addressing, our
current litigation and environmental liability exposure; and                                               
|
| |  |  | certain 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. These forward-looking statements are based on
current expectations, forecasts and assumptions involving risks and
uncertainties that could cause actual outcomes to differ materially. Our
forward-looking statements are generally accompanied by words such as intend,
anticipate, believe, estimate, expect and other similar words and
statements. Applicable risks and uncertainties, which in some instances are
beyond our ability to control and which may cause actual outcomes to differ
materially from what is presently anticipated, include, but are not limited to:



| |  |  | interruptions to our business and the businesses of our suppliers and
customers as a result, or in anticipation, of international conflict,
war, disease, or other such disruptions to commerce;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the duration and severity of the current global economic slowdown;                                                                                                                              
|
| |  |  | risks associated with the cyclical nature of the electronics industry
and fluctuations in demand for our services and products;                                                                 

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| |  |  | our ability to compete successfully to win new business and customers
and to retain existing customers as well as the level of success of our
competitors;                                                                                                                                                                                                                   
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | opportunities and needs for acquisitions of assets and/or businesses,
changes in interest rates and other financial market conditions, our
ability to accurately project our cash flows and capital requirements,
and other developments or conditions, which might constrain our ability
or willingness to repay our existing indebtedness in the manner
presently intended;
|
| |  |  | our expectations concerning our ability to realize revenues from
customer wins depends on our customers actual production schedules
which in turn depend on end-user demand which is difficult to predict;                                                                                                                                                                  
|
| |  |  | our ability to effectively implement restructuring and cost
reductions, and to realize the benefit of anticipated cost-savings, due
to our restructuring initiatives and otherwise;                                                                                                                                                                                          
|
| |  |  | our ability to integrate into our existing business the operations of future acquisitions effectively;                                                                                                                                                                                                                                                                       
|
| |  |  | our ability to sell excess or obsolete inventory to customers or third parties;                                                                                                                                                                                                                                                                                              
|
| |  |  | uncertainties regarding the outcomes and expenses of current
litigation, as well as the possibility of future litigation matters
arising; and                                                                                                                                                                                                                                
|
| |  |  | our ability to attract and retain key personnel during the course of
our restructuring activities.                                                                                                                                                                                                                                                                           

For more information about risks and uncertainties, see Risk Factors and
reports filed by Solectron with the Securities and Exchange Commission on Forms
10-K, 8-K, 10-Q, S-3, S-4 and S-8. 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 are 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.

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 to the consolidated financial statements in our Annual
Report on Form 10-K for the fiscal year ended August 31, 2002 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
reserves, 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 full product manufacturing including,
but not limited to, PCBA, sub-system and complete 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 or an asset has been impaired
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.

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Inventory Reserves

The majority of our inventory purchase commitments are based upon demand
forecasts that our customers provide to us. The forecasted period is generally
three months, except for long lead-time items for which the period is longer.
Customers frequently make changes to their forecasts, thereby often requiring
that we make changes to our inventory purchases, commitments, and production
scheduling and may require us to cancel open purchase commitments with our
vendors. This process may lead to on-hand inventory quantities and on-order
purchase commitments that are in excess of the customers revised needs, or
parts that become obsolete before use in production.

We generally execute supply agreements with our significant customers in our
Global Operations business unit. Under these supply agreements, the
responsibility for excess or obsolete inventory related to raw materials that
we purchased or ordered to meet customers demand forecasts primarily lies with
our customers. However, 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 inventory purchases not covered by our supply agreements with our
customers.

Each supply agreement specifies the agreed-upon definition of excess and
obsolete inventory for which our customers may be held liable and the
procedures for disposition including any conditions or limitations on our right
to sell the inventory back to the customer. The supply agreements generally
allow a period of time during which we work collaboratively with our customers
to reduce or eliminate the amount of potentially excess and obsolete inventory.
After the expiration of the specified time period, we may exercise our
contractual right to sell the remaining excess and obsolete inventory back to
the customer. The time period allowed to mitigate excess and obsolete inventory
can be up to 12 months. Consequently, there will be time lags between when
potential excess or obsolete inventory is first identified and when we are
entitled to be paid from the exercise of our rights to sell the applicable
inventory to the customer.

We do not provide inventory allowances for excess and obsolete inventory when
(i) the supply agreement provides us with the contractual right to sell
inventory that is considered excess or obsolete back to our customers, and (ii)
we believe the customer is capable of honoring its contractual obligation to
purchase the inventory. If our customers do not comply with their contractual
obligations or if they are unable to honor their contractual obligations, the
inventory reserves included in our financial statements may be understated. For
example, we are subject to the risk that a customer may not comply with its
contractual obligation to purchase the excess and obsolete inventory under a
supply agreement because the customer is experiencing weakening financial
condition. Several of our customers, including customers who have accounted for
10% or more of revenue, are in the telecommunications industry, an industry
that has experienced declining revenue, large losses, negative cash flows, and
several bankruptcies or defaults on borrowing arrangements. There is a risk
that these customers may not purchase inventory back from us despite
contractual obligations, which could harm our financial condition if we are
unable to sell the inventory at carrying value.

For our Global Operations business unit, we record inventory reserves for
excess and obsolete inventory that we have determined our customers are not
responsible for or are unable to live up to their obligation to purchase such
inventory from us and we do not expect to be able to use in production or sell
to third parties. For our other business units, we make judgments with respect
to recording inventory reserves based on various factors such as the aging and
anticipated future demand of the inventory, as well as the applicable
provisions of any relevant customer contracts, and assessment of the
disposition value, if any, of such inventory. In these other units, we more
often do not have the right to require our customers to purchase excess or
obsolete inventory.

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, as was the case during the third quarter of
fiscal 2003. Such events or

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circumstances may include significant adverse
changes in the general business climate, among others. We perform the
impairment tests at the reporting unit level, which we have determined to be
consistent with our business units (as defined in Note 5 to the condensed
consolidated financial statements) except for our Technology Solutions and
Global Services business units, 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.

Other Intangible Assets

We perform impairment tests for other intangible assets in accordance with SFAS
No. 144. Our intangible assets are primarily related to supply agreements and
intellectual property obtained from asset acquisitions. 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, if any, 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 determine the length of time until we believe we
can sublease a facility (generally estimated at 24 months) and the amount of
rent we can expect to receive. As of May 31, 2003, the majority of the
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. See Note 10 to the condensed
consolidated financial statements, Restructuring and Impairment, for further
discussion of our restructuring activities.

Income Taxes

We currently have significant deferred tax assets in certain jurisdictions
resulting from tax credit carryforwards, anticipated 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 current quarter. In previous reporting periods, we had
provided valuation allowances for future tax benefits resulting from foreign
net operating losses 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

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quarter, 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 to approximately
$1.2 billion. 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 arose, and until such time, we would not expect to
record any significant tax benefits in our future results of operations.

Results of Operations

The electronics industry is subject to rapid technological change, product
obsolescence and price competition. These and other factors affecting the
electronics industry, or any of Solectrons major customers in particular,
could materially harm Solectrons results of operations. See Risk Factors for
additional factors relating to possible fluctuations of our operating results.

The following table sets forth, for the periods indicated, certain items in the
condensed consolidated statements of operations as a percentage of net sales.
The financial information and the discussion below should be read in
conjunction with the condensed consolidated financial statements and notes
thereto.

|                                    |  |                           |        |                          |  |      |       |      |  |  |       |    |  |  |       |   
|----------------------------------- |  | ------------------------- | ------ | ------------------------ |  | ---- | ----- | ---- |  |  | ----- | -- |  |  | ----- | --
|                                    |  | Three Months Ended May 31 |        | Nine Months Ended May 31
|                                    |  |                           |        |                         
|                                    |  | 2003                      |        | 2002                     |  | 2003 |       | 2002
|                                    |  |                           |        |                          |  |      |       |     
|Net sales                           |  |                           | 100.0  | %                        |  |      | 100.0 | %    |  |  | 100.0 | %  |  |  | 100.0 | % 
|Cost of sales                       |  |                           | 94.2   |                          |  |      | 93.0  |      |  |  | 94.0  |    |  |  | 93.3  |   
|                                    |  |                           |        |                          |  |      |       |      |  |  |       |    |  |  |       |   
|Gross profit                        |  |                           | 5.8    |                          |  |      | 7.0   |      |  |  | 6.0   |    |  |  | 6.7   |   
|Operating expenses:                 |  |                           |        |                          |  |      |       |      |  |  |       |    |  |  |       |   
|Selling, general and administrative |  |                           | 6.1    |                          |  |      | 7.2   |      |  |  | 6.3   |    |  |  | 6.9   |   
|Research and development            |  |                           | 0.8    |                          |  |      | 0.7   |      |  |  | 0.8   |    |  |  | 0.6   |   
|Restructuring and impairment costs  |  |                           | 13.6   |                          |  |      | 10.3  |      |  |  | 6.1   |    |  |  | 6.1   |   
|Goodwill impairment                 |  |                           | 68.1   |                          |  |      |      |      |  |  | 21.9  |    |  |  |      |   
|                                    |  |                           |        |                          |  |      |       |      |  |  |       |    |  |  |       |   
|Operating loss                      |  |                           | (82.8  | )                        |  |      | (11.2 | )    |  |  | (29.1 | )  |  |  | (6.9  | ) 
|Interest income                     |  |                           | 0.3    |                          |  |      | 0.4   |      |  |  | 0.3   |    |  |  | 0.6   |   
|Interest expense                    |  |                           | (1.9   | )                        |  |      | (2.4  | )    |  |  | (1.8  | )  |  |  | (1.9  | ) 
|Other income (expense) - net        |  |                           | (0.1   | )                        |  |      | (0.1  | )    |  |  | 0.5   |    |  |  | 0.8   |   
|                                    |  |                           |        |                          |  |      |       |      |  |  |       |    |  |  |       |   
|Loss before income taxes            |  |                           | (84.5  | )                        |  |      | (13.3 | )    |  |  | (30.1 | )  |  |  | (7.4  | ) 
|Income tax expense (benefit)        |  |                           | 25.6   |                          |  |      | (3.9  | )    |  |  | 7.3   |    |  |  | (2.3  | ) 
|                                    |  |                           |        |                          |  |      |       |      |  |  |       |    |  |  |       |   
|Net loss                            |  |                           | (110.1 | )%                       |  |      | (9.4  | )%   |  |  | (37.4 | )% |  |  | (5.1  | )%
|                                    |  |                           |        |                          |  |      |       |      |  |  |       |    |  |  |       |   

Net Sales

We are organized into four business units: Global Operations, Technology
Solutions, Global Services, and MicroSystems which was established from our
acquisition of C-MAC during the second quarter of fiscal 2002. Our largest
business unit, Global Operations, provided 74.4% and 77.1% of net sales,
respectively, for the three and nine months ended May 31, 2003 compared to
80.7% and 84.8% of net sales for the corresponding periods of fiscal 2002. Our
Technology Solutions business unit contributed 13.5% and 11.1% of net sales,
respectively, for the three and nine months ended May 31, 2003 compared to 8.5%
and 6.5%, respectively, for the corresponding periods in fiscal 2002. Our
Global Services business unit contributed 8.6% and 8.4% of net sales,
respectively, for the three and nine months ended May 31, 2003 compared to 7.3%
and 6.4% of net sales, respectively, for the corresponding periods in fiscal
2002. Our MicroSystems business unit contributed 3.5% and 3.4% of net sales,
respectively, for the three and nine months ended May 31, 2003 compared to 3.5%
and 2.3% of net sales, respectively, for the corresponding periods in fiscal
2002.

Global Operations Business Unit

Net sales from our Global Operations business unit decreased to $2.1 billion
and $6.8 billion, respectively, for the three and nine months ended May 31,
2003 compared to $2.4 billion and $7.8 billion, respectively, for the
corresponding periods in fiscal 2002. This
represents decreases of 14.4% and 12.9%, respectively, for the three and nine
months ended May 31, 2003 from the corresponding periods of fiscal 2002. These
decreases 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 high-end computing, semiconductor, test, and consumer
products in addition to our business and asset acquisitions during the past
year.

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Technology Solutions Business Unit

Net sales from our Technology Solutions business unit increased to $381.6
million and $969.3 million, respectively, for the three and nine months ended
May 31, 2003 compared to $257.8 million and $599.7 million, respectively, for
the corresponding periods in fiscal 2002. This represents increases of 48.0%
and 61.6%, respectively, for the three and nine months ended May 31, 2003 over
the corresponding periods of fiscal 2002. The increases were primarily due to
increased demand for memory products and embedded computer systems resulting in
business wins from new and existing customers.

Global Services Business Unit

Net sales from our Global Services business unit increased to $241.3 million
and $740.3 million, respectively, for the three and nine months ended May 31,
2003 compared to $221.4 million and $586.3 million, respectively, for the
corresponding periods in fiscal 2002. This represents increases of 9.0% and
26.3%, respectively, for the three and nine months ended May 31, 2003 over the
corresponding periods of fiscal 2002. These increases primarily resulted from
our acquisitions of Magnetic Data Technologies in June 2002, a call and
technical support services center in Europe and IBMs global asset recovery
operations, both in the second quarter of fiscal 2003.

MicroSystems Business Unit

Net sales from our MicroSystems business unit were $97.4 million and $296.4
million, respectively, for the three and nine months ended May 31, 2003
compared to $106.1 million and $207.3 million, respectively, for the
corresponding periods in fiscal 2002. This represents a decrease of 8.2% and
an increase of 43.0%, respectively, for the three and nine months ended May 31,
2003 over the corresponding periods of fiscal 2002. The decrease of 8.2% for
the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002
was primarily due to lower customer demand. The increase of 43.0% for the nine
months ended May 31, 2003 over the corresponding period of fiscal 2002 was due
to this business unit being formed as a result of the acquisition of C-MAC in
the second quarter of fiscal 2002.

International Sales

In the three and nine months ended May 31, 2003, our international locations
contributed approximately 64% of consolidated net sales compared to
approximately 61% for the corresponding periods of fiscal 2002. Net sales from
our international sites, as a percentage of consolidated net sales, have grown
primarily due to project transfers from sites in the United States to low-cost
locations including Asia/Pacific, Eastern Europe and Latin America. Our
international operations are subject to various 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 ensure that there will not be such
an impact in the future.

Major Customers

Certain customers accounted for 10% or more of our net sales. The following
table includes these customers and the percentage of net sales attributed to
them:

|                       |  |                    |      |                   |  |      |      |      |  |  |      |   |  |  |      |  
|---------------------- |  | ------------------ | ---- | ----------------- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                       |  | Three Months Ended |      | Nine Months Ended
|                       |  | May 31             |      | May 31           
|                       |  |                    |      |                  
|                       |  | 2003               |      | 2002              |  | 2003 |      | 2002
|                       |  |                    |      |                   |  |      |      |     
|Hewlett-Packard/Compaq |  |                    | 13.2 | %                 |  |      | 12.0 | %    |  |  | 12.3 | % |  |  | 11.5 | %
|Nortel Networks        |  |                    | 10.9 | %                 |  |      | 13.3 | %    |  |  | 10.9 | % |  |  | 14.3 | %
|Cisco Systems          |  |                    | 10.8 | %                 |  |      | 10.8 | %    |  |  | 10.2 | % |  |  | 10.9 | %

Our top ten customers accounted for approximately 60% and 58% of consolidated
net sales for the three and nine months ended May 31, 2003 compared to
approximately 60% and 65%, respectively, in corresponding periods of fiscal
2002. We are dependent upon continued revenues from the customers listed above
as well as our other large customers. Sales to these or any other customers
could 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.

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We believe that our ability to grow depends on increasing sales to existing
customers 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 assume that any of our current customers will continue to
utilize our services. Consequently, our results of operations may be materially
adversely affected.

Gross Profit

Our gross margin percentage decreased to 5.8% and 6.0% for the three and nine
months ended May 31, 2003, respectively, compared to 7.0% and 6.7% for the
corresponding periods in fiscal 2002. Our margin continues to be negatively
affected by inefficiencies associated with reduced demand and also a $76.3
million inventory charge related to excess and obsolete inventory in our Global
Operations business unit during the second quarter of fiscal 2003, which was
taken due to the continued depressed condition of the telecommunications
market. Our margin was also negatively affected by certain incremental costs
incurred to meet customer requirements in the repair business within our Global
Services business unit during the second quarter of fiscal 2003. In addition,
since manufacturing transfer costs have been accounted for as operational costs
versus restructuring costs, they have negatively affected our gross margin in
recent quarters as transfers have been accelerated. We also incurred
non-recurring charges relating to restructuring activities in our operations
and service businesses related to plant closures that could not be classified
as restructuring during the third quarter of fiscal 2003. Although we have
begun to see the benefits of our restructuring activities on our margin,
further demand reductions, the inventory charge and the other non-recurring
charges more than offset the benefit of our restructuring activities.

For our Global Operations business unit, we anticipate that a larger percentage
of our sales may be derived from systems-build projects that generally yield
lower profit margins than PCB assembly. We expect most of our Technology
Solutions sales may continue to be derived from turnkey 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
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 turnkey projects, pricing within the
electronics industry, component costs and delivery linearity, the cost
structure at individual sites and unanticipated restructuring or inventory
charges. 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
turnkey projects, additional costs associated with new projects and price
erosion within the electronics industry could harm our gross margin.

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.

See Note 1 to the condensed consolidated financial statements, Basis of
Presentation and Recent Accounting Pronouncements, for discussion of certain
reclassifications affecting gross profit.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses decreased $45.3 million or
20.8% for the third quarter of fiscal 2003 compared to the third quarter of
fiscal 2002. SG&A expenses decreased $76.9 million or 12.3% for the nine months
ended May 31, 2003 compared to the corresponding period in fiscal 2002. As a
percentage of net sales, SG&A decreased to 6.1% and 6.3%, respectively, for the
three and nine months ended May 31, 2003 compared to 7.2% and 6.9% for the
corresponding periods in fiscal 2002. The decreases were primarily 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 acquisitions, including C-MAC.

See Note 1 to the condensed consolidated financial statements, Basis of
Presentation and Recent Accounting Pronouncements, for discussion of certain
reclassifications affecting SG&A expenses.

Research and Development Expenses

With the exception of our Technology Solutions business unit, 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

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environmental stress technology and the implementation
of environmentally friendly assembly processes such as lead-free and no-clean.
Technology Solutions R&D efforts are focused on developing board and system
level product solutions servicing the telecommunications, military and
aerospace, and industrial markets.

R&D expenses for the third quarter of fiscal 2003 remained relatively
consistent at $22.7 million and 0.8% of net sales, compared to $20.4 million
and 0.7% of net sales in the third quarter of fiscal 2002. R&D expenses also
remained consistent as a percentage of net sales at 0.8% for the nine months
ended May 31, 2003 compared to 0.6% for the nine months ended May 31, 2002. In
absolute dollars, R&D expenses increased to $66.2 million for the nine months
ended May 31, 2003 from $54.1 million in the corresponding period in fiscal
2002. The increase was primarily due to our acquisition of C-MAC and the
related businesses included in our MicroSystems and Technology Solutions
business units at the beginning of the second quarter of fiscal 2002.

Restructuring and Impairment

Beginning in the second quarter of fiscal 2001, we initiated a series of
restructuring of our operations 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. For
leased facilities that will be abandoned and subleased, lease costs charged to
restructuring expense represent future lease payments subsequent to abandonment
less estimated sublease income. For facilities and equipment held for disposal,
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. In furtherance of the implementation of our restructuring plans, we
expect to incur additional restructuring-related charges of approximately $125
million through the second quarter of fiscal 2004 although no certainty can be
attributed to this amount. We continue to evaluate our cost structure relative
to current anticipated revenue levels and to adjust our manufacturing footprint
between high cost and low cost areas 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.

During the third quarter of fiscal 2003, we continued our restructuring
activities and total restructuring and impairment costs of $223 million
(excluding intangible asset impairments) were charged against earnings during
the third quarter. During the first and second quarters of fiscal 2003, charges
of $102 million and $57 million, respectively, were recorded.

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 quarter 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 10 to the condensed consolidated financial statements, Restructuring
and Impairment, for further discussion of our restructuring since initiation
of the activities in fiscal 2001.

During the third quarter of fiscal 2003, we also recorded an impairment charge
related to certain intangible assets of $161 million. See Note 8 to the
condensed consolidated financial statements, Goodwill and Intangible Assets,
for further discussion.

Goodwill Impairment

Goodwill impairment was approximately $1.9 billion for the three and nine
months ended May 31, 2003 as a result of our goodwill impairment test performed
during the third quarter of fiscal 2003. See Note 8 to the condensed
consolidated financial statements, Goodwill and Intangible Assets, for
further discussion.

Interest Income

Interest income decreased $6.0 million to $8.0 million in the third quarter of
fiscal 2003 from $14.0 million in the third quarter of fiscal 2002. Interest
income decreased $29.3 million to $26.0 for the nine months ended May 31, 2003
from $55.3 million in the corresponding period in fiscal 2002. The decreases
were due to reduced average cash, cash equivalent and short-term investment
balances and lower average interest rates in fiscal 2003 as compared to fiscal
2002.

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Interest Expense

Interest expense decreased $20.3 million to $51.9 million in the third quarter
of fiscal 2003 from $72.2 million in the third quarter of fiscal 2002.
Interest expense decreased $14.0 million to $163.4 million for the nine months
ended May 31, 2003 from $177.4 million in the corresponding period in fiscal
2002. These decreases were primarily due to the retirement of $3.2 billion
aggregate principal amount at maturity of our 2.75% and 3.25% LYONs due 2020
since February 28, 2002 including our repurchase of $514 million of LYONs with
aggregate principal amount at maturity of $818 million during the third quarter
of fiscal 2003. Interest expense decrease due to the retirement of our LYONs
have been partially offset by the issuance of our ACES and Senior Notes for
gross proceeds of approximately $1.6 billion that bear interest at higher rates
than the LYONs.

Other Income (Expense) - net

Other expense for the third quarter of fiscal 2003 remained relatively
consistent at $4.0 million, compared to $3.5 million in the third quarter of
fiscal 2002. Other income decreased to $46.9 million for the nine months ended
May 31, 2003 from $73.9 million in the corresponding period in fiscal 2002.
Other income (expense)  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 condensed consolidated financial
statements:

|                                              |  |                           |       |                          |  |      |      |      |  |   |         |  |  |   |         | 
|--------------------------------------------- |  | ------------------------- | ----- | ------------------------ |  | ---- | ---- | ---- |  | - | ------- |  |  | - | ------- | 
|                                              |  | Three months ended May 31 |       | Nine months ended May 31
|                                              |  |                           |       |                         
|                                              |  | 2003                      |       | 2002                     |  | 2003 |      | 2002
|                                              |  |                           |       |                          |  |      |      |     
|Principal amount at maturity of retired LYONs |  | $                         | 818.1 |                          |  | $    | 46.0 |      |  | $ | 1,443.1 |  |  | $ | 3,499.7 | 
|                                              |  |                           |       |                          |  |      |      |      |  |   |         |  |  |   |         | 
|Carrying value of retired LYONs               |  | $                         | 514.2 |                          |  | $    | 25.3 |      |  | $ | 861.4   |  |  | $ | 1,911.2 | 
|Cash paid                                     |  |                           | 514.2 |                          |  |      | 21.3 |      |  |   | 823.1   |  |  |   | 1,860.5 | 
|                                              |  |                           |       |                          |  |      |      |      |  |   |         |  |  |   |         | 
|Gain included in other income (expense)-net   |  | $                         |      |                          |  | $    | 4.0  |      |  | $ | 38.3    |  |  | $ | 50.7    | 
|                                              |  |                           |       |                          |  |      |      |      |  |   |         |  |  |   |         | 

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

See Note 1 to the condensed consolidated financial statements, Basis of
Presentation and Recent Accounting Pronouncements, for further discussion of
other income (expense) - net.

Income Taxes

Our income tax expense was $721 million and $644 million, respectively, for the
three and nine months ended May 31, 2003 as compared to income tax benefits of
$118 million and $213 million, respectively, for the three and nine months
ended May 31, 2002. Managements decision to provide a valuation allowance on
certain deferred tax assets resulted in the tax expense incurred in the current
period. Income tax expense, which would otherwise be incurred over the next
several quarters, will be reduced to the extent of offsetting valuation
allowance reductions.

In prior quarters, 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

Cash, cash equivalents and short-term investments decreased to approximately
$1.7 billion at May 31, 2003 from approximately $2.2 billion at August 31,
2002. As of May 31, 2003 and August 31, 2002, restricted balances of $102
million and $235 million, were included in the approximately $1.7 billion and
approximately $2.2 billion, respectively, of cash, cash equivalents and
short-term investments. Certain of 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 two quarterly interest
payments.

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The decrease in cash, cash equivalents and short-term investments was primarily
a result of the continued retirement of our LYONs. During the nine months of
fiscal 2003, our primary uses of cash included using $823 million of our
available cash towards retirement of our LYONs and $88 million to repay other
debt obligations. The decrease was partially offset by cash inflows such as our
cash provided by operating activities of $357 million including income tax
refunds received of $234 million.

Accounts receivable decreased to approximately $1.6 billion at May 31, 2003
from approximately $1.8 billion at August 31, 2002 primarily due to a decrease
in sales. Inventories decreased to approximately $1.6 billion at May 31, 2003
from approximately $1.9 billion at August 31, 2002 primarily from the sale of
excess raw materials inventory back to our customers throughout the nine-month
period ended May 31, 2003 and a $76 million inventory charge related to excess
and obsolete inventory in our Global Operations business unit during the second
quarter of fiscal 2003.

As of May 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 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
May 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 third quarter, we obtained waivers to the minimum
cash interest coverage ratio covenants. Subsequent to the end of the third
quarter, we amended the definitions of the consolidated tangible net worth
covenants, effective May 30, 2003, to include the impact of the deferred tax
asset valuation allowance charge. As a result of these amendments, we were in
compliance with all applicable covenants as of May 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
will
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 $41 million in committed and $284 million in uncommitted
foreign lines of credit and other bank facilities as of May 31, 2003. 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 May 31, 2003, borrowings and guaranteed
amounts were $16 million under committed and $49 million under uncommitted
foreign lines of credit. Borrowings are payable on demand. The weighted-average
interest rate was 5.8 % for committed and 2.6% for uncommitted foreign lines of
credit as of May 31, 2003.

We have purchased in the past and may continue to purchase in the future our
remaining LYONs on an opportunistic basis. Our liquidity could be materially
adversely affected if we purchase these LYONs with cash. Instead of
repurchasing the 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, while it may be in the best interests of our senior debt holders to
satisfy these obligations with common stock, we may choose not to do so because
this could result in significant dilution to our stockholders. Satisfying these
obligations with cash could impair our liquidity. On March 31, 2003, we
announced our intention to
repurchase any 2.75% LYONs put to us with cash on May 8, 2003. Accordingly, we
repurchased $514 million of these LYONs with cash during the third quarter of
fiscal 2003. Approximately $10 million of these LYONs remain in long-term debt
within the condensed consolidated balance sheet as of May 31, 2003. Based on
the aggregate amount outstanding on May 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 $1.1 billion.

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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 may 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 $125 million and $106 million,
respectively, as of May 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 the third quarter, we obtained a waiver to
the minimum cash interest coverage ratio covenant. Subsequent to the end of the
third quarter, we amended the definition of the consolidated tangible net worth
covenant, effective May 30, 2003, to include the impact of the deferred tax
asset valuation allowance charge. As a result of these amendments, we were in
compliance with all applicable covenants as of May 31, 2003. Monthly lease
payments are generally based on the Termination Value and 30-day LIBOR index
(1.3% as of May 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 May 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 May 31,
2003:

|                   |  |                        |         |      |  |          |      |      |  |   |         |  |  |      |      |  |            |   |       |  |  |   |         |     |  |   |       | 
|------------------ |  | ---------------------- | ------- | ---- |  | -------- | ---- | ---- |  | - | ------- |  |  | ---- | ---- |  | ---------- | - | ----- |  |  | - | ------- | --- |  | - | ----- | 
|                   |  | Payments Due by Period
|                   |  |                       
|                   |  |                        |         |      |  | 3 months |      |      |  |   |         |  |  |      |      |  |            |   |       |  |  |   |         |     |  |  
|                   |  | Total                  |         | FY03 |  | FY04     |      | FY05 |  |   | FY06    |  |  | FY07 |      |  | Thereafter |  
|                   |  |                        |         |      |  |          |      |      |  |   |         |  |  |      |      |  |            |   |       |  |  |   |        
|Short term debt    |  | $                      | 1,179.7 |      |  | $        | 32.9 |      |  | $ | 1,146.8 |  |  | $    |     |  |            | $ |      |  |  | $ |        |     |  | $ |      | 
|Long term debt (1) |  |                        | 1,851.8 |      |  |          |     |      |  |   | 37.1    |  |  |      | 13.6 |  |            |   | 164.7 |  |  |   | 1,111.5 | (2) |  |   | 524.9 | 
|Operating lease    |  |                        | 380.6   |      |  |          | 45.4 |      |  |   | 94.4    |  |  |      | 53.5 |  |            |   | 39.4  |  |  |   | 31.2    |     |  |   | 116.7 | 
|                   |  |                        |         |      |  |          |      |      |  |   |         |  |  |      |      |  |            |   |       |  |  |   |         |     |  |   |       | 
|                   |  | $                      | 3,412.1 |      |  | $        | 78.3 |      |  | $ | 1,278.3 |  |  | $    | 67.1 |  |            | $ | 204.1 |  |  | $ | 1,142.7 |     |  | $ | 641.6 | 
|                   |  |                        |         |      |  |          |      |      |  |   |         |  |  |      |      |  |            |   |       |  |  |   |         |     |  |   |       | 



|(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 $1.1 billion on such commitment date of May 20,
2004 based on the notes outstanding as of May 31, 2003.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|(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 to the condensed consolidated
financial statements, Long-Term Debt, for further discussion of our
ACES.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, we guarantee used and unused lines of credit and debt for our
subsidiaries totaling $325 million as of May 31, 2003. We also guarantee
performance of certain of our subsidiaries in various transactions such as
leases, totaling $259 million as of May 31, 2003.

Recent Developments

We announced on June 19, 2003 that Marc Onetto, a former senior GE executive
with an extensive background in manufacturing, supply-chain management,
information technology and quality, joined us on June 18, 2003 as executive
vice president of worldwide operations. He reports to Mike Cannon, president
and chief executive officer. At Solectron, Mr. Onetto is responsible for
worldwide manufacturing, materials management, quality, new product
introduction, information technology, logistics and repair operations.

On June 19, 2003, we announced our earnings for the third quarter of fiscal
2003. Accordingly, we filed a Form 8-K with the Securities and Exchange
Commission dated June 19, 2003.

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. In particular, we depend on
the telecommunications industry, where the decline began in the second quarter
of fiscal 2001. Continued weakness in this industry or any further
deterioration in the business or financial condition of our customers in this
industry could have a material adverse impact 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 nine months ended May 31, 2003, our fixed charges exceeded our earnings
by approximately $2.6 billion compared to $677 million in the nine months ended
May 31, 2002. The fixed charge excess is primarily due to our operating losses.
We compute the ratio of earnings 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 May 31, 2003, we had $1.1 billion of short-term indebtedness, primarily
consisting of our obligation related to our 3.25% LYONs due 2020, and
approximately $1.9 billion of long-term indebtedness. We will require
substantial amounts of cash to fund scheduled payments of principal and
interest on our outstanding indebtedness, as well as future capital
expenditures and any increased working capital requirements. In addition, we
may require substantial amounts of cash in connection with our obligations to
repurchase our LYONs.

During the first quarter of fiscal 2003, we purchased $18 million aggregate
principal amount at maturity of our 2.75% LYONs due 2020. On March 31, 2003, we
announced our intention to repurchase any 2.75% LYONs put to us with cash on
May 8, 2003. Accordingly, we repurchased $514 million of these LYONs with cash
during the third quarter of fiscal 2003. Approximately $10 million of these
LYONs remain in long-term debt within the condensed consolidated balance sheet
as of May 31, 2003.

During the first and second quarters of fiscal 2003, we purchased $372 million
and $235 million, respectively, aggregate principal amount at maturity of our
3.25% LYONs due 2020 and approximately $2.0 billion aggregate principle amount
at maturity of these LYONs remained outstanding as of May 31, 2003. Based on
the aggregate amount outstanding on May 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

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principal amount for a total of approximately
$1.1 billion. 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 the supply agreements, the responsibility for excess or
obsolete inventory related to raw materials that were previously purchased or
ordered to meet a customers demand forecast primarily lies with our customer.
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. Several of our
customers, including customers who have accounted for 10% or more of revenue,
are in the telecommunications industry, an industry that has experienced
declining revenue, large losses, negative cash flows, and several bankruptcies
or defaults on borrowing arrangements. There is a risk that these customers may
not purchase inventory back from us despite contractual 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 inventory purchases not
covered by our supply agreements. In addition, in the normal course of
business, bona fide disagreements may arise over the amount and/or timing of
such claims in order to avoid litigation expenses, collection risks, or
disruption of customer relationships, and 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.

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

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| |  |  | 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;                      
|
| |  |  | 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 May 31, 2003.

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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 60% and 58%, respectively, of net
sales in the three and nine months ended May 31, 2003 and approximately 60% and
65% of net sales in corresponding periods of fiscal 2002. 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 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 supply agreements,
as well as on the financial condition and success of our customers and their
customers.

Net sales may decline in future periods due to the continued weakness in
customer demand, particularly in our telecommunications sector, resulting from
the worldwide economic slowdown. In addition, net sales were adversely affected
due to our unwinding of the Lucent supply agreement, which was expected to
generate $2 billion in revenues over the original three-year contract period.
Sales, gross profit and operating income from this supply agreement were $88
million, $3 million and $1 million, respectively, for the nine months ended May
31, 2003. Production under this supply agreement ceased in March 2003.

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

EMS companies must provide increasingly rapid product turnaround for their
customers. We generally do not have long-term contracts with our top customers.
As a result, we cannot guarantee that we will 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 are
experiencing a significant decrease in demand for their products and services.
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, can result
in inefficiencies and costs due to resulting excess capacity and overhead at
one facility and capacity constraints and related strains on our resources at
the other.

OUR STRATEGIC RELATIONSHIPS WITH
MAJOR CUSTOMERS CREATE RISKS.

In the past several years, we have completed several strategic transactions
with OEM customers. Under these arrangements, we generally acquire inventory,
equipment and other assets from the OEM, and lease (or in some cases acquire)
their manufacturing facilities, while simultaneously entering into multi-year
supply agreements for the production of their products. We intend to continue
to pursue these OEM divestiture transactions in the future. There is strong
competition among EMS companies for these transactions, and this competition

may increase. These transactions have contributed to a significant portion of
our past revenue growth, and if we fail to complete similar transactions in the
future, our revenue could be harmed. As part of these arrangements, we
typically enter into supply agreements with these OEMs. These agreements
generally do not require any minimum volumes of purchases by the OEM and the
actual volume of purchases may be less than anticipated. The arrangements
entered into with divesting OEMs typically involve many risks, including the
following:



| |  |  | we may pay a purchase price to the divesting OEMs that exceeds the
value we may 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;                   

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| |  |  | we, rather than the divesting OEM, 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.

As a result of these and other risks, we may be unable to achieve anticipated
levels of profitability under these 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 MERGERS, ACQUISITIONS, AND DIVESTITURES, AND
COST-EFFECTIVELY ASSIMILATE NEW 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. We may consider acquisitions of companies and strategic assets
under our acquisition strategy subject to compliance with any restrictions that
may exist under certain of our financing instruments. These acquisitions may be
for cash, capital stock or any combination of cash and capital stock, or other
property, and may include the incurrence or assumption of indebtedness and a
reduction of our available cash. In addition, we are in the process of
evaluating our portfolio of businesses with a view towards possible divestment
of certain parts of our current operations which we do not believe to be
strategic or synergistic to Solectrons primary business focus and which may
present us with the opportunity to improve our liquidity if such businesses can
be sold at an attractive valuation.

In order to achieve anticipated revenue and other financial performance
targets, we must continue to manage our assets and operations efficiently and
integrate our acquisitions. Our acquisitions place a heavy strain on our
personnel and management, manufacturing and other resources. Similarly, any
divestment activities, which we may undertake 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 any such divestments.
We anticipate that any divestment activities we may undertake will place a
heavy strain on our personnel and management resources, and there can be no
assurance that any 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 any divestment activities we may undertake could harm our financial
condition and results of operations. In addition, there can be no assurance
that we will receive the expected benefits from any divestment activities we
may undertake, as such transactions may result in significant costs, expenses
and charges that are greater than the value we may realize in connection with
such transactions.

Our ability to manage and integrate our acquisitions, as well as any future
acquisitions, will require progressive increases in manufacturing
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
our business activities could harm our financial condition and results of
operations. In addition, should we continue to expand geographically, we may
experience inefficiencies from the management of geographically dispersed
facilities and incur substantial infrastructure and working capital costs. We
incurred approximately $2.5 billion (including goodwill and other intangible
impairment charges of approximately $2.1 billion) of restructuring and
impairment costs in the first nine months of 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:

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| |  |  | 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 associated with acquisitions;                                                                                                                                                                                                                                                       
|
| |  |  | 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 ratings 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.

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 $125 million
through the second quarter of fiscal 2004 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.

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WE DEPEND ON LIMITED OR SOLE SOURCE SUPPLIERS FOR CRITICAL COMPONENTS. THE
INABILITY TO OBTAIN SUFFICIENT COMPONENTS AS REQUIRED 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. Also for our Technology Solutions business unit, we are dependent
upon certain limited or sole source suppliers for critical components used for
our memory module, communications card and embedded computer products. 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
required, or to develop alternative sources as 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, 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.

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. The memory
module, communications card and embedded computer subsystem industries are also
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 AND GROWING PORTION OF OUR NET
SALES; WE ARE INCREASINGLY EXPOSED TO RISKS ASSOCIATED WITH OPERATING
INTERNATIONALLY.

In the three and nine months ended May 31, 2003, approximately 64%, of net
sales came from sites outside the United States, while approximately 61% of net
sales came from outside the United States in the same periods of fiscal 2002.
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;                                                 

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

The recent outbreak of severe acute respiratory syndrome, or SARS, that began
in China, Hong Kong, Singapore and Vietnam may have a negative impact on our
operations. Our operations may be impacted by a number of SARS-related factors,
including, but not limited to, disruptions at our third-party manufacturers
that are primarily located in China, reduced sales in our international retail
channels and increased supply chain costs. If the number of cases continues to
rise or spread to other areas, our international sales and operations could be
harmed.

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 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.

We periodically hedge foreign currency forecasted transactions with foreign
exchange forward contracts. These transactions are treated as cash flow hedges.
These foreign exchange forward contracts generally have maturities of six
months or less.

As of May 31, 2003, we had outstanding foreign exchange forward contracts with
a total notional amount of approximately $657 million. 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 May 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 22%
of our net sales in the third quarter of 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.

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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 May 31, 2003 approximately 99% 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 $512 million of cash equivalents and short-term investments that are
subject to interest rate risk as of May 31, 2003. The weighted average interest
rate of these balances as of May 31, 2003 was 1.2%. The fair value of these
cash equivalents and short-term investments approximated the carrying value as
of May 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 paid variable rates and we received 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 original interest
rate swaps had a total notional amount of $1 billion upon inception. The first
$500 million of swap transactions related to our 7.25% $1.1 billion ACES,
expire on November 15, 2004 and remain outstanding. The second $500 million of
swap transactions related to the 9.625% $500 million senior notes, were to
expire on February 15, 2009 and were settled during the first quarter of fiscal
2003. Under each of these swap transactions, we paid an interest rate equal to
the 3-month LIBOR rate plus a fixed spread. In exchange, we received 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. During the third quarter of
fiscal 2003, the swaps related to the ACES were not effective as required by
SFAS No. 133. Accordingly, we ceased accounting for the instruments as hedges
as of the beginning of the quarter. The impact of this change was not
significant and we expect the swaps to be effective in future quarters.

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. The
addition of numerous production and manufacturing service facilities as a
result of our recent combination with C-MAC could generate additional risks
that we have yet been unable to evaluate fully.

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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
will
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. Such capital raising
activities may be on terms that may not be acceptable to us or otherwise not
available. In addition, any further ratings downgrades may further negatively
impact the price of our securities and 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.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

See Risk Factors  We Are Exposed to Fluctuations in Foreign Currency
Exchange Rates, and We Are Exposed to Interest Rate Fluctuations, for
factors related to fluctuations in the exchange rates of foreign currency and
fluctuations in interest rates.




Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on their evaluation as
of the end of the period covered by this Report, Solectrons principal
executive officer and principal financial officer have concluded that
Solectrons disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act))
are effective to ensure that information required to be disclosed by Solectron
in reports that it files or submits 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 Controls. There were no significant changes in Solectrons
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.




PART II. OTHER INFORMATION

SARBANES-OXLEY ACT OF 2002

Sections 201 and 202 of the Sarbanes-Oxley Act of 2002 (the Act), signed into
law on July 30, 2002, require that all audit services and non-audit services
by our independent auditors (KPMG LLP) must be pre-approved by our Audit
Committee. Furthermore, the
Act prohibits an auditor from performing certain non-audit services for an
audit client regardless of the Audit Committees approval, subject to
exceptions issued by the Public Company Accounting Oversight Board.

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On May 20, 2003, our Audit Committee approved certain non-audit services to be
performed by KPMG LLP. The approved non-audit services included tax services,
statutory filings and agreed upon procedures related to audits of costs
reimbursed by third parties.




Item 1. 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 their 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 August 29, 2002, ATEL Leasing Corporation, a lessor of manufacturing
equipment to us, filed suit against us in the California Superior Court for the
City and County of San Francisco (ATEL Leasing Corporation v. Solectron
Corporation, Case No. 412011), alleging that ATEL is entitled to recover as
liquidated damages and not as a penalty amounts equal to the stipulated loss
value of all of the equipment leased to us by ATEL under two equipment lease
agreements. ATELs complaint sought liquidated damages of approximately $26
million, plus additional interest allegedly accruing thereon, and litigation
expenses. We contended that ATELs claims were without merit, and that we had
meritorious defenses, including that the liquidated damages provision upon
which ATEL relied is an unenforceable penalty under California law. In fact,
the United States District Court for the Northern District of California had
ruled in a March 2001 opinion (ATEL Financial Corp. v. Quaker Coal
Company, 132
F.Supp.2d 1233) that a liquidated damages provision, which ATEL had attempted
to enforce in that case, was an unenforceable penalty under California law.
ATEL appealed that ruling, but on March 5, 2003, the Ninth Circuit Court of
Appeals affirmed the District Courts judgment against ATEL. In response to
this adverse ruling, ATEL dismissed its complaint against us on or about May
15, 2003. Despite this dismissal, ATEL has continued to threaten litigation in
an effort to induce us to renegotiate the equipment leases, and while we
continue to believe ATELs claims to be without merit, there can be no
assurance that ATEL will not file a new lawsuit against us.

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.

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. The lawsuit seeks an unspecified amount of damages on
behalf of the putative class. 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. Pursuant to the Courts
consolidation orders, a consolidated amended complaint is anticipated to be
filed within the next few weeks. 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

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from September 2001 through September 2002. The
complaint seeks an unspecified amount of compensatory and punitive damages, and
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
alleges to be applicable to those sales of Solectron stock. On May 19, 2003,
Solectron and the individual defendants moved to dismiss the Lifshitz
complaint. 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 three former officers, purportedly
breached their fiduciary duties and participated in or permitted constructive
fraud, unjust enrichment, and alleged violations of the California
Corporations Code. 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
amended complaint contains various factual errors and legal deficiencies. We
intend to seek dismissal of the consolidated amended complaint. We may be
forced to incur substantial litigation expenses in defending this litigation.

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Item 6. Exhibits and Reports
on Form 8-K

(a)  Exhibits:

|            |  |                                                                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Description                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                              
|3.1*        |  | Certificate of Incorporation of the Company, as amended                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                              
|3.2**       |  | Bylaws of the Company, as amended                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                              
|3.3***      |  | Certificate of Designation Rights, Preferences and Privileges
of Series A Participating Preferred Stock of the Company                                                                                                                       
|            |  |                                                                                                                                                                                                                                              
|10.1        |  | Waiver Agreement, dated as of May 30, 2003, among
Solectron, Goldman Sachs Credit Partners L.P., JP Morgan
Chase Bank, The Bank of Novia Scotia, Bank of America,
N.A. and certain other lenders                                             
|            |  |                                                                                                                                                                                                                                              
|10.2        |  | Waiver Agreement, dated as of May 30, 2003, among
Solectron, 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             
|            |  |                                                                                                                                                                                                                                              
|10.3        |  | Fourth Amendment Agreement, effective as of May 30, 2003,
among Solectron, Goldman Sachs Credit Partners L.P., JP
Morgan Chase Bank, The Bank of Novia Scotia, Bank of
America, N.A. and certain other lenders                               
|            |  |                                                                                                                                                                                                                                              
|10.4        |  | First Amendment Agreement, effective as of May 30, 2003,
among Solectron, 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 certain
other lenders
|            |  |                                                                                                                                                                                                                                              
|99.1        |  | Certification of Chief Executive Officer Pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002                                                                                                                                        
|            |  |                                                                                                                                                                                                                                              
|99.2        |  | Certification of Chief Financial Officer Pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002                                                                                                                                        
|            |  |                                                                                                                                                                                                                                              
|99.3****    |  | 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                                                                                             
|            |  |                                                                                                                                                                                                                                              
|99.4****    |  | 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                                                                                            



|*    |  | Incorporated by reference from Exhibit 3.1 filed with Solectrons Form
10-Q for the quarter ended February 28, 2001, Exhibit 3.1 filed with
Solectrons Form 10-Q for the quarter ended February 25, 2000, and Exhibit
3.1 filed with Solectrons Form 10-Q for the quarter ended February 26,
1999.                                                                                                                                             
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|**   |  | Incorporated by reference from Exhibit 3.2 filed with Solectrons Annual
Report on Form 10-K for fiscal year ended August 31, 1997, Exhibit 3.2
filed with Solectrons Form 10-Q for the quarter ended February 26, 1999
and Exhibit 3.2 filed with Solectrons Form 10-Q for the quarter ended
November 30, 2001.                                                                                                                               
|    
|***  |  | Incorporated by reference from Exhibit 3.3 filed with Solectrons Annual
Report on Form 10-K for fiscal year ended August 31, 2001.                                                                                                                                                                                                                                                                                                              
|    
|**** |  | A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to Solectron
Corporation and will be retained by Solectron Corporation and furnished to
the Securities and Exchange Commission or its staff upon request.

(b)  Reports on Form 8-K

None

45



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##### Table of Contents



SOLECTRON CORPORATION




SIGNATURE

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

|                    |  |                                   |  |                                                                                                          
|------------------- |  | --------------------------------- |  | ---------------------------------------------------------------------------------------------------------
|                    |  | SOLECTRON CORPORATION(Registrant)
|                    |  |                                   |  |                                                                                                          
|Date: July 11, 2003 |  |                                   |  |                                                                                                          
|                    |  |                                   |  |                                                                                                          
|                    |  | By                                |  | /S/ Kiran Patel                                                                                          
|                    |  |                                   |  |                                                                                                          
|                    |  |                                   |  | Kiran PatelExecutive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)

46



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##### Table of Contents






INDEX TO EXHIBITS

|            |  |                                                                                                                                                                                                                                               |  |  |  | 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit No. |  | Exhibit Description                                                                                                                                                                                                                           |  |  |  | 
|            |  |                                                                                                                                                                                                                                               |  |  | 
|3.1*        |  | Certificate of Incorporation of the Company, as amended                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                              
|3.2**       |  | Bylaws of the Company, as amended                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                              
|3.3***      |  | Certificate of Designation Rights, Preferences and Privileges
of Series A Participating Preferred Stock of the Company                                                                                                                       
|            |  |                                                                                                                                                                                                                                              
|10.1        |  | Waiver Agreement, dated as of May 30, 2003, among
Solectron, Goldman Sachs Credit Partners L.P., JP Morgan
Chase Bank, The Bank of Novia Scotia, Bank of America,
N.A. and certain other lenders                                             
|            |  |                                                                                                                                                                                                                                              
|10.2        |  | Waiver Agreement, dated as of May 30, 2003, among
Solectron, 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             
|            |  |                                                                                                                                                                                                                                              
|10.3        |  | Fourth Amendment Agreement, effective as of May 30, 2003,
among Solectron, Goldman Sachs Credit Partners L.P., JP
Morgan Chase Bank, The Bank of Novia Scotia, Bank of
America, N.A. and certain other lenders                               
|            |  |                                                                                                                                                                                                                                              
|10.4        |  | First Amendment Agreement, effective as of May 30, 2003,
among Solectron, 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 certain
other lenders
|            |  |                                                                                                                                                                                                                                              
|99.1        |  | Certification of Chief Executive Officer Pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002                                                                                                                                        
|            |  |                                                                                                                                                                                                                                              
|99.2        |  | Certification of Chief Financial Officer Pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002                                                                                                                                        
|            |  |                                                                                                                                                                                                                                              
|99.3****    |  | 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                                                                                             
|            |  |                                                                                                                                                                                                                                              
|99.4****    |  | 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                                                                                            



|*    |  | Incorporated by reference from Exhibit 3.1 filed with Solectrons Form
10-Q for the quarter ended February 28, 2001, Exhibit 3.1 filed with
Solectrons Form 10-Q for the quarter ended February 25, 2000, and Exhibit
3.1 filed with Solectrons Form 10-Q for the quarter ended February 26,
1999.                                                                                                                                             
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|**   |  | Incorporated by reference from Exhibit 3.2 filed with Solectrons Annual
Report on Form 10-K for fiscal year ended August 31, 1997, Exhibit 3.2
filed with Solectrons Form 10-Q for the quarter ended February 26, 1999
and Exhibit 3.2 filed with Solectrons Form 10-Q for the quarter ended
November 30, 2001.                                                                                                                               
|    
|***  |  | Incorporated by reference from Exhibit 3.3 filed with Solectrons Annual
Report on Form 10-K for fiscal year ended August 31, 2001.                                                                                                                                                                                                                                                                                                              
|    
|**** |  | A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to Solectron
Corporation and will be retained by Solectron Corporation and furnished to
the Securities and Exchange Commission or its staff upon request.

47