e10vq
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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 DECEMBER 31, 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: 0-23354

FLEXTRONICS INTERNATIONAL LTD.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
     
SINGAPORE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
  NOT APPLICABLE
(I.R.S. EMPLOYER
IDENTIFICATION NO.)

MICHAEL E. MARKS
CHIEF EXECUTIVE OFFICER
FLEXTRONICS INTERNATIONAL LTD.
36 ROBINSON ROAD #18-01
CITY HOUSE
SINGAPORE 068877
(65) 6299-8888
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

     As of February 12, 2004, there were 529,167,354 shares of the Registrant’s ordinary shares outstanding.



 


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS’ REPORT
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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 8K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 23.01
EXHIBIT 31.01
EXHIBIT 31.02
EXHIBIT 32.01
EXHIBIT 32.02


Table of Contents

FLEXTRONICS INTERNATIONAL LTD.

INDEX

             
        PAGE
       
PART I. FINANCIAL INFORMATION
       
Item 1. Financial Statements
       
   
Independent Accountants’ Report
    3  
   
Condensed Consolidated Balance Sheets — December 31, 2003 and March 31, 2003
    4  
   
Condensed Consolidated Statements of Operations — Three and Nine Months Ended December 31, 2003 and December 31, 2002
    5  
   
Condensed Consolidated Statements of Cash Flows — Nine Months Ended December 31, 2003 and December 31, 2002
    6  
   
Notes to Condensed Consolidated Financial Statements
    7  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    15  
Item 3. Quantitative and Qualitative Disclosures About Market Risk
    26  
Item 4. Controls and Procedures
    26  
PART II. OTHER INFORMATION
       
Item 1. Legal proceedings
    26  
Item 6. Exhibits and Reports on Form 8-K
    27  
 
Signatures
    28  

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INDEPENDENT ACCOUNTANTS’ REPORT

To the Board of Directors and Shareholders of Flextronics International Ltd.

We have reviewed the accompanying condensed consolidated balance sheet of Flextronics International Ltd. and subsidiaries as of December 31, 2003, and the related condensed consolidated statements of operations for the three and nine month periods ended December 31, 2003 and 2002, and of cash flows for the nine month periods ended December 31, 2003 and 2002. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of March, 31, 2003 and the related consolidated statements of operations, stockholders’ equity, and cash flow for the year then ended (not presented herein); and in our report dated April 21, 2003 (May 5, 2003 as to a subsequent event), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP


San Jose, California
February 13, 2004

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FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

                     
        As of   As of
        December 31, 2003   March 31, 2003
       
 
        (In thousands, except
        share and per share amounts)
ASSETS
               
CURRENT ASSETS:
               
 
Cash and cash equivalents
  $ 830,213     $ 424,020  
 
Accounts receivable, net
    1,792,759       1,417,086  
 
Inventories
    1,204,398       1,141,559  
 
Deferred income taxes
    36,681       29,153  
 
Other current assets
    680,801       466,942  
 
 
   
     
 
   
Total current assets
    4,544,852       3,478,760  
Property, plant and equipment, net
    1,641,723       1,965,729  
Deferred income taxes
    470,723       415,041  
Goodwill
    2,293,177       2,121,997  
Other intangibles, net
    59,719       70,913  
Other assets
    500,288       341,664  
 
 
   
     
 
   
Total assets
  $ 9,510,482     $ 8,394,104  
 
 
   
     
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES:
               
 
Bank borrowings and current portion of long-term debt
  $ 70,707     $ 52,484  
 
Current portion of capital lease obligations
    8,903       7,622  
 
Accounts payable
    2,395,340       1,601,923  
 
Other current liabilities
    1,025,049       918,990  
 
 
   
     
 
   
Total current liabilities
    3,499,999       2,581,019  
Long-term debt, net of current portion:
               
 
Capital lease obligations4
    17,184       7,909  
 
8 3/4% Senior Subordinated Notes due 2007
          150,000  
 
Zero Coupon Convertible Junior Subordinated Notes due 2008
    200,000       200,000  
 
9 7/8% Senior Subordinated Notes due 2010, net of discount
    7,337       497,172  
 
9 3/4% Senior Subordinated Notes due 2010
    186,637       160,192  
 
1% Convertible Subordinated Notes due 2010
    500,000        
 
6 1/2% Senior Subordinated Notes due 2013
    400,000        
 
Other
    108,780       34,580  
Other liabilities
    217,770       221,212  
Commitments and contingencies (Note L)
               
SHAREHOLDERS’ EQUITY:
               
 
Ordinary shares, S$.01 par value, authorized - 1,500,000,000 shares; issued and outstanding 528,336,828 and 520,228,062 as of December 31, 2003 and March 31, 2003, respectively
    3,124       3,078  
 
Additional paid-in capital
    4,999,721       4,948,601  
 
Retained deficit
    (738,469 )     (370,093 )
 
Accumulated other comprehensive income (loss)
    115,415       (33,419 )
 
Deferred compensation
    (7,016 )     (6,147 )
 
 
   
     
 
   
Total shareholders’ equity
    4,372,775       4,542,020  
 
 
   
     
 
   
Total liabilities and shareholders’ equity
  $ 9,510,482     $ 8,394,104  
 
 
   
     
 

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

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FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

                                   
      Three months ended   Nine months ended
     
 
      December 31, 2003   December 31, 2002   December 31, 2003   December 31, 2002
     
 
 
 
              (In thousands, except per share amounts)        
Net sales
  $ 4,152,344     $ 3,851,494     $ 10,762,263     $ 10,319,134  
Cost of sales
    3,912,912       3,638,559       10,175,320       9,756,875  
Restructuring and other charges
    50,553       86,892       401,750       266,244  
 
   
     
     
     
 
 
Gross profit
    188,879       126,043       185,193       296,015  
Selling, general and administrative expenses
    121,597       115,502       346,952       340,112  
Intangibles amortization
    9,553       6,147       26,943       15,314  
Restructuring and other charges
    20,466       9,696       56,629       38,167  
Interest and other expense, net
    13,453       23,901       60,067       70,756  
Loss on early extinguishment of debt
                103,909        
 
   
     
     
     
 
 
Income (loss) before income taxes
    23,810       (29,203 )     (409,307 )     (168,334 )
Provision for (benefit from) income taxes
    2,381       (22,726 )     (40,931 )     (65,355 )
 
   
     
     
     
 
 
Net income (loss)
  $ 21,429     $ (6,477 )   $ (368,376 )   $ (102,979 )
 
   
     
     
     
 
Earnings (loss) per share:
                               
 
Basic
  $ 0.04     $ (0.01 )   $ (0.70 )   $ (0.20 )
 
   
     
     
     
 
 
Diluted
  $ 0.04     $ (0.01 )   $ (0.70 )   $ (0.20 )
 
   
     
     
     
 
Weighted average shares used in computing per share amounts:
                               
 
Basic
    527,321       517,810       523,983       516,508  
 
   
     
     
     
 
 
Diluted
    561,438       517,810       523,983       516,508  
 
   
     
     
     
 

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

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FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

                     
        Nine months ended
       
        December 31, 2003   December 31, 2002
       
 
        (In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
               
 
Net loss
  $ (368,376 )   $ (102,979 )
 
Depreciation and amortization
    260,205       257,314  
 
Change in working capital and other
    647,252       600,272  
 
 
   
     
 
   
Net cash provided by operating activities
    539,081       754,607  
 
   
     
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
 
Purchases of property and equipment, net of dispositions
    (95,738 )     (156,652 )
 
Purchases of OEM facilities and related assets
          (7,152 )
 
Acquisitions of businesses, net of cash acquired
    (29,324 )     (489,890 )
 
Other investments and notes receivable
    (194,092 )     (142,251 )
 
 
   
     
 
   
Net cash used in investing activities
    (319,154 )     (795,945 )
 
   
     
 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
 
Bank borrowings and proceeds from long-term debt
    1,110,616       534,919  
 
Repayments of bank borrowings and long-term debt
    (958,267 )     (633,534 )
 
Repayments of capital lease obligations
    (10,115 )     (19,881 )
 
Proceeds from exercise of stock options and Employee Stock Purchase Plan
    45,832       20,756  
 
 
   
     
 
   
Net cash provided by (used in) financing activities
    188,066       (97,740 )
 
   
     
 
Effect on cash from exchange rate changes
    (1,800 )     7,595  
 
   
     
 
Net increase (decrease) in cash and cash equivalents
    406,193       (131,483 )
Cash and cash equivalents at beginning of period
    424,020       745,124  
 
   
     
 
Cash and cash equivalents at end of period
  $ 830,213     $ 613,641  
 
   
     
 

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

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FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(Unaudited)

NOTE A – ORGANIZATION OF THE COMPANY

     Flextronics International Ltd. (“Flextronics” or the “Company”) was incorporated in the Republic of Singapore in May 1990. The Company is a leading provider of advanced design and electronics manufacturing services, or EMS, to original equipment manufacturers, or OEMs, primarily in the handheld electronics devices, information technologies infrastructure, communications infrastructure, computer and office automation, and consumer devices industries. The Company’s strategy is to provide customers with end-to-end services where it takes responsibility for engineering, supply chain management, new product introduction and implementation, manufacturing, and logistics management, with the goal of delivering a complete packaged product. Once a complete packaged product is delivered, Flextronics also provides after-market services such as repair and warranty services and network and communications installation and maintenance.

     In addition to the assembly of printed circuit boards and complete systems and products, the Company’s manufacturing services include the fabrication and assembly of plastic and metal enclosures, the fabrication of printed circuit boards and backplanes (which are printed circuit boards into which other printed circuit boards or cards may be inserted) and the fabrication and assembly of photonics components. Throughout the production process, the Company offers design and engineering services; logistics services, such as materials procurement, inventory management, vendor management, packaging and distribution; and automation of key elements of the supply chain through advanced information technologies. The Company has recently begun providing original design manufacturing, or ODM, services where it designs, develops and manufactures products, such as cell phones and other consumer-related devices, that are sold by its OEM customers under their brand name.

NOTE B – SUMMARY OF ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements, and should be read in conjunction with the Company’s audited consolidated financial statements as of and for the fiscal year ended March 31, 2003 contained in the Company’s Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended December 31, 2003 are not necessarily indicative of the results that may be expected for the year ending March 31, 2004.

     The Company’s fiscal year ends on March 31 of each year. The first and second fiscal quarters end on the Friday closest to the last day of each such fiscal quarter, and the third and fourth fiscal quarters which end on December 31 and March 31, respectively.

     Amounts included in the financial statements are expressed in U.S. dollars unless otherwise designated as Singapore dollars (S$) or Euros (Î).

     The accompanying condensed consolidated financial statements include the accounts of Flextronics and its wholly and majority-owned subsidiaries, after elimination of all significant intercompany accounts and transactions.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

Property, Plant and Equipment

     Property, plant and equipment are stated at cost. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the related assets (three to thirty years), with the exception of building leasehold improvements, which are amortized over the life of the lease, if shorter. Repairs and maintenance costs are expensed as incurred.

     The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of property and equipment is measured by comparing its carrying amount to the projected cash flows the property and equipment are expected to generate. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its fair value.

Goodwill and Other Intangibles

     Goodwill is subject to at least an annual assessment for impairment, applying a fair value based test. Additionally, an acquired intangible asset in a business combination is separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so. Other intangibles, with finite lives, are valued and amortized over their estimated useful lives. In-process research and development is written off immediately.

     Goodwill of the Company’s reporting units is tested for impairment on an annual basis and between annual tests in certain circumstances. Goodwill is tested for impairment at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, a second step is performed to measure the amount of impairment loss, if any. Further, in the event that the carrying amount of the Company as a whole is greater than its market capitalization, there is a potential likelihood that some or all of its goodwill would be considered impaired.

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The Company has not recognized any impairment of its goodwill except as disclosed in “Restructuring and Other Charges”. However, no assurances can be given that future impairment tests of goodwill will not result in an impairment.

     The following table summarizes the activity in the Company’s goodwill account during the nine months ended December 31, 2003 (in thousands):

         
Balance as of April 1, 2003
  $ 2,121,997  
Additions
    43,710  
Foreign currency translation adjustments
    127,470  
 
   
 
Balance as of December 31, 2003
  $ 2,293,177  
 
   
 

     All of the Company’s acquired intangible assets are subject to amortization over their estimated useful lives. The Company’s intangible assets are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of an intangible may not be recoverable. Intangible assets are comprised of contractual agreements, patents and trademarks, developed technologies and other acquired intangibles. Contractual agreements are being amortized over periods up to ten years. Patents and trademarks and developed technologies are being amortized on a straight-line basis up to ten years. Other acquired intangibles relate to favorable leases and customer lists, and are amortized on a straight-line basis over three to ten years. No residual value is estimated for the intangible assets. During the nine months ended December 31, 2003, there were approximately $7.9 million of additions to intangible assets, primarily related to purchased patents and trademarks and license agreements. The components of other intangible assets as of the dates presented are as follows (in thousands):

                                                     
        December 31, 2003   March 31, 2003
       
 
        Gross           Net   Gross           Net
        carrying   Accumulated   carrying   carrying   Accumulated   carrying
        amount   amortization   amount   amount   amortization   amount
       
 
 
 
 
 
Intangible assets:
                                               
 
Contractual agreements
  $ 73,303     $ (19,000 )   $ 54,303     $ 61,629     $ (10,875 )   $ 50,754  
 
Patents and trademarks
    2,868       (61 )     2,807       161       (34 )     127  
 
Developed technologies
    7,633       (6,833 )     800       7,633       (5,546 )     2,087  
 
Other acquired intangibles
    42,376       (40,567 )     1,809       47,639       (29,694 )     17,945  
 
 
   
     
     
     
     
     
 
   
Total
  $ 126,180     $ (66,461 )   $ 59,719     $ 117,062     $ (46,149 )   $ 70,913  
 
 
   
     
     
     
     
     
 

     The Company expects that its amortization expense for the three-month period ending March 31, 2004, will be approximately $11.4 million. Expected annual amortization expense will be approximately $17.8 million, $8.0 million, $4.8 million and $4.3 million, respectively for each of the next four fiscal years and approximately $13.4 million in total thereafter.

Deferred Income Taxes

     The Company provides for income taxes in accordance with the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of “temporary differences” between the financial statement carrying amounts and the tax basis of existing assets and liabilities by applying the applicable statutory tax rate to such differences.

Accounting for Stock-Based Compensation

     At December 31, 2003, the Company maintained six stock-based employee compensation plans. The Company accounts for its stock option awards to employees under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. No compensation expense is recorded for options granted in which the exercise price equals or exceeds the market price of the underlying stock on the date of grant in accordance with the provisions of APB Opinion No. 25. The following table illustrates the effect on net income (loss) and earnings (loss) per share had the Company applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation,” to stock-based employee compensation.

                                   
      Three months ended   Nine months ended
     
 
      December 31, 2003   December 31, 2002   December 31, 2003   December 31, 2002
     
 
 
 
Net income (loss), as reported
  $ 21,429     $ (6,477 )   $ (368,376 )   $ (102,979 )
Deduct: Fair value compensation cost, net of tax
    (13,777 )     (20,595 )     (42,750 )     (64,734 )
 
   
     
     
     
 
 
Proforma net income (loss)
  $ 7,652     $ (27,072 )   $ (411,126 )   $ (167,713 )
 
   
     
     
     
 
Basic earnings (loss) per share:
                               
 
As reported
  $ 0.04     $ (0.01 )   $ (0.70 )   $ (0.20 )
 
   
     
     
     
 
 
Proforma
  $ 0.01     $ (0.05 )   $ (0.78 )   $ (0.32 )
 
   
     
     
     
 
Diluted earnings (loss) per share:
                               
 
As reported
  $ 0.04     $ (0.01 )   $ (0.70 )   $ (0.20 )
 
   
     
     
     
 
 
Proforma
  $ 0.01     $ (0.05 )   $ (0.78 )   $ (0.32 )
 
   
     
     
     
 

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     The fair value of employee stock options granted and stock purchased under the Company’s employee share purchase plan were estimated at the date of grant using the Black-Scholes model and the following weighted average assumptions:

                                 
    Three months ended   Nine months ended
   
 
    December 31, 2003   December 31, 2002   December 31, 2003   December 31, 2002
   
 
 
 
Volatility
    87 %     77 %     83% - 87 %     77 %
Risk-free interest rate range
    1.0% - 2.6 %     1.1% - 3.8 %     1.0% - 2.6 %     1.1% - 3.8 %
Dividend yield
    0 %     0 %     0 %     0 %
Expected lives range
  0.5 - 3.8 years   0.5 - 3.7 years   0.5 - 3.8 years   0.5 - 3.7 years

     Due to the subjective nature of the assumptions used in the Black-Scholes model, the proforma net income (loss) and earnings (loss) per share disclosures may not reflect the associated fair value of the outstanding options.

     The Company provides restricted stock grants to key employees under its 2002 Interim Incentive Plan. Shares awarded under the plan vest in installments over a five-year period and unvested shares are forfeited upon termination of employment. During fiscal 2003, 1,230,000 shares of restricted stock were granted with a fair value on the date of grant of $5.88 per share. In July 2003, 210,000 shares of restricted stock were granted with a fair value on the date of grant of $10.34 per share. The unearned compensation associated with the restricted stock grants was $7.0 million as of December 31, 2003. This amount is included in shareholders’ equity. Grants of restricted stock are recorded as compensation expense over the vesting period at the fair market value of the stock at the date of grant. During the three and nine months ended December 31, 2003 compensation expense related to the restricted stock grants amounted to approximately $0.5 million and $1.3 million, respectively.

NOTE C – INVENTORIES

Inventories

     Inventories are stated at the lower of cost (on a first-in, first-out basis) or market value. Cost is comprised of direct materials, labor and overhead. The components of inventories, as of the dates presented were as follows (in thousands):

                 
    December 31, 2003   March 31, 2003
   
 
Raw materials
  $ 703,021     $ 692,881  
Work-in-process
    235,171       231,738  
Finished goods
    266,206       216,940  
 
   
     
 
 
  $ 1,204,398     $ 1,141,559  
 
   
     
 

NOTE D – EARNINGS (LOSS) PER SHARE

     Basic earnings (loss) per share is computed using the weighted average number of ordinary shares outstanding during the applicable periods.

     Diluted earnings (loss) per share is computed using the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the applicable periods. Ordinary share equivalents include ordinary shares issuable upon the exercise of stock options, and are computed using the treasury stock method, as well as shares issuable upon conversion of debt instruments.

     Earnings (loss) per share data were computed as follows (in thousands, except per share amounts):

                                   
      Three months ended   Nine months ended
     
 
      December 31, 2003   December 31, 2002   December 31, 2003   December 31, 2002
     
 
 
 
Basic earnings (loss) per share:
                               
 
Net income (loss)
  $ 21,429     $ (6,477 )   $ (368,376 )   $ (102,979 )
 
 
   
     
     
     
 
Shares used in computation:
                               
 
Weighted average ordinary shares outstanding
    527,321       517,810       523,983       516,508  
 
 
   
     
     
     
 
Basic earnings (loss) per share
  $ 0.04     $ (0.01 )   $ (0.70 )   $ (0.20 )
 
 
   
     
     
     
 
Diluted earnings (loss) per share:
                               
 
Net income (loss)
  $ 21,429     $ (6,477 )   $ (368,376 )   $ (102,979 )
 
 
   
     
     
     
 
Shares used in computation:
                               
 
Weighted average common equivalent shares from stock options (1)
    34,117                    
 
 
   
     
     
     
 
 
Weighted average ordinary shares and common equivalent shares outstanding
    561,438       517,810       523,983       516,508  
 
 
   
     
     
     
 
Diluted earnings (loss) per share
  $ 0.04     $ (0.01 )   $ (0.70 )   $ (0.20 )
 
 
   
     
     
     
 

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(1)   Due to the Company’s reported net losses, the ordinary share equivalents from stock options and other equity instruments to purchase 8,630,765, 13,022,790 and 8,770,038 shares outstanding were excluded from the computation of diluted earnings per share during the three months ended December 31, 2002 and the nine months ended December 31, 2003 and December 31, 2002, respectively, because the inclusion would be anti-dilutive for the periods.
 
    Additionally, ordinary share equivalents from the zero coupon convertible junior subordinated notes of 19,047,619 shares outstanding were anti-dilutive for the nine months ended December 31, 2003, and therefore not assumed to be converted for diluted earnings per share computation. Such shares were included as common stock equivalents during the quarter ended December 31, 2003. The ordinary share equivalents from the 1% convertible subordinated notes due August 2010 are excluded from the computation of diluted earnings per share. The Company has the positive intent and ability to settle the face value of the 1% convertible subordinated notes in cash and to settle any conversion spread (excess of conversion value over face value) in stock. Accordingly, the assumed shares required to settle the conversion spread are included in diluted earnings per share (such shares were zero for the quarter ended December 31, 2003 based on the average fair value of the Company’s common stock during the period).
 
    Also, the ordinary share equivalents from stock options to purchase 13,174,166, 28,695,713, 19,614,200 and 28,481,252 shares outstanding during the three months ended December 31, 2003 and December 31, 2002 and the nine months ended December 31, 2003 and December 31, 2002, respectively, were excluded from the computation of diluted earnings per share because the exercise price of these options was greater than the average market price of the Company’s ordinary shares during the respective periods.

NOTE E – OTHER COMPREHENSIVE INCOME (LOSS)

     The following table summarizes the components of other comprehensive income (loss) (in thousands):

                                   
      Three months ended   Nine months ended
     
 
      December 31, 2003   December 31, 2002   December 31, 2003   December 31, 2002
     
 
 
 
Net income (loss)
  $ 21,429     $ (6,477 )   $ (368,376 )   $ (102,979 )
Other comprehensive income (loss):
                               
 
Foreign currency translation adjustment, net of tax
    58,618       20,883       143,841       118,449  
 
Unrealized holding gain (loss) on investments and derivatives, net of tax
    (2,355 )     754       4,993       (310 )
 
   
     
     
     
 
Comprehensive income (loss)
  $ 77,692     $ 15,160     $ (219,542 )   $ 15,160  
 
   
     
     
     
 

NOTE F – LONG-TERM DEBT

     In May 2003, the Company issued $400.0 million aggregate principal amount of its 6.5% senior subordinated notes due May 2013. In June 2003, the Company used $156.6 million of the net proceeds from this issuance to redeem all of its outstanding 8.75% senior subordinated notes due October 2007, of which $150.0 million aggregate principal amount was outstanding. In connection with the redemption, the Company incurred a loss during the first quarter of fiscal 2004 of approximately $8.7 million associated with the early extinguishment of the notes.

     In August 2003, the Company issued $500.0 million aggregate principal amount of its 1% convertible subordinated notes due August 2010. The notes are convertible at any time prior to maturity into ordinary shares of the Company’s stock at a conversion price of $15.525 (subject to certain adjustments). In August 2003, the Company used a portion of the net proceeds from this issuance and other cash sources to repurchase $492.3 million aggregate principal amount, or 98.5%, of its outstanding 9.875% senior subordinated notes due July 2010. In connection with the repurchase, the Company incurred a loss during the second quarter of fiscal 2004 of approximately $95.2 million associated with the early extinguishment of the notes.

NOTE G — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     All derivative instruments are recorded on the balance sheet at fair value. If the derivative is designated as a cash flow hedge, the effective portion of changes in the fair value of the derivative is recorded in shareholders’ equity as a separate component of accumulated other comprehensive income (loss) and is recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are immediately recognized in earnings. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings in the current period.

     The Company is exposed to foreign currency exchange rate risk inherent in forecasted sales, cost of sales and assets and liabilities denominated in non-functional currencies. The Company has established currency risk management programs to protect against reductions in value and volatility of future cash flows caused by changes in foreign currency exchange rates. The Company enters into short-term foreign currency forward contracts to hedge only those currency exposures associated with certain assets and liabilities, mainly accounts receivable and accounts payable, and cash flows denominated in non-functional currencies.

     As of December 31, 2003, the fair value of these short-term foreign currency forward contracts was recorded as an asset amounting to $3.7 million. At the same date, the Company had recorded in other comprehensive income (loss) deferred gains of approximately $3.8 million relating to the Company’s foreign currency forward contracts. These gains are expected to be recognized in earnings over the next twelve months. The gains and losses recognized in earnings due to hedge ineffectiveness were immaterial for all periods presented.

NOTE H – TRADE RECEIVABLES SECURITIZATION

     The Company continuously sells a designated pool of trade receivables to a third party qualified special purpose entity, which in turn sells an undivided ownership interest to a conduit, administered by an unaffiliated financial institution. In addition to this financial institution, the Company participates in the securitization agreement as an investor in the conduit. The securitization agreement allows the operating subsidiaries participating in the securitization to receive a cash payment for sold receivables, less a deferred purchase price receivable. The Company’s share of the total investment varies depending on certain criteria, mainly the collection performance on the sold receivables. The agreement, which expires in March 2004, is subject to annual renewal.

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Currently, the unaffiliated financial institution’s maximum investment limit is $250.0 million. The Company has sold $460.4 million of its accounts receivable as of December 31, 2003, which represents the face amount of the total outstanding trade receivables on all designated customer accounts at that date. The Company received net cash proceeds of $249.1 million from the unaffiliated financial institution for the sale of these receivables. The Company has a recourse obligation that is limited to the deferred purchase price receivable, which approximates 5% of the total sold receivables, and its own investment participation, the total of which was $216.2 million as of December 31, 2003.

     The Company continues to service, administer and collect the receivables on behalf of the special purpose entity and receives a servicing fee of 1.0% of serviced receivables per annum. The Company pays facility and commitment fees of up to 0.24% for unused amounts and program fees of up to 0.34% of outstanding amounts.

     The accounts receivable balances that were sold were removed from the consolidated balance sheet and are reflected as cash provided by operating activities in the consolidated statement of cash flows.

NOTE I – RESTRUCTURING AND OTHER CHARGES

Fiscal 2004

     The Company accounts for costs associated with restructuring activities initiated after December 31, 2002 in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue (“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred.

     As a result of strategic decisions to optimize the operating efficiencies provided by the Company’s global presence and to reduce its workforce and manufacturing capacity, the Company approved plans during the first nine months of fiscal 2004 to exit certain activities and involuntarily terminate employees. Accordingly, the Company recognized restructuring charges of approximately $458.4 million during the nine months ended December 31, 2003, related to the closure and consolidation of, and impairment of certain long-lived assets at various manufacturing facilities. As further discussed below, $308.8 million, $42.4 million and $50.6 million of the charges were classified as a component of cost of sales in the first, second and third quarters of fiscal 2004, respectively.

     Restructuring charges recorded during the nine months ended December 31, 2003 by reportable geographic regions were as follows: Americas, $163.1 million; Asia, $111.3 million; and Europe, $184.0 million.

     The Company currently anticipates that the facility closures and activities to which all of these charges relate will be substantially completed within one year of the commitment dates of the respective exit plans, except for certain long-term contractual obligations.

     The components of the restructuring charges recorded during the first, second and third quarters of fiscal 2004 were as follows (in thousands):

                                             
        First Quarter   Second Quarter   Third Quarter   Total        
        Charges   Charges   Charges   Charges        
       
 
 
 
       
Restructuring charges:
                                       
 
Severance
  $ 11,891     $ 20,075     $ 33,104     $ 65,070     cash
 
Long-lived asset impairment
    290,572       19,521       10,281       320,374     non-cash
 
Exit costs
    24,645       20,656       27,634       72,935     cash/non-cash
 
   
     
     
     
         
   
Total restructuring charges
  $ 327,108     $ 60,252     $ 71,019     $ 458,379          
 
   
     
     
     
         

     During the nine months ended December 31, 2003, the Company recorded approximately $65.1 million of employee termination costs associated with the involuntary terminations of approximately 3,600 employees in connection with the various facility closures and consolidations. As of December 31, 2003, approximately 2,800 employees had been terminated, and the remaining 800 employees had been notified that they are to be terminated upon completion of the various facility closures and consolidations. Approximately $8.2 million, $13.7 million and $29.4 million of the charges were classified as a component of cost of sales in the first, second and third quarters of fiscal 2004.

     During the nine months ended December 31, 2003, the Company also recorded approximately $320.4 million for the write-down of property, plant and equipment from their carrying value of $395.4 million. Approximately $282.1 million, $14.7 million and $10.0 million of this amount were classified as a component of cost of sales during the first, second and third quarters of fiscal 2004, respectively. Certain assets will be held for use and remain in service until their anticipated disposal dates. For assets being held for use, impairment is measured as the amount by which the carrying amount exceeds the fair value of the asset. This calculation is measured at the asset group level which is the lowest level for which there are identifiable cash flows. The fair value of assets held for use was determined based on projected discounted cash flows of the asset plus salvage value. Certain other assets will be held for disposal as these assets are no longer required in operations. Assets held for disposal are no longer being depreciated. For assets being held for disposal, an impairment loss is recognized if the carrying amount of the asset exceeds its fair value less cost to sell.

     The restructuring charges recorded during the nine months ended December 31, 2003, also included approximately $72.9 million for other exit costs. Approximately $18.5 million, $14.0 million and $11.2 million of this amount was classified as a component of cost of sales in the first, second and third quarters of fiscal 2004, respectively. Other exit costs included contractual obligations totaling $29.0 million, which were incurred directly as a result of the various exit plans. The contractual obligations consisted of facility lease terminations amounting to $17.9 million, equipment lease terminations amounting to $7.3 million and payments to suppliers and third parties to terminate contractual agreements amounting to $3.8 million. The Company expects to make payments associated with its contractual obligations with respect to facility and equipment leases through the end of fiscal 2024 and with respect to the other contractual obligations with suppliers and third parties through the end of fiscal 2004. Other exit costs also included charges of $17.6 million relating to asset impairments primarily resulting from customer contracts that were terminated by the Company as a result of various facility closures. The Company expects to dispose of the impaired assets, primarily through scrapping and write-offs, by the end of fiscal 2004. Other exit costs also included $2.8 million primarily related to facility refurbishment and abandonment costs related to certain building repair work necessary to prepare the exited facilities for sale or to return the facilities to their respective landlords.

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The remaining $23.5 million is associated with legal and consulting costs incurred as a direct result of the facility closures. The legal costs primarily relate to a settlement reached in November 2003 in the lawsuit with Beckman Coulter, Inc related to a contract dispute involving a manufacturing relationship between the companies. Pursuant to the terms of the settlement agreement, Flextronics agreed to a $23.0 million cash payment to Beckman Coulter to resolve the matter, and Beckman Coulter agreed to dismiss all pending claims against the Company and release the Company from any future claims relating to this matter.

     The Company will be required to take additional charges in the future as a result of its restructuring activities. Such charges will be recognized when the liability is incurred.

     The following table summarizes the activity related to restructuring charges recorded during the first, second and third quarters of fiscal 2004:

                                   
              Long-lived                
              Asset   Other Exit        
      Severance   Impairment   Costs   Total
     
 
 
 
Activities during the quarter:
                               
 
Provision
  $ 11,891     $ 290,572     $ 24,645     $ 327,108  
 
Cash payments
    (1,372 )           (3,022 )     (4,394 )
 
Non-cash write-downs
          (290,572 )     (7,899 )     (298,471 )
 
 
   
     
     
     
 
Balance as of June 30, 2003
    10,519             13,724       24,243  
Activities during the quarter:
                               
 
Provision
    20,075       19,521       20,656       60,252  
 
Cash payments
    (14,938 )           (9,073 )     (24,011 )
 
Non-cash write-downs
          (19,521 )     (4,242 )     (23,763 )
 
 
   
     
     
     
 
Balance as of September 30, 2003
    15,656             21,065       36,721  
Activities during the quarter:
                               
 
Provision
    33,104       10,281       27,634       71,019  
 
Cash payments
    (29,732 )           (23,321 )     (53,053 )
 
Non-cash write-downs
          (10,281 )     (5,429 )     (15,710 )
 
 
   
     
     
     
 
Balance as of December 31, 2003
    19,028             19,949       38,977  
Less: current portion
    19,028             14,205       33,233  
 
 
   
     
     
     
 
Accrued restructuring costs, net of current portion (classified as other long-term liabilities)
  $     $     $ 5,744     $ 5,744  
 
 
   
     
     
     
 

Fiscal 2003

     The Company accounted for costs associated with restructuring activities initiated prior to December 31, 2002 in accordance with EITF No. 94-3.

     The Company recognized pre-tax restructuring and other charges of approximately $304.4 million during fiscal 2003, of which $297.0 million related to the closure and consolidation of various manufacturing facilities and $7.4 million related to the impairment of investments in certain technology companies. Approximately $179.4 million and $86.9 million of the charges relating to facility closures were classified as a component of cost of sales in the first and third quarters of fiscal 2003, respectively.

     Net restructuring and other charges recorded during fiscal 2003 by reportable geographic regions were as follows: Americas, $174.5 million; Asia, $1.8 million; and Europe, $128.1 million.

     The components of the net restructuring and other charges recorded during the first and third quarters of fiscal 2003 were as follows (in thousands):

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        First Quarter   Third Quarter   Total        
        Charges   Charges   Charges        
       
 
 
       
Restructuring charges:
                               
 
Severance
  $ 76,901     $ 41,574     $ 118,475     cash
 
Long-lived asset impairment
    56,279       14,285       70,564     non-cash
 
Exit costs
    67,187       40,729       107,916     cash/non-cash
 
   
     
     
         
   
Total restructuring charges
    200,367       96,588       296,955          
Other charges
    7,456             7,456     non-cash
 
   
     
     
         
   
Net restructuring and other charges before income tax benefit
    207,823       96,588       304,411          
Income tax benefit
    (49,826 )     (29,460 )     (79,286 )        
 
   
     
     
         
   
Net restructuring and other charges
  $ 157,997     $ 67,128     $ 225,125          
 
   
     
     
         

     The following table summarizes the activity of the restructuring charges recorded during fiscal 2003 and prior years.

                                   
              Long-lived                
              Asset   Other Exit        
      Severance   Impairment   Costs   Total
     
 
 
 
Balance as of March 31, 2003
  $ 49,791     $     $ 69,804     $ 119,595  
Activities during the quarter:
                               
 
Cash payments
    (25,344 )           (19,118 )     (44,462 )
 
   
     
     
     
 
Balance as of June 30, 2003
    24,447             50,686       75,133  
Activities during the quarter:
                               
 
Cash payments
    (12,862 )           (15,147 )     (28,009 )
 
   
     
     
     
 
Balance as of September 30, 2003
    11,585             35,539       47,124  
Activities during the quarter:
                               
 
Cash payments
    (3,788 )           (11,229 )     (15,017 )
 
   
     
     
     
 
Balance as of December 31, 2003
    7,797             24,310       32,107  
Less: current portion
    6,197             15,527       21,724  
 
   
     
     
     
 
Accrued restructuring charges, net of current portion (classified as other long-term liabilities)
  $ 1,600     $     $ 8,783     $ 10,383  
 
   
     
     
     
 

NOTE J – GEOGRAPHIC REPORTING

     The Company operates and is managed internally by two operating segments that have been combined for operating segment disclosures, as they do not meet the quantitative thresholds for separate disclosure established in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer of the Company.

     Geographic information as of and for the periods presented is as follows (in thousands):

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      Three months ended   Nine months ended
     
 
      December 31, 2003   December 31, 2002   December 31, 2003   December 31, 2002
     
 
 
 
Net sales:
                               
 
Asia
  $ 1,949,354     $ 1,573,631     $ 5,103,975     $ 3,789,977  
 
Americas
    555,386       855,074       1,523,198       2,684,522  
 
Europe
    1,775,737       1,669,618       4,509,581       4,488,226  
 
Intercompany eliminations
    (128,133 )     (246,829 )     (374,491 )     (643,591 )
 
 
   
     
     
     
 
 
  $ 4,152,344     $ 3,851,494     $ 10,762,263     $ 10,319,134  
 
 
   
     
     
     
 
                                   
      Three months ended   Nine months ended
     
 
      December 31, 2003   December 31, 2002   December 31, 2003   December 31, 2002
     
 
 
 
Income (loss) before income taxes:
                               
 
Asia
  $ 73,175     $ 56,347     $ 74,162     $ 138,751  
 
Americas
    (16,550 )     (55,484 )     (176,065 )     (174,273 )
 
Europe
    (4,984 )     (11,264 )     (126,579 )     (73,191 )
 
Corporate adjustments and intercompany eliminations
    (27,831 )     (18,802 )     (180,825 )     (59,621 )
 
 
   
     
     
     
 
 
  $ 23,810     $ (29,203 )   $ (409,307 )   $ (168,334 )
 
 
   
     
     
     
 
                   
      December 31, 2003   March 31, 2003
     
 
Property, plant and equipment, net
               
 
Asia
  $ 674,640     $ 758,331  
 
Americas
    422,529       544,348  
 
Europe
    544,554       663,050  
 
   
     
 
 
  $ 1,641,723     $ 1,965,729  
 
   
     
 

     Revenues are generally attributable to the country in which the product is manufactured.

     For purposes of the preceding tables, “Asia” includes China, Japan, India, Malaysia, Mauritius, Singapore, Taiwan and Thailand, “Americas” includes Brazil, Canada, Mexico and the United States, “Europe” includes Austria, Denmark, Finland, France, Germany, Hungary, Ireland, Israel, Italy, Netherlands, Norway, Poland, Portugal, South Africa , Sweden, Switzerland and the United Kingdom.

NOTE K – CONSOLIDATION OF VARIABLE INTEREST ENTITIES

     Effective April 1, 2003, the Company adopted Financial Accounting Standard Board’s Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities”, which expands upon and strengthens existing accounting guidance concerning when a company should include in its financial statements the assets, liabilities and activities of another entity. Prior to the issuance of FIN 46, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 now requires a variable interest entity, as defined in FIN 46, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest.

     The Company has variable interests in real estate assets subject to operating lease arrangements located in Mexico and Texas. The principal impact of the adoption of FIN 46 was the recording of additions to land and building and long-term debt in the amount of $89.9 million at December 31, 2003. The cumulative effect of adopting FIN 46 was not material to the Company’s financial position, results of operations or cash flows.

NOTE L – NEW ACCOUNTING STANDARDS

Derivative Instruments and Hedging Activities

     In April 2003, the FASB issued SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and the adoption did not have a material impact on the Company’s financial position, results of operations or cash flows.

Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 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. The adoption of SFAS No. 150 did not have a material impact on the Company’s financial position, results of operations or cash flows.

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Revenue Recognition

     In December 2002, the EITF reached a consensus on EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence of their fair values to separately account for some or all of the deliverables (that is, there are separate units of accounting). In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. This Issue addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF 00-21 does not change otherwise applicable revenue recognition criteria. The guidance in this EITF is effective for revenue arrangements entered into after March 31, 2004. The issuance of EITF 00-21 did not have a material impact on the Company’s financial position, results of operations or cash flows.

     In December 2003, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition.” SAB 104 supercedes SAB 101, “Revenue Recognition in Financial Statements.” The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21. Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (“the FAQ”) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The issuance of SAB 104 did not have a material impact on the Company’s financial position, results of operations or cash flows.

NOTE M – SUBSEQUENT EVENTS

     In January 2004, the Company announced that it is in discussions with Nortel Networks, regarding the potential divestiture of nearly all of Nortel’s optical, wireless and enterprise manufacturing operations and related supply chain activities. It is currently anticipated that Nortel’s system house activities in Montreal and Calgary (Canada); Campinas (Brazil); Monkstownn (Northern Ireland) and Chateaudun (France) would be transferred to the Company. The Company would assume all the systems integration activities, including the final assembly, testing and repair operations along with related activities, including the management of the supply chain and related suppliers for these locations. The Company anticipates that it would make cash payments to Nortel in excess of $500.0 million over a nine-month period to acquire certain inventory and equipment, and an unspecified amount for certain intangible assets. In connection with the arrangement to acquire certain assets from Nortel, the Company expects to enter into a multi-year supply agreement for the production of Nortel’s products. The completion of this transaction is subject to the ability of the parties to successfully negotiate and then consummate a transaction on mutually agreeable terms and involves risks and uncertainties including fluctuations in demand for Nortel’s products, the Company’s ability to meet Nortel’s needs on a cost-effective basis and the other risk described below in “Management’s Discussion and Analysis of Financial Condition – Risk Factors.”

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words “expects,” “anticipates,” “believes,” “intends,” “plans” and similar expressions identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed below in “Certain Factors Affecting Operating Results.” Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements.

CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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     We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. For further discussion of our significant accounting policies, refer to Note 2, “Summary of Accounting Policies,” of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003. See also the Notes to Condensed Consolidated Financial Statements in this report on Form 10-Q.

Long-Lived Assets

     We review property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its fair value. Recoverability of property and equipment is measured by comparing its carrying amount to the projected discounted cash flows the property and equipment are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property and equipment exceeds its fair value.

     We evaluate goodwill and other intangibles for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable from its estimated future cash flows. Recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second test is performed to measure the amount of impairment loss. If, at the time of our annual evaluation, the net asset value (or “book value”) of any reporting unit is greater than its fair value, some or all of the related goodwill would likely be considered to be impaired. To date, we have not recognized any impairment of our goodwill and other intangible assets in connection with our impairment evaluations. However, we have recorded impairment charges in connection with our restructuring activities.

Allowance for Doubtful Accounts

     We perform ongoing credit evaluations of our customers’ financial condition and make provisions for doubtful accounts based on the outcome of our credit evaluations. We evaluate the collectibility of our accounts receivable based on specific customer circumstances, current economic trends, historical experience with collections and the age of past due receivables. Unanticipated changes in the liquidity or financial position of our customers may require additional provisions for doubtful accounts.

Inventory Valuation

     Our inventories are stated at the lower of cost (on a first-in, first-out basis) or market value. Our industry is characterized by rapid technological change, short-term customer commitments and rapid changes in demand. We make provisions for estimated excess and obsolete inventory based on our regular reviews of inventory quantities on hand and the latest forecasts of product demand and production requirements from our customers. If actual market conditions or our customers’ product demands are less favorable than those projected, additional provisions may be required. In addition, unanticipated changes in liquidity or financial position of our customers and/or changes in economic conditions may require additional provisions for inventories due to our customers’ inability to fulfill their contractual obligations with regard to inventory being held on their behalf.

Restructuring Charges

     We recognized restructuring charges during the first, second and third quarters of fiscal 2004 and in fiscal 2003, fiscal 2002 and fiscal 2001, related to our plans to close or consolidate duplicate manufacturing and administrative facilities. In connection with these activities, we recorded restructuring charges for employee termination costs, long-lived asset impairment and other exit-related costs.

     The recognition of the restructuring charges required that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned exit activity. If our actual results in exiting these facilities differ from our estimates and assumptions, we may be required to revise the estimates of future liabilities, requiring the recording of additional restructuring charges or the reduction of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with developed exit plans.

     Refer to Note I, “Restructuring and Other Charges,” of the Notes to Condensed Consolidated Financial Statements for further discussion of our restructuring activities.

Deferred Income Taxes

     Our deferred income tax assets represent temporary differences between the financial statement carrying amount and the tax basis of existing assets and liabilities that will result in deductible amounts in future years, including net operating loss carryforwards. Based on estimates, the carrying value of our net deferred tax assets assumes that it is more likely than not that we will be able to generate sufficient future taxable income in certain tax jurisdictions. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. If these estimates and related assumptions change in the future, we may be required to increase our valuation allowance against the deferred tax assets resulting in additional income tax expense.

ACQUISITIONS AND STRATEGIC CUSTOMER TRANSACTIONS

     We have actively pursued business acquisitions and strategic transactions with customers to expand our global reach, manufacturing capacity and service offerings and to diversify and strengthen customer relationships. Accordingly, we made a number of acquisitions and strategic customer transactions, which were accounted for using the purchase method. Our consolidated financial statements include the operating results of each business from the date of acquisition. Proforma results of operations have not been presented because the effects of these acquisitions were not material on either an individual or an aggregate basis.

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, certain statements of operations data expressed as a percentage of net sales.

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      Three months ended   Nine months ended
     
 
      December 31, 2003   December 31, 2002   December 31, 2003   December 31, 2002
     
 
 
 
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales
    94.2 %     94.5 %     94.5 %     94.5 %
Restructuring and other charges
    1.3 %     2.2 %     3.7 %     2.6 %
 
   
     
     
     
 
 
Gross margin
    4.5 %     3.3 %     1.8 %     2.9 %
Selling, general and administrative expenses
    2.9 %     3.0 %     3.2 %     3.3 %
Intangibles amortization
    0.2 %     0.2 %     0.3 %     0.1 %
Restructuring and other charges
    0.5 %     0.3 %     0.5 %     0.4 %
Interest and other expense, net
    0.3 %     0.6 %     0.6 %     0.7 %
Loss on early extinguishment of debt
    0.0 %     0.0 %     1.0 %     0.0 %
 
   
     
     
     
 
 
Income (loss) before income taxes
    0.6 %     (0.8 )%     (3.8 )%     (1.6 )%
Provision for (benefit from) income taxes
    0.1 %     (0.6 )%     (0.4 )%     (0.6 )%
 
   
     
     
     
 
 
Net income (loss)
    0.5 %     (0.2 )%     (3.4 )%     (1.0 )%
 
   
     
     
     
 

Net Sales

     Net sales for the third quarter of fiscal 2004 increased 8% to $4.2 billion from $3.9 billion in the third quarter of fiscal 2003. Net sales for the first nine months of fiscal 2004 increased 4% to $10.8 billion from $10.3 billion for the same period in fiscal 2003. The increases in net sales in fiscal 2004 were primarily attributable to expansion of existing customer programs in the handheld devices and computers and office automation end markets. The increases in net sales were also attributable to new customer programs in the industrial and medical market segment. Also contributing to the increases were revenues associated with our acquisitions and strategic customer transactions completed in fiscal 2003, primarily our strategic transaction with Casio Computer Co., Ltd. The increases were partially offset by weakness in certain areas of customer demand, namely in the consumer and communications infrastructure markets.

Gross Profit

     Gross profit varies from period to period and is affected by a number of factors, including product mix, component costs and availability, product life cycles, unit volumes, startup, expansion and consolidation of manufacturing facilities, capacity utilization, pricing, competition and new product introductions.

     Gross margin for the third quarter of fiscal 2004 increased to 4.5% from 3.3% in the third quarter of fiscal 2003. The increase in gross margin for the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003 was primarily due to lower restructuring and other charges incurred of $50.6 million compared to $86.9 million in the year ago quarter. Additionally, improved fixed cost absorption driven by increased volumes and our continued restructuring activities contributed to the increase in gross margin. The improvement was offset by continued downward industry pricing pressures as a consequence of the excess capacity resulting from the continued economic downturn.

     Gross margin for the nine months ended December 31, 2003 decreased to 1.8% from 2.9% in the same period of fiscal 2003. For the nine months ended December 31, 2003 and December 31, 2002, restructuring and other charges of $401.8 million and $266.2 million, during the nine months ended December 31, 2003 and December 31, 2002, respectively. The increase in restructuring and other charges combined with continued industry pricing pressures contributed to the decrease in gross margin during the nine months ended December 31, 2003. This was offset by our improved fixed cost absorption driven by increased volumes, as well as efficiencies gained from our continued restructuring activities.

     Increased mix of products that have relatively high material costs as a percentage of total unit costs has historically been a factor that has adversely affected our gross margins. We believe that this and other factors may adversely affect our gross margins, but we do not expect that this will have a material effect on our income from operations.

Restructuring and Other Charges

     We recognized restructuring charges of approximately $458.4 million during the nine months ended December 31, 2003, which was related to the closure and consolidation of, and impairment of certain long-lived assets at various manufacturing facilities. Of this amount, approximately $308.8 million, $42.4 million and $50.6 million of the charges were classified as a component of cost of sales in the first, second and third quarters of fiscal 2004.

     We recognized restructuring and other charges of approximately $304.4 million during the nine months ended December 31, 2002, of which $297.0 million related to the closure and consolidation of various manufacturing facilities and $7.4 million for the impairment of investments in certain technology companies. Of this amount, approximately $266.2 million of the charges were classified as a component of cost of sales.

     We believe that the potential cost of goods savings achieved through lower depreciation and reduced employee expenses will be offset in part by reduced revenues at the affected facilities. In addition, we may incur further restructuring charges in the future, as we continue to reconfigure our operations in order to address excess capacity concerns, which may materially affect our results of operations in those future periods.

     Refer to Note I, “Restructuring and Other Charges,” of the Notes to Condensed Consolidated Financial Statements for further discussion of our restructuring activities.

Selling, General and Administrative Expenses

     Selling, general and administrative expenses, or SG&A, for the third quarter of fiscal 2004 increased slightly to $121.6 million compared to $115.5

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million in the third quarter of fiscal 2003. SG&A for the nine months ended December 31, 2003 increased to $347.0 million compared to $340.1 million in the same period a year ago. The absolute dollar increases in SG&A were primarily driven by increased revenues in the current fiscal year. The decreases in SG&A as a percentage of net sales in fiscal 2004 were also a result of increased revenues; and reflect savings generated by our focus on controlling discretionary spending combined with efficiencies gained from our restructuring activities. The reductions were partially offset by increased spending associated with the expansion of our ODM service offering.

Intangibles Amortization

     Intangibles amortization for the third quarter of fiscal 2004 increased to $9.6 million from $6.1 million in the third quarter of fiscal 2003. For the first nine months of fiscal 2004, intangibles amortization was $26.9 million compared to $15.3 million for the comparable period of fiscal 2003. The increases in intangibles amortization in fiscal 2004 were attributable to intangible assets acquired through various business acquisitions completed in the second half of fiscal 2003, in particular due to the completion of our assessment of the value of intangible assets acquired from Telia Companies and Xerox Corporation.

Interest and Other Expense, Net

     Interest and other expense, net was $13.5 million for the third quarter of fiscal 2004 compared to $23.9 million for third quarter of fiscal 2003. Interest and other expense, net for nine months ended December 31, 2003 was $60.1 million compared to $70.8 million in the same period a year ago. The decreases in net expense were primarily driven by reduced interest expense due to the redemption of $150.0 million aggregate principal amount of our 8.75% notes in June 2003 and the repurchase of $492.3 million aggregate principal amount of our 9.875% notes in August 2003. In the first nine months of fiscal 2004, we issued $400.0 million aggregate principal amount of 6.5% senior subordinated notes due May 2013 and $500.0 million aggregate principal amount of 1% convertible subordinated notes due August 2010.

Loss on Early Extinguishment of Debt

     We recognized a loss on early extinguishment of debt of $8.7 million and $95.2 million during the first and second quarters of fiscal 2004. In June 2003, we used a portion of the net proceeds from our issuance of $400.0 million of 6.5% senior subordinated notes in May 2003 to redeem all of our $150.0 million aggregate principal amount of 8.75% senior subordinated notes due October 2007. In the second quarter of fiscal 2004, we used a portion of the net proceeds from our issuance in August 2003 of $500.0 million aggregate principal amount of 1% convertible subordinated notes due May 2013 and other cash sources to repurchase $492.3 million aggregate principal amount, or 98.5%, of our 9.875% senior subordinated notes due July 2010.

Provision for Income Taxes

     Certain of our subsidiaries have, at various times, been granted tax relief in their respective countries, resulting in lower income taxes than would otherwise be the case under ordinary tax rates.

     Our consolidated effective tax rate was a provision of 10% for the third quarter of fiscal 2004 and a benefit of 78% for the same quarter of fiscal 2003. For the nine months ended December 31, 2003, our consolidated effective tax rate was a benefit of 10% compared to a benefit of 39% for the comparable period of 2003. The consolidated effective tax rate for a particular period varies depending on the amount of earnings from different jurisdictions, operating loss carryforwards, income tax credits, changes in previously established valuation allowances for deferred tax assets based upon management’s current analysis of the realizability of these deferred tax assets, as well as certain tax holidays and incentives granted to us and our subsidiaries in China, Hungary and Malaysia.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 2003, we had cash and cash equivalents totaling $830.2 million and total bank and other debts totaling $1.5 billion. Also, we have a revolving credit facility of $880.0 million, which is subject to compliance with certain financial covenants, under which we had no borrowings as of December 31, 2003.

     Cash provided by operating activities was $539.1 million and $754.6 million during the nine months ended December 31, 2003 and December 31, 2002, respectively. The decrease in cash provided by operating activities in the current fiscal year was primarily due to a net loss of $368.4 million recorded during the first nine months of fiscal 2004 compared to a net loss of $103.0 million for the year ago period. Also, increases in current assets, including accounts receivable, contributed to the decline in cash generated from operating activities.

     Cash used in investing activities was $319.2 million and $796.0 million for the first nine months of fiscal 2004 and fiscal 2003, respectively. Cash used in investing activities during the nine months ended December 31, 2003 primarily related to (i) net capital expenditures of $95.7 million to purchase manufacturing equipment and for continued expansion of manufacturing facilities in certain lower-cost high-volume centers, primarily in Asia, (ii) net payments of $194.1 million for investments and notes receivable, including our participation in our trade receivables securitization program and (iii) payments of $29.3 million for acquisitions of businesses. Cash used in investing activities for the nine months ended December 31, 2002 consisted of (i) net capital expenditures of $156.7 million to purchase equipment and for continued expansion of various manufacturing facilities, (ii) payment of $489.9 million for acquisitions of businesses and for purchases of certain OEM assets, primarily NatSteel Broadway and (iii) payment of $142.3 million primarily related to our participation in our trade receivables securitization program.

     Our financing activities provided net cash of $188.1 million in the first nine months of fiscal 2004, compared to net cash used in financing activities of $97.7 million for the same period in fiscal 2003. Cash provided by financing activities during the nine months ended December 31, 2003 primarily related to our issuances of: (i) 6.5% senior subordinated notes due May 2013 in May 2003, which generated net proceeds of $393.7 million and (ii) 1% convertible subordinated notes due August 2010 in August 2003, which generated net proceeds of $484.7 million. In June 2003, we used $156.6 million to redeem our 8.75% senior subordinated notes due October 2007. Also, in August 2003, we repurchased $492.3 million aggregate principal amount of our 9.875% senior subordinated notes due July 2010. In connection with the early extinguishments of these notes, we incurred a loss of approximately $103.9 million, of which $91.6 million were cash charges paid in the first six months of fiscal 2004. Additionally, proceeds from the sale of ordinary shares under our employee stock plans generated approximately $45.8 million of cash. Cash used in financing activities during the nine months ended December 31, 2002 related to repayments of debt and capital lease obligations of approximately $653.4 million, offset by additional borrowings of $534.9 million and $20.8 million in proceeds from ordinary shares under our stock plans.

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     Our working capital requirements and capital expenditures could continue to increase in order to support future expansions of our operations. It is possible that future acquisitions may be significant and may require the payment of cash, including our recent announcement regarding a proposed transaction with Nortel Networks as further discussed below. Future liquidity needs will also depend on fluctuations in levels of inventory, accounts receivable and accounts payable, the timing of capital expenditures by us for new equipment, the extent to which we utilize operating leases for the new facilities and equipment, the extent of cash charges associated with future restructuring activities and levels of shipments and changes in volumes of customer orders.

     In January 2004, we announced that we are in discussions with Nortel Networks, regarding the potential divestiture of nearly all of Nortel’s optical, wireless and enterprise manufacturing operations and related supply chain activities. It is currently anticipated that Nortel’s system house activities in Montreal and Calgary (Canada); Campinas (Brazil); Monkstownn (Northern Ireland) and Chateaudun (France) would be transferred to Flextronics. We would assume all the systems integration activities, including the final assembly, testing and repair operations along with related activities, including the management of the supply chain and related suppliers for these locations. We anticipate making cash payments to Nortel in excess of $500.0 million over a nine-month period for to acquire certain inventory and equipment, and an unspecified amount for intangible assets. In connection with the arrangement to acquire certain assets from Nortel, we expect to enter into a multi-year supply agreement for the production of Nortel’s products. The completion of this transaction is subject to the ability of the parties to successfully negotiate and then consummate a transaction on mutually agreeable terms and involves risks and uncertainties including fluctuations in demand for Nortel’s products, our ability to meet Nortel’s needs on a cost-effective basis and the other risk described below in “Risk Factors.”

     We believe that our existing cash balances, together with anticipated cash flows from operations and borrowings available under our credit facility will be sufficient to fund our operations and anticipated transactions through at least the next twelve months. Historically, we have funded our operations from the proceeds of public offerings of equity and debt securities, cash and cash equivalents generated from operations, bank debt, sales of accounts receivable and capital equipment lease financings. We anticipate that we will continue to enter into debt and equity financings, sales of accounts receivable and lease transactions to fund our acquisitions and anticipated growth. The sale of equity or convertible debt securities could result in dilution to our current shareholders. Further, we may issue debt securities that have rights and privileges senior to those of holders of our ordinary shares, and the terms of this debt could impose restrictions on our operations. Such financings and other transactions may not be available on terms acceptable to us or at all.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

     We have an $880.0 million revolving credit facility with a syndicate of domestic and foreign banks. The credit facility consists of two separate credit agreements, one providing for up to $440.0 million principal amount of revolving credit loans to us and designated subsidiaries; and one providing for up to $440.0 million principal amount of revolving credit loans to one of our U.S. subsidiaries. Of the total amount available, $173.3 million relates to a 364-day facility that expires in March 2004 and $266.7 million expires in March 2005. Borrowings under the credit facility bear interest, at our option, either at (i) the base rate (as defined in the credit facility); or (ii) the LIBOR rate (as defined in the credit facility) plus the applicable margin for LIBOR loans ranging between 1.125% and 2.50%, based on our credit ratings and facility usage. We are required to pay a quarterly commitment fee ranging from 0.15% to 0.50% per annum, based on our credit ratings, of the unutilized portion of the credit facility.

     The credit facility is unsecured, and contains certain restrictions on our ability to (i) incur certain debt, (ii) make certain investments and (iii) make certain acquisitions of other entities. The credit facility also requires that we maintain certain financial covenants, including, among other things, a maximum ratio of total indebtedness to EBITDA (earnings before interest expense, taxes, depreciation, and amortization), a minimum ratio of fixed charge coverage, and a minimum net worth, as defined, during the term of the credit facility. Borrowings under the credit facility are guaranteed by us and certain of our subsidiaries. As of December 31, 2003, there were no borrowings outstanding under the credit facility. The credit facility expires in March 2004, and we are currently in discussions for a replacement facility through the same agent bank. We expect to be able to do so on terms that are substantially similar to those of the current facility. However, we cannot assure you that we will be able to renew the facility on such terms.

     As of December 31, 2003, our outstanding debt obligations included: (i) borrowings outstanding related to our senior subordinated notes, (ii) borrowings outstanding related to our convertible junior subordinated notes, (iii) amounts drawn by subsidiaries on various lines of credit, (iv) equipment and property financed under leases and (v) other term obligations, including mortgage loans. Additionally, we have leased certain of our facilities under operating lease commitments.

     We have entered into agreements with respect to properties located in Mexico and Texas, which were historically accounted for as operating leases. Construction on both properties has been completed. The amounts outstanding on the Mexico and Texas properties as December 31, 2003, were $22.9 million and $67.0 million, respectively. Upon the expiration of these leases in 2006 and 2007, respectively, we may renew the leases for an additional five years subject to certain approvals and conditions, or arrange a sale of the buildings to a third party. We also have the right to purchase the buildings at cost at the end of the lease terms, or to terminate the leases at any time by paying the outstanding termination value. We have provided a residual value guarantee, which means that if the building is sold to a third party, we are responsible for making up any shortfall between the actual sales price and the amount funded under the leases. The maximum potential amount of the residual value guarantee is $76.4 million. As of December 31, 2003, the Company recorded the properties as fixed assets and also recorded the related debt. Refer to Note K, “Consolidation of Variable Interest Entities,” of the Notes to Condensed Consolidated Financial Statements.

     We continuously sell a designated pool of trade receivables to a third party qualified special purpose entity, which in turn sells an undivided ownership interest to a conduit, administered by an unaffiliated financial institution. In addition to this financial institution, we participate in the securitization agreement as an investor in the conduit. The securitization agreement allows the operating subsidiaries participating in the securitization to receive a cash payment for sold receivables, less a deferred purchase price receivable. Our share of the total investment varies depending on certain criteria, mainly the collection performance on the sold receivables. The agreement, which expires in March 2004, is subject to annual renewal. Currently, the unaffiliated financial institution’s maximum investment limit is $250.0 million. We sold $460.4 million of our accounts receivable as of December 31, 2003, which represents the face amount of the total outstanding trade receivables on all designated customer accounts at that date. We received net cash proceeds of $249.1 million from the unaffiliated financial institution for the sale of these receivables. We have a recourse obligation that is limited to the deferred purchase price receivable, which approximates 5% of the total sold receivables, and our own investment participation, the total of which was $216.2 million as of December 31, 2003. The accounts receivable balances that were sold were removed from the consolidated balance sheet and are reflected as cash provided by operating activities in the consolidated statement of cash flows.

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RELATED PARTY TRANSACTIONS

     Since June 30, 2002, neither we nor any of our subsidiaries have made or will make any loans to our executive officers. Prior to that time, we made loans to several of our executive officers. Each loan is evidenced by a promissory note in favor of Flextronics and is generally secured by a deed of trust on property of the officer. Certain notes are non-interest bearing and others have interest rates ranging from 2.48% to 5.85%. The remaining outstanding balance of the loans, including accrued interest, as of December 31, 2003, was approximately $9.4 million. Additionally, in connection with an investment partnership, we made loans to several of our executive officers to fund their contributions to the investment partnership. Each loan is evidenced by a full-recourse promissory note in favor of the subsidiary. Interest rates on the notes range from 5.05% to 6.40%. The remaining balance of these loans, including accrued interest, as of December 31, 2003 was approximately $2.2 million.

EFFECT OF NEW ACCOUNTING STANDARDS

Derivative Instruments and Hedging Activities

     In April 2003, the FASB issued SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and the adoption did not have a material impact on our financial position, results of operations or cash flows.

Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 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. The adoption of SFAS No. 150 did not have a material impact on our financial position, results of operations or cash flows.

Revenue Recognition

     In December 2002, the Emerging Issues Task Force, (“EITF”), reached a consensus on EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence of their fair values to separately account for some or all of the deliverables (that is, there are separate units of accounting). In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. This Issue addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF 00-21 does not change otherwise applicable revenue recognition criteria. The guidance in this Issue is effective for revenue arrangements entered after March 31, 2004. The issuance of EITF 00-21 did not have a material impact on our financial position, results of operations or cash flows.

     In December 2003, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition.” SAB 104 supercedes SAB 101, “Revenue Recognition in Financial Statements.” The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21. Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (“the FAQ”) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The issuance of SAB 104 did not have a material impact on the our financial position, results of operations or cash flows.

RISK FACTORS

If we do not manage effectively changes in our operations, our business may be harmed.

     We have experienced growth in our business as a result of internal growth and acquisitions. Since the beginning of fiscal 2001, our global workforce has more than doubled in size. During that time, we have also reduced our workforce at some locations and closed certain facilities in connection with our restructuring activities. These changes are likely to considerably strain our management control systems and resources, including decision support, accounting management, information systems and facilities. If we do not continue to improve our financial and management controls, reporting systems and procedures to manage our employees effectively and to expand our facilities, our business could be harmed.

     We plan to continue to transition manufacturing to lower cost locations. We plan to increase our manufacturing capacity in our low-cost regions by expanding our facilities and adding new equipment. This expansion and transition involves significant risks, including, but not limited to, the following:

    we may not be able to attract and retain the management personnel and skilled employees necessary to support expanded operations;
 
    we may not efficiently and effectively integrate new operations and information systems, expand our existing operations and manage geographically dispersed operations;
 
    we may incur cost overruns;
 
    we may incur unusual charges related to our restructuring activities;

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    we may encounter construction delays, equipment delays or shortages, labor shortages and disputes and production start-up problems that could harm our growth and our ability to meet customers’ delivery schedules; and
 
    we may not be able to obtain funds for this transition, and we may not be able to obtain loans or operating leases with attractive terms.

     In addition, we expect to incur new fixed operating expenses associated with our expansion efforts that will increase our cost of sales, including increases in depreciation expense and rental expense. If our revenues do not increase sufficiently to offset these expenses, our operating results could be seriously harmed. Over the past few years, our transition to low-cost manufacturing regions has contributed to our incurring significant charges that have resulted from reducing our workforce and capacity at higher-cost locations. In fiscal 2003, we recognized restructuring charges of approximately $297.0 million associated with the consolidation and closure of several manufacturing facilities. During the nine months ended December 31, 2003, we incurred restructuring charges of $458.4 million related to the closure and consolidation of and impairment of certain long-lived assets at several manufacturing facilities. We will be required to take additional restructuring charges in the future, as a result of these activities. We expect to recognize additional restructuring charges and currently anticipate that such charges will total at least $35.0 million during the March 2004 quarter, although the actual amount may vary, due to changes in market and other conditions. We cannot assure you as to the timing or amount of any future restructuring charges. If we are required to take additional restructuring charges in the future, this could have a material adverse impact on our financial position, results of operations and cash flows.

We depend on the handheld devices, computer and office automation, communications and information technologies infrastructure and consumer devices industries which continually produce technologically advanced products with short life cycles; our inability to continually manufacture such products on a cost-effective basis could harm our business.

     During the nine months ended December 31, 2003, we derived approximately 32% of our revenues from customers in the handheld devices industry, whose products include cell phones, pagers and personal digital assistants; approximately 26% of our revenues from customers in the computers and office automation industry, whose products include copiers, scanners, graphic cards, desktop and notebook computers and peripheral devices such as printers and projectors; approximately 14% of our revenues from providers of communications infrastructure, whose products include equipment for optical networks, cellular base stations, radio frequency devices, telephone exchange and access switches and broadband devices; approximately 11% of our revenues from the consumer devices industry, whose products include set-top boxes, home entertainment equipment, cameras and home appliances; and approximately 8% of our revenues from providers of information technologies infrastructure, whose products include servers, workstations, storage systems, mainframes, hubs and routers. The remaining 9% of our revenues was derived from customers in a variety of other industries, including the medical, automotive, industrial and instrumentation industries.

     Factors affecting these industries in general could seriously harm our customers and, as a result, us. These factors include:

    rapid changes in technology, which result in short product life cycles;
 
    seasonality of demand for our customers’ products;
 
    the inability of our customers to successfully market their products, and the failure of these products to gain widespread commercial acceptance; and
 
    recessionary periods in our customers’ markets.

Our customers have and may continue to cancel their orders, change production quantities or locations, or delay production.

     As a provider of electronics manufacturing services, we must provide increasingly rapid product turnaround for our customers. We generally do not obtain firm, long-term purchase commitments from our customers, and we often experience reduced lead-times in customer orders. Customers cancel their orders, change production quantities and delay production for a number of reasons. The uncertain economic conditions and geopolitical situation has resulted, and may continue to result, in some of our customers delaying the delivery of 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 have harmed, and may continue to 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 require that manufacturing of their products be transitioned from one facility to another to achieve cost and other objectives. Such transfers result in inefficiencies and costs due to resulting excess capacity and overhead at one facility and capacity constraints and related stresses at the other.

     In addition, we make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimates of customer requirements. The short-term nature of our customers’ commitments and the rapid changes in demand for their products reduce our ability to estimate accurately future customer requirements. This makes it difficult to schedule production and maximize utilization of our manufacturing capacity. We often increase staffing, increase capacity and incur other expenses to meet the anticipated demand of our customers, which cause reductions in our gross margins if customer orders continue to be delayed or cancelled. Anticipated orders may not materialize, and delivery schedules may be deferred as a result of changes in demand for our customers’ products. On occasion, customers require rapid increases in production, which stress our resources and reduce margins. Although we have increased our manufacturing capacity, and plan further increases, we may not have sufficient capacity at any given time to meet our customers’ demands. In addition, because many of our costs and operating expenses are relatively fixed, a reduction in customer demand harms our gross profit and operating income.

Our operating results vary significantly from period to period.

     We experience significant fluctuations in our results of operations. Some of the principal factors that contribute to these fluctuations are:

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    changes in demand for our services;
 
    our effectiveness in managing manufacturing processes and costs in order to decrease manufacturing expenses;
 
    the mix of the types of manufacturing services we provide, as high-volume and low-complexity manufacturing services typically have lower gross margins than lower volume and more complex services;
 
    changes in the cost and availability of labor and components, which often occur in the electronics manufacturing industry and which affect our margins and our ability to meet delivery schedules;
 
    the degree to which we are able to utilize our available manufacturing capacity;
 
    our ability to manage the timing of our component purchases so that components are available when needed for production, while avoiding the risks of purchasing inventory in excess of immediate production needs; and
 
    local conditions and events that may affect our production volumes, such as labor conditions, political instability and local holidays.

     Two of our significant end-markets are the handheld devices market and the consumer devices market. These markets exhibit particular strength toward the end of the calendar year in connection with the holiday season. As a result, we have historically experienced stronger revenues in our third fiscal quarter as compared to our other fiscal quarters.

Our increased original design manufacturing, or ODM, activity may reduce our profitability.

     We have recently begun providing ODM services, where we design and develop products that we then manufacture for OEM customers. We are actively pursuing ODM projects, focusing primarily on consumer related devices, such as cell phones and related products, which requires that we make investments in research and development, technology licensing, test and tooling equipment, patent applications, facility expansion and recruitment.

     Although we enter into contracts with our ODM customers, we may design and develop products for these customers prior to receiving a purchase order or other firm commitment from them. We are required to make substantial investments in the resources necessary to design and develop these products, and no revenue may be generated from these efforts if our customers do not approve the designs in a timely manner or at all, or if they do not then purchase anticipated levels of products. In addition, ODM activities often require that we purchase inventory for initial production runs before we have a purchase commitment from a customer. Even after we have a contract with a customer with respect to an ODM product, these contracts may allow the customer to delay or cancel deliveries and may not obligate the customer to any volumes of purchases. These contracts can generally be terminated by either party on short notice. There is no assurance that we will be able to maintain our current level of ODM activity at all or for an extended period of time. Due to the initial costs of investing in the resources necessary for this business, our increased ODM activities have adversely affected our profitability during fiscal 2004. We continue to make investments in our ODM services, which could adversely affect our profitability through fiscal 2005 and beyond. Further, the products we design must satisfy safety and regulatory standards and some products must also receive government certifications. If we fail to timely obtain these approvals or certifications, we would be unable to sell these products, which would harm our sales, profitability and reputation.

The success of our ODM activity depends on our ability to protect our intellectual property rights.

     We retain certain intellectual property rights to our ODM products. As the level of our ODM activity is increasing, the extent to which we rely on rights to intellectual property incorporated into products is increasing. Despite our efforts, we cannot be certain that the measures we have taken to prevent unauthorized use of our technology will be successful. If we are unable to protect our intellectual property rights, this could reduce or eliminate the competitive advantages of our proprietary technology, which would harm our business.

Intellectual property infringement claims against us or our customers could harm our ODM business.

     Our ODM products often face competition from the products of OEMs, many of whom may own the intellectual property rights underlying those products. As a result, we could become subject to claims of intellectual property infringement as the number of our competitors increases. In addition, customers for our ODM services typically require that we indemnify them against the risk of intellectual property infringement. If any claims are brought against us or our customers for such infringement, whether or not these have merit, we could be required to expend significant resources in defense of such claims. In the event of such an infringement claim, we may be required to spend a significant amount of money to develop non-infringing alternatives or obtain licenses. We may not be successful in developing such alternatives or obtaining such a license on reasonable terms or at all.

If our ODM products are subject to design defects, our business may be damaged and we may incur significant fees.

     In our contracts with our ODM customers, we generally provide them with a warranty against defects in our designs. If an ODM product or component that we design is found to be defective in its design, this may lead to increased warranty claims. Although we have product liability insurance coverage, this is expensive and may not be available on acceptable terms, in sufficient amounts, or at all. A successful product liability claim in excess of our insurance coverage or any material claim for which insurance coverage was denied or limited and for which indemnification was not available could have a material adverse effect on our business, results of operations and financial condition.

We are exposed to intangible asset risk.

     We have a substantial amount of intangible assets. These intangible assets are generally attributable to acquisitions and represent the difference between the purchase price paid for the acquired businesses and the fair value of net tangible assets of the acquired businesses. We are required to evaluate goodwill and other intangibles for impairment on at least an annual basis, and whenever changes in circumstances indicate that the carrying amount may not be recoverable from estimated future cash flows.

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As a result of our annual and other periodic evaluations, we may determine that the intangible asset values need to be written down to their fair values, which could result in material charges that could be adverse to our operating results and financial position.

We may encounter difficulties with acquisitions, which could harm our business.

     Since the beginning of fiscal 2001, we have completed over 40 acquisitions of businesses and we expect to continue to acquire additional businesses in the future. We are currently in preliminary discussions with respect to potential acquisitions and strategic customer transactions, however, we do not have any agreements or commitments to make any material acquisitions or strategic customer transactions. Any future acquisitions may require additional debt or equity financing, or the issuance of shares in the transaction. This could increase our leverage or be dilutive to our existing shareholders. We may not be able to complete acquisitions or strategic customer transactions in the future to the same extent as the past, or at all.

     In addition, acquisitions involve numerous risks and challenges, including:

    difficulties in integrating acquired businesses and operations;
 
    diversion of management’s attention from the normal operation of our business;
 
    potential loss of key employees and customers of the acquired companies;
 
    difficulties in managing and integrating operations in geographically dispersed locations;
 
    lack of experience operating in the geographic market or industry sector of the acquired business;
 
    increases in our expenses and working capital requirements, which reduce our return on invested capital; and
 
    exposure to unanticipated contingent tax and other liabilities of acquired companies.

     Any of these and other factors have harmed, and in the future could harm, our ability to achieve anticipated levels of profitability at acquired operations or realize other anticipated benefits of an acquisition, and could adversely affect our business and operating results.

Our strategic relationships with major customers create risks.

     Over the past several years, we have completed numerous strategic transactions with OEM customers, including, among others, Telia Companies, Xerox, Alcatel, Casio and Ericsson. Under these strategic arrangements, we generally acquire inventory, equipment and other assets from the OEM, and lease or 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. Most recently, in January 2004, we announced that we are in discussions with Nortel Networks regarding a proposed transaction in which Nortel would divest nearly all of its optical, wireless and enterprise manufacturing operations to Flextronics. We cannot assure you that we can obtain any anticipated new customer programs, including the program under discussion with Nortel. Further, even if we obtain these programs, they may be delayed or may not contribute to our revenue or profitability as expected or at all. 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 revenue growth, and if we fail to complete similar transactions in the future, our revenue growth could be harmed. As part of these arrangements, we typically enter into manufacturing services 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 need to 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;
 
    we, rather than the divesting OEM, bear the risk of excess capacity at the facility;
 
    we may not achieve anticipated cost reductions and efficiencies at the facility;
 
    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 have been, and in the future may be, unable to achieve anticipated levels of profitability under these arrangements, and they have not, and in the future may not, result in any material revenues or contribute positively to our earnings per share.

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We depend on the continuing trend of outsourcing by OEMs.

     Future growth in our revenue depends on new outsourcing opportunities in which we assume additional manufacturing and supply chain management responsibilities from OEMs. To the extent that these opportunities are not available, either because OEMs decide to perform these functions internally or because they use other providers of these services, our future growth would be limited.

The majority of our sales come from a small number of customers; if we lose any of these customers, our sales could decline significantly.

     Sales to our ten largest customers have represented a significant percentage of our net sales in recent periods. Our ten largest customers accounted for approximately 61% and 70% of net sales during the nine months ended December 31, 2003 and December 31, 2002, respectively. Our largest customers during the nine months ended December 31, 2003 were Hewlett-Packard and Sony-Ericsson, accounting for approximately 13% and 12% of net sales, respectively. Our largest customers during the nine months ended December 31, 2002 were Hewlett-Packard and Sony-Ericsson, accounting for approximately 12% and 11% of net sales, respectively. No other customer accounted for more than 10% of net sales during those periods.

     Our principal customers have varied from year to year, and our principal customers may not continue to purchase services from us at current levels, if at all. Significant reductions in sales to any of these customers, or the loss of major customers, would seriously harm our business. If we are not able to timely replace expired, canceled or reduced contracts with new business, our revenues could be harmed.

Our industry is extremely competitive.

     The EMS industry is extremely competitive and includes hundreds of companies, several of which have achieved substantial market share. Current and prospective customers also evaluate our capabilities against the merits of internal production. Some of our competitors may have greater design, manufacturing, financial or other resources than us. Additionally, we face competition from Taiwanese ODM suppliers, who have a substantial share of the global market for information technology hardware production, primarily related to notebook and desktop computers and personal computer motherboards, as well as provide consumer products and other technology manufacturing services.

     In recent years, many participants in the industry, including us, have substantially expanded their manufacturing capacity. The overall demand for electronics manufacturing services has decreased, resulting in increased capacity and substantial pricing pressures, which has harmed our operating results. Certain sectors of the EMS industry are currently experiencing increased price competition, and if this increased level of competition should continue, our revenues and gross margin may continue to be adversely affected.

We may be adversely affected by shortages of required electronic components.

     At various times, there have been shortages of some of the electronic components that we use, as a result of strong demand for those components or problems experienced by suppliers. These unanticipated component shortages have resulted in curtailed production or delays in production, which prevented us from making scheduled shipments to customers in the past and may do so in the future. Our inability to make scheduled shipments could cause us to experience a reduction in our sales and an increase in our costs and could adversely affect our relationship with existing customers as well as prospective customers. Component shortages may also increase our cost of goods sold because we may be required to pay higher prices for components in short supply and redesign or reconfigure products to accommodate substitute components. As a result, component shortages could adversely affect our operating results for a particular period due to the resulting revenue shortfall and increased manufacturing or component costs.

Our customers may be adversely affected by rapid technological change.

     Our customers compete in markets that are characterized by rapidly changing technology, evolving industry standards and continuous improvement in products and services. These conditions frequently result in short product life cycles. Our success will depend largely on the success achieved by our customers in developing and marketing their products. If technologies or standards supported by our customers’ products become obsolete or fail to gain widespread commercial acceptance, our business could be adversely affected.

We are subject to the risk of increased income taxes.

     We have structured our operations in a manner designed to maximize income in countries where:

    tax incentives have been extended to encourage foreign investment; or
 
    income tax rates are low.

     We base our tax position upon the anticipated nature and conduct of our business and upon our understanding of the tax laws of the various countries in which we have assets or conduct activities. However, our tax position is subject to review and possible challenge by taxing authorities and to possible changes in law, which may have retroactive effect. We cannot determine in advance the extent to which some jurisdictions may require us to pay taxes or make payments in lieu of taxes.

     Several countries in which we are located allow for tax holidays or provide other tax incentives to attract and retain business. These tax incentives expire over various periods from 2004 to 2010 and are subject to certain conditions with which we expect to comply. We have obtained tax holidays or other incentives where available, primarily in China, Malaysia and Hungary. In these three countries, we generated an aggregate of approximately $5.8 billion of our total revenues for the fiscal year ended March 31, 2003. Our taxes could increase if certain tax holidays or incentives are not renewed upon expiration, or tax rates applicable to us in such jurisdictions are otherwise increased. In addition, further acquisitions of businesses may cause our effective tax rate to increase.

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We conduct operations in a number of countries and are subject to risks of international operations.

     The geographical distances between the Americas, Asia and Europe create a number of logistical and communications challenges for us. These challenges include managing operations across multiple time zones, directing the manufacture and delivery of products across distances, coordinating procurement of components and raw materials and their delivery to multiple locations, and coordinating the activities and decisions of the core management team, which is based in a number of different countries. Facilities in several different locations may be involved at different stages of the production of a single product, leading to additional logistical difficulties.

     Because our manufacturing operations are located in a number of countries throughout the Americas, Asia and Europe, we are subject to the risks of changes in economic, political and social conditions in those countries, including:

    fluctuations in the value of local currencies;
 
    labor unrest and difficulties in staffing;
 
    longer payment cycles;
 
    cultural differences;
 
    increases in duties and taxation levied on our products;
 
    imposition of restrictions on currency conversion or the transfer of funds;
 
    limitations on imports or exports of components or assembled products, or other travel restrictions;
 
    expropriation of private enterprises; and
 
    a potential reversal of current favorable policies encouraging foreign investment or foreign trade by our host countries

     The attractiveness of our services to our U.S. customers can be affected by changes in U.S. trade policies, such as most favored nation status and trade preferences for some Asian countries. In addition, some countries in which we operate, such as Brazil, Hungary, Mexico, Malaysia and Poland, have experienced periods of slow or negative growth, high inflation, significant currency devaluations or limited availability of foreign exchange. Furthermore, in countries such as China and Mexico, governmental authorities exercise significant influence over many aspects of the economy, and their actions could have a significant effect on us. Finally, we could be seriously harmed by inadequate infrastructure, including lack of adequate power and water supplies, transportation, raw materials and parts in countries in which we operate.

We are exposed to fluctuations in foreign currency exchange rates.

     We transact business in various foreign countries. As a result, we are exposed to fluctuations in foreign currencies. We have currency exposure arising from both sales and purchases denominated in currencies other than the functional currencies of our entities. Volatility in the exchange rates between the foreign currencies and the functional currencies of our entities could seriously harm our business, operating results and financial condition. We try to manage our foreign currency exposure by borrowing in various foreign currencies and by entering into foreign exchange forward contracts. Mainly, we enter into foreign exchange forward contracts intended to reduce the short-term impact of foreign currency fluctuations on current assets and liabilities denominate in foreign currency. These exposures are primarily, but not limited to, cash, receivables, payables and inter-company balances, in currencies other than the functional currency unit of the operating entity. We will first evaluate and, to the extent possible, use non-financial techniques, such as currency of invoice, leading and lagging payments, receivable management or local borrowing to reduce transactions exposure before taking steps to minimize remaining exposure with financial instruments. Foreign exchange forward contracts are treated as cash flow hedges and such contracts generally expire within three months. The credit risk of these forward contracts if minimal since the contracts are with large financial institutions. The gains and losses on forward contracts generally offset the gains and losses on the assets, liabilities and transactions hedged.

We depend on our executive officers and key employees.

     Our success depends to a large extent upon the continued services of our executive officers. Generally our employees are not bound by employment or non-competition agreements, and we cannot assure that we will retain our executive officers and other key employees. We could be seriously harmed by the loss of any of our executive officers. In order to manage our growth, we will need to recruit and retain additional skilled management personnel and if we are not able to do so, our business and our ability to continue to grow could be harmed. In addition, in connection with expanding our ODM activities, we must attract and retain experienced design engineers. Although a number of companies in our industry have implemented workforce reductions, there remains substantial competition for highly skilled employees. Our failure to recruit and retain experienced design engineers could limit the growth of our ODM activities, which could adversely affect our business.

We are subject to environmental compliance risks.

     We are subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous substances in the ordinary course of our manufacturing process. In addition, we are responsible for cleanup of contamination at some of our current and former manufacturing facilities and at some third party sites. If more stringent compliance or cleanup standards under environmental laws or regulations are imposed, or the results of future testing and analyses at our current or former operating facilities indicate that we are responsible for the release of hazardous substances, we may be subject to additional remediation liability. Further, additional environmental matters may arise in the future at sites where no problem is currently known or at sites that we may acquire in the future.

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Currently unexpected costs that we may incur with respect to environmental matters may result in additional loss contingencies, the quantification of which cannot be determined at this time.

The market price of our ordinary shares is volatile.

     The stock market in recent years has experienced significant price and volume fluctuations that have affected the market prices of technology companies. These fluctuations have often been unrelated to or disproportionately impacted by the operating performance of these companies. The market for our ordinary shares may be subject to similar fluctuations. Factors such as fluctuations in our operating results, announcements of technological innovations or events affecting other companies in the electronics industry, currency fluctuations and general market conditions may cause the market price of our ordinary shares to decline.

We are a defendant in several securities class action lawsuits and this litigation could harm our business whether or not determined adversely to us.

     Between June and August 2002, Flextronics and certain of our officers and directors were named as defendants in several securities class action lawsuits filed in the Untied States District Court for the Southern District of New York. These actions, which were filed on behalf of those who purchased, or otherwise acquired, Flextronics’ ordinary shares between January 18, 2001 and June 4, 2002, including those who purchased in our secondary offerings of on February 1, 2001 and January 7, 2002. These actions generally allege that, during this period, the defendants made misstatements to the investing public about the financial condition and prospects of Flextronics. On April 23, 2003, the Court entered an order transferring these lawsuits to the United States District Court for the Northern District of California. On July 16, 2003, Flextronics filed a motion to dismiss on behalf of itself and its officers and directors named as defendants. On November 17, 2003, the Court entered an order granting defendants’ motion to dismiss without prejudice. On January 28, 2004, plaintiffs filed an amended complaint. Flextronics’ motion to dismiss the amended complaint is due March 10, 2004 with a hearing on the motion to dismiss scheduled for May 26, 2004.

     These actions seek unspecified damages. Although we believe that the plaintiffs’ claims lack merit and intend to vigorously defend these lawsuits, we are unable to predict the ultimate outcome of these lawsuits. There can be no assurance we will be successful in defending these lawsuits, and, if we are unsuccessful, we may be subject to significant damages. Even if we are successful, defending the lawsuits may be expensive and may divert management’s attention from other business concerns and harm our business.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     There were no material changes during the nine months ended December 31, 2003 to our exposure to market risk for changes in interest rates and foreign currency exchange rates.

     We have a portfolio of fixed and variable rate debt, primarily consisting of fixed rate debt obligations. Our variable rate debt instruments create exposures for us related to interest rate risk.. A hypothetical 10% change in interest rates from those as of December 31, 2003 would not have a material effect on our financial position, results of operations and cash flows over the next twelve months.

     We transact business in various foreign countries and are, therefore, subject to risk of foreign currency exchange rate fluctuations. We have established a foreign currency risk management policy to manage this risk. Based on our overall currency rate exposures, including derivative financial instruments and nonfunctional currency-denominated receivables and payables, a near-term 10% appreciation or depreciation of the U.S. dollar from the rate as of December 31, 2003 would not have a material effect on our financial position, results of operations and cash flows over the next twelve months.

ITEM 4. CONTROLS AND PROCEDURES

  (a)   Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Our chief executive officer and our chief financial officer, based on their evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, concluded that our disclosure controls and procedures were effective for this purpose.
 
  (b)   There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out this evaluation.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     Between June and August 2002, Flextronics and certain of our officers and directors were named as defendants in several securities class action lawsuits filed in the Untied States District Court for the Southern District of New York. These actions, which were filed on behalf of those who purchased, or otherwise acquired, Flextronics’ ordinary shares between January 18, 2001 and June 4, 2002, including those who purchased in our secondary offerings of on February 1, 2001 and January 7, 2002. These actions generally allege that, during this period, the defendants made misstatements to the investing public about the financial condition and prospects of Flextronics. On April 23, 2003, the Court entered an order transferring these lawsuits to the United States District Court for the Northern District of California. On July 16, 2003, Flextronics filed a motion to dismiss on behalf of itself and its officers and directors named as defendants. On November 17, 2003, the Court entered an order granting defendants’ motion to dismiss without prejudice. On January 28, 2004, plaintiffs filed an amended complaint. Flextronics’ motion to dismiss the amended complaint is due March 10, 2004 with a hearing on the motion to dismiss scheduled for May 26, 2004.

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     These actions seek unspecified damages. Although we believe that the plaintiffs’ claims lack merit and intend to vigorously defend these lawsuits, we are unable to predict the ultimate outcome of these lawsuits. There can be no assurance we will be successful in defending these lawsuits, and, if we are unsuccessful, we may be subject to significant damages. Even if we are successful, defending the lawsuits may be expensive and may divert management’s attention from other business concerns and harm our business.

     We are also subject to legal proceedings, claims, and litigation arising in the ordinary course of business. We defend ourselves vigorously against any such claims. While the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8K

(a) Exhibits

             
Exhibit No.   Exhibit        

 
       
23.01   Consent of Deloitte & Touche LLP.
     
31.01   Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.02   Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.01   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
     
32.02   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. *

*  As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of Flextronics International Ltd. under the Securities Act of 1933 or the Securities Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in such filings.

     (b)  Reports on Form 8-K

     On December 1, 2003, we filed a current report on Form 8-K to report under Item 5 and to file the press release related to the settlement reached in the lawsuit between Beckman Coulter and Flextronics related to a contract dispute involving a manufacturing relationship between the companies. Pursuant to the terms of the settlement agreement, Flextronics agreed to a $23.0 million cash payment to Beckman Coulter to resolve the matter, and Beckman Coulter agreed to dismiss all pending claims against the Company and release the Company from any future claims relating to this matter.

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SIGNATURES

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

         
    FLEXTRONICS INTERNATIONAL LTD.
(Registrant)
         
Date: February 17, 2004       /s/ Michael E. Marks
       
        Michael E. Marks
        Chief Executive Officer
        (Principal Executive Officer)
         
Date: February 17, 2004       /s/ Robert R.B. Dykes
       
        Robert R.B. Dykes
        President, Systems Group and
        Chief Financial Officer
        (Principal Financial Officer)
         
Date: February 17, 2004       /s/ Thomas J. Smach
       
        Thomas J. Smach
        Senior Vice President, Finance
        (Principal Accounting Officer)

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EXHIBIT INDEX

             
Exhibit No.   Exhibit        

 
       
23.01   Consent of Deloitte & Touche LLP.
     
31.01   Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.02   Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.01   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
     
32.02   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. *

*  As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of Flextronics International Ltd. under the Securities Act of 1933 or the Securities Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in such filings.

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