UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2005 (*See Note B to the Condensed Consolidated Financial Statements)

or

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

For the transition period from                              to

Commission file number 0-23354

FLEXTRONICS INTERNATIONAL LTD.

Singapore (State or other jurisdiction of incorporation or organization)		Not Applicable (I.R.S. Employer Identification No.)
One Marina Boulevard, #28-00 Singapore (Address of registrant’s principal executive offices)		018989 (Zip Code)

Registrant’s telephone number, including area code
(65) 6890 7188

     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 R     No £

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

     As of August 4, 2005, there were 572,299,427 shares of the Registrant’s ordinary shares, S$0.01 par value, outstanding.

 

 

FLEXTRONICS INTERNATIONAL LTD.

INDEX

		PAGE
PART I. FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Report of Independent Registered Public Accounting Firm			3
Condensed Consolidated Balance Sheets — June 30, 2005 and March 31, 2005			4
Condensed Consolidated Statements of Operations — Three Months Ended June 30, 2005 and June 30, 2004			5
Condensed Consolidated Statements of Cash Flows — Three Months Ended June 30, 2005 and June 30, 2004			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. Controls and Procedures			42
PART II. OTHER INFORMATION			42
Item 1. Legal proceedings			42
Item 6. Exhibits			42
Signatures			44
EXHIBIT 4.03
EXHIBIT 4.04
EXHIBIT 10.01
EXHIBIT 15.01
EXHIBIT 31.01
EXHIBIT 31.02
EXHIBIT 32.01
EXHIBIT 32.02

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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 (the “Company”) as of June 30, 2005, and the related condensed consolidated statements of operations and cash flows for the three month periods ended June 30, 2005 and 2004. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 standards of the Public Company Accounting Oversight Board (United States), 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 reviews, 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 standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of March 31, 2005 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated June 14, 2005, 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, 2005 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
August 9, 2005

FLEXTRONICS INTERNATIONAL LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

		June 30, 2005				March 31, 2005
		(In thousands, except share and per
		share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	830,207			$	869,258
Accounts receivable, net			2,057,050				1,842,010
Inventories			1,511,004				1,518,866
Deferred income taxes			12,562				12,117
Other current assets			543,863				544,914
Total current assets			4,954,686				4,787,165
Property and equipment, net			1,669,137				1,704,516
Deferred income taxes			690,950				684,952
Goodwill			3,312,749				3,359,477
Other intangible assets, net			148,735				142,712
Other assets			321,198				328,750
Total assets		$	11,097,455			$	11,007,572
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Bank borrowings and current portion of long-term debt		$	55,627			$	17,448
Current portion of capital lease obligations			8,332				8,718
Accounts payable			2,571,883				2,523,269
Accrued payroll			264,809				285,504
Other current liabilities			1,054,079				1,045,255
Total current liabilities			3,954,730				3,880,194
Long-term debt, net of current portion:
Capital lease obligations, net of current portion			7,156				9,141
Zero coupon convertible junior subordinated notes due 2008			200,000				200,000
1% Convertible Subordinated Notes due 2010			500,000				500,000
6 1/2% Senior Subordinated Notes due 2013			399,650				399,650
6 1/4% Senior Subordinated Notes due 2014			507,487				490,270
Other			108,308				110,509
Other liabilities			179,080				193,760
Commitments and contingencies (Note I)
Shareholders’ equity:
Ordinary shares, S$0.01 par value, authorized - 1,500,000,000 shares; issued and outstanding – 571,522,026 and 568,329,662 shares as of June 30, 2005 and March 31, 2005, respectively			3,380				3,360
Additional paid-in capital			5,509,413				5,486,404
Accumulated deficit			(323,893	)			(382,600	)
Accumulated other comprehensive income			58,280				123,683
Deferred compensation			(6,136	)			(6,799	)
Total shareholders’ equity			5,241,044				5,224,048
Total liabilities and shareholders’ equity		$	11,097,455			$	11,007,572

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

FLEXTRONICS INTERNATIONAL LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three Months Ended June 30,
		2005				2004
		(In thousands, except per share amounts)
Net sales		$	3,897,531			$	3,880,448
Cost of sales			3,618,317				3,633,516
Restructuring charges			27,572				20,991
Gross profit			251,642				225,941
Selling, general and administrative expenses			147,791				141,596
Intangibles amortization			14,621				8,661
Restructuring charges			5,117				2,597
Interest and other expense, net			26,017				18,286
Income before income taxes			58,096				54,801
Benefit from income taxes			(611	)			(19,521	)
Net income		$	58,707			$	74,322
Earnings per share:
Basic		$	0.10			$	0.14
Diluted		$	0.10			$	0.13
Weighted average shares used in computing per share amounts:
Basic			569,325				530,626
Diluted			598,298				568,013

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

FLEXTRONICS INTERNATIONAL LTD

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Three Months Ended June 30,
		2005				2004
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	58,707			$	74,322
Depreciation and amortization			89,538				86,481
Change in working capital and other			(96,529	)			5,416
Net cash provided by operating activities			51,716				166,219
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net of dispositions			(52,915	)			(60,269	)
Acquisitions of businesses, net of cash acquired			(133,265	)			(33,424	)
Prepayment relating to pending acquisition			—				(226,461	)
Other investments and notes receivable			23,034				(96,256	)
Net cash used in investing activities			(163,146	)			(416,410	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings and long-term debt			750,614				414,814
Repayments of bank borrowings and long-term debt			(728,297	)			(139,590	)
Repayments of capital lease obligations			(1,942	)			(2,140	)
Net proceeds from issuance of ordinary shares			23,029				11,840
Net cash provided by financing activities			43,404				284,924
Effect of exchange rate on cash			28,975				14,615
Net increase (decrease) in cash and cash equivalents			(39,051	)			49,348
Cash and cash equivalents at beginning of period			869,258				615,276
Cash and cash equivalents at end of period		$	830,207			$	664,624

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

FLEXTRONICS INTERNATIONAL LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 electronics manufacturing services (EMS) to original equipment manufacturers (OEMs) for a broad range of products in the following industries: handheld devices, computers and office automation, communications infrastructure, consumer devices, information technology infrastructure, industrial, automotive and medical. The Company’s strategy is to provide customers with a complete range of vertically integrated global supply chain services through which the Company designs, builds and ships a complete packaged product for its OEM customers. The Company’s OEM customers leverage the Company’s services to meet their product requirements throughout the entire product life cycle. The Company also provides after-market services such as repair and warranty services as well as 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 and the fabrication of printed circuit boards and backplanes. The Company also provides contract design and related engineering services offerings to its customers, from full product development to system integration, industrialization, product cost reduction and software application development. These services include industrial and mechanical design, hardware design, embedded and application software development, semiconductor design, and system validation and test development.

     In addition, the Company offers original product design and manufacturing services, where the customer purchases a product that was designed, developed and manufactured by the Company that the Company may customize to provide the customer with a unique “look and feel” (commonly referred to as original design manufacturing, or “ODM”). ODM products are then sold by the Company’s OEM customers under the OEM’s 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, 2005 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 months period ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending March 31, 2006.

     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 end on December 31 and March 31, respectively. Accordingly, the first quarter of fiscal 2006 includes the period April 1, 2005 through and including July 1, 2005.

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

     The accompanying unaudited 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. For consolidated majority-owned subsidiaries in which the Company owns less than 100%, the Company records minority interest to account for the ownership interest of the minority owner. The Company recorded $43.1 million and $40.8 million as of June 30, 2005 and March 31, 2005, respectively, of minority interest, which is included in other liabilities in the condensed consolidated balance sheets. The associated minority interest expense has not been material to the Company’s results of operations for the three months ended June 30, 2005 and June 30, 2004, and was classified as interest and other expense, net, in the condensed consolidated statements of operations.

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.

Translation of Foreign Currencies

     The financial position and results of operations of certain of the Company’s subsidiaries are measured using a currency other than the U.S. dollar as their functional currency. Accordingly, for these subsidiaries all assets and liabilities are translated into U.S. dollars at the current exchange rates as of the respective balance sheet date. Revenue and expense items are translated at the average exchange rates prevailing during the period. Cumulative gains and losses from the translation of these subsidiaries’ financial statements are reported as a separate component of shareholders’ equity.

Revenue Recognition

     Manufacturing revenue is recognized when the goods are shipped by the Company or received by its customer, title and risk of ownership have been passed, the price to the buyer is fixed or determinable and recoverability is reasonably assured. Service revenue is recognized when the services have been performed.

Allowance for Doubtful Accounts

     The Company performs ongoing credit evaluations of its customers’ financial condition and makes provisions for doubtful accounts based on the outcome of the credit evaluations. The Company evaluates the collectability of its 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 the Company’s customers may require additional provisions for doubtful accounts.

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, net of applicable lower of cost or market provisions, were as follows:

		June 30, 2005				March 31, 2005
		(In thousands)
Raw materials		$	764,544			$	711,251
Work-in-progress			306,564				306,833
Finished goods			439,896				500,782
		$	1,511,004			$	1,518,866

Property and Equipment

     Property 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 term of the lease, if shorter.

     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 undiscounted 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 of the reporting units is tested for impairment on January 31st and whenever events or changes in circumstance indicate that the carrying amount of goodwill may not be recoverable. 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. Reporting units represent components of the Company for which discrete financial information is available to management, and for which management regularly reviews the operating results. For purposes of the annual goodwill impairment evaluation, the Company has identified two separate reporting units: Electronic Manufacturing Services and Network Services. 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.

     The following table summarizes the activity in the Company’s goodwill account during the three months ended June 30, 2005:

		Three Months Ended
		June 30, 2005
		(In thousands)
Balance, beginning of the period		$	3,359,477
Additions			54,576
Reclassification to other intangibles(1)			(22,201	)
Foreign currency translation adjustments			(79,103	)
Balance, end of the period		$	3,312,749

     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, customer relationships and other acquired intangibles. Contractual agreements, patents and trademarks, and developed technologies are amortized on a straight-line basis up to ten years. Other acquired intangibles related to favorable leases and customer relationships are amortized on a straight-line basis over three to ten years. No residual value is estimated for the intangible assets. During the three months ended June 30, 2005, there was approximately $22.2 million of additions to intangible assets, primarily related to customer relationships and developed technologies. The components of other intangible assets are as follows:

		As of June 30, 2005												March 31, 2005
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
						(In thousands)												(In thousands)
Intangible assets:
Contractual agreements		$	72,346			$	(29,650	)		$	42,696			$	104,383			$	(58,221	)		$	46,162
Patents and trademarks			8,082				(1,814	)			6,268				8,082				(1,688	)			6,394
Developed technologies			21,156				(2,816	)			18,340				11,812				(1,231	)			10,581
Customer relationships			83,175				(7,878	)			75,297				71,353				(4,342	)			67,011
Other acquired intangibles			28,283				(22,149	)			6,134				32,619				(20,055	)			12,564
Total		$	213,042			$	(64,307	)		$	148,735			$	228,249			$	(85,537	)		$	142,712

     Total amortization expense recorded during the three months ended June 30, 2005 and June 30, 2004 was $14.6 million and $8.7 million, respectively. Expected future annual amortization expense is as follows:

Fiscal years ending March 31,		Amount
		(In thousands)
2006		$	30,647	(1)
2007			28,248
2008			23,360
2009			16,463
2010			15,416
Thereafter			34,601
Total amortization expenses		$	148,735

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 by applying the applicable statutory tax rate to such differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.

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 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.

Restructuring Costs

     The Company recognizes restructuring charges related to its plans to close or consolidate duplicate manufacturing and administrative facilities. In connection with these activities, the Company records restructuring charges for employee termination costs, long-lived asset impairment and other exit-related costs.

     The recognition of the restructuring charges requires the Company to make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned exit activity. If the Company’s actual results differ from its estimates and assumptions, the Company 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, the Company evaluates 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.

Accounting for Stock-Based Compensation

     At June 30, 2005, the Company maintained four 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.

     On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payments (“SFAS No. 123R”). SFAS No. 123R eliminates the alternative of applying the intrinsic value measurement provisions of Opinion 25 to stock compensation awards issued to employees and requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award (usually the vesting period).

     SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

     1. Modified Prospective Application Method: Under this method SFAS No. 123R is applied to new awards and to awards modified, repurchased, or cancelled after the effective date. Compensation cost for the portion of awards for which service has not been rendered (such as unvested options) that are outstanding as of the date of adoption shall be recognized as the remaining services are rendered. The compensation cost relating to unvested awards at the date of adoption shall be based on the grant-date fair value of those awards as calculated for pro forma disclosures under the original SFAS No. 123.

     2. Modified Retrospective Application Method: Companies may also use the Modified Retrospective Application Method for all prior years for which the original SFAS No. 123 was effective or only to prior interim periods in the year of initial adoption. If the Modified Retrospective Application Method is applied, financial statements for prior periods shall be adjusted to give effect to the fair-value-based method of accounting for awards on a consistent basis with the pro forma disclosures required for those periods under the original SFAS No. 123.

     On April 14, 2005, the Securities and Exchange Commission (or the “SEC”) adopted a rule amendment that delayed the compliance dates for SFAS No. 123R such that the Company is now allowed to adopt the new standard no later than April 1, 2006. The Company has not yet quantified the effects of the adoption of SFAS No. 123R, but it is expected that it will result in significant stock-based compensation expense. The pro forma effects on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of original SFAS No. 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of Opinion 25) are disclosed in the following table.

		Three Months Ended June 30,
		2005				2004
		(in thousands)
Net income, as reported		$	58,707			$	74,322
Add: Stock-based employee compensation expense included in reported net income, net of tax			663				471
Less: Fair value compensation costs, net of tax			(10,304	)			(14,745	)
Pro forma net income		$	49,066			$	60,048
Basic earnings per share:
As reported		$	0.10			$	0.14
Pro forma		$	0.09			$	0.11
Diluted earnings per share:
As reported		$	0.10			$	0.13
Pro forma		$	0.08			$	0.11

     Although such pro forma effects of applying original SFAS No. 123 may be indicative of the effects of adopting SFAS No. 123R, the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS No. 123R will be dependent on numerous factors including, but not limited to, the valuation model chosen by the Company to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the service period; and the transition method chosen for adopting SFAS No. 123R. The Company is currently evaluating option valuation methodologies assumptions in light of SFAS No. 123R.

     In accordance with the disclosure provisions of SFAS No. 123, the fair value of employee stock options granted during the first quarter of fiscal years 2006 and 2005 was estimated at the date of grant using the Black-Scholes model and the following weighted average assumptions:

		Three Months Ended June 30,
		2005				2004
Volatility			39.0	%			82.8	%
Risk-free interest rate			3.8	%			3.1	%
Dividend yield			0.0	%			0.0	%
Expected option life		4 years				3.8 years

     For the first quarter of fiscal year 2005, the Company used its historical volatility as its basis to estimate expected volatility. In light of recent accounting guidance related to stock options, the Company reevaluated the volatility assumptions used to estimate the value of employee stock options granted after January 1, 2005. Management determined that implied volatility related to publicly traded options is more reflective of market conditions and a better indicator of expected volatility than historical volatility.

     The following weighted average assumptions are used in estimating the fair value related to shares issued under the Company’s employee stock purchase plan:

		Three Months Ended June 30,
		2005				2004
Volatility			34.4	%			40.3	%
Risk-free interest rate			1.9	%			1.6	%
Dividend yield			0.0	%			0.0	%
Expected option life		0.5 years				0.5 years

     Due to the subjective nature of the assumptions used in the Black-Scholes model, the pro forma net income and earnings 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 the first quarter of fiscal year 2005, 30,000 shares of restricted stock were granted with a weighted average fair value on the date of grant of $17.37 per share. The unearned compensation associated with the restricted stock grants was $6.1 million and $6.8 million as of June 30, 2005 and March 31, 2005, respectively. These amounts are included in shareholders’ equity as a component of additional paid-in capital. 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 months ended June 30, 2005 and June 30, 2004, compensation expense related to the restricted stock grants amounted to approximately $663,000 and $471,000, respectively.

Recent Accounting Pronouncements

     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 is a replacement of Accounting Principles Board Opinion (“APB”) No. 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting

principle and the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2007. The Company is currently evaluating the effect that the adoption of SFAS No. 154 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact.

     In March 2005, the FASB issued FIN 47 as an interpretation of FASB Statement No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143). This interpretation clarifies that the term conditional asset retirement obligation as used in SFAS No. 143, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even through uncertainly exists about the timing and/or method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is currently assessing the impact of the adoption of FIN 47.

NOTE C — EARNINGS PER SHARE

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

     Diluted earnings 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 per share was computed as follows:

		Three Months Ended June 30,
		2005				2004
		(In thousands, except per share
		amounts)
Basic earnings per share:
Net income		$	58,707			$	74,322
Shares used in computation:
Weighted average ordinary shares outstanding			569,325				530,626
Basic earnings per share		$	0.10			$	0.14
Diluted earnings per share:
Net income		$	58,707			$	74,322
Shares used in computation:
Weighted average ordinary shares outstanding			569,325				530,626
Weighted average ordinary share equivalents from stock options and awards (1)			9,925				16,037
Weighted average ordinary share equivalents from convertible notes (2)			19,048				21,350
Weighted average ordinary shares and ordinary share equivalent outstanding			598,298				568,013
Diluted earnings per share		$	0.10			$	0.13

NOTE D — OTHER COMPREHENSIVE INCOME (LOSS)

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

		Three Months Ended June 30,
		2005				2004
		(In thousands)
Net income		$	58,707			$	74,322
Other comprehensive income (loss):
Foreign currency translation adjustment, net of taxes			(66,960	)			15,107
Unrealized holding gain (loss) on investments and derivative instruments, net of taxes			1,557				(1,432	)
Comprehensive income (loss)		$	(6,696	)		$	87,997

NOTE E — FINANCIAL INSTRUMENTS

     The value of the Company’s cash and cash equivalents, investments, accounts receivable and accounts payable carrying amount approximates fair value. The fair value of the Company’s long-term debt is determined based on current broker trading prices. The Company’s cash equivalents are comprised of cash deposited in money market accounts and certificates of deposit. The Company’s investment policy limits the amount of credit exposure to 20% of the total investment portfolio in any single issuer.

     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. The Company does not engage in foreign currency speculation. The credit risk of these forward contracts is minimized since the contracts are with large financial institutions. The Company hedges committed exposures and these forward contracts generally do not subject the Company to risk of accounting losses. The gains and losses on forward contracts generally offset the gains and losses on the assets, liabilities and transactions hedged.

     As of June 30, 2005, the fair value of these short-term foreign currency forward contracts was recorded as other current assets amounting to $2.9 million. As of June 30, 2005, the Company had recorded in other comprehensive income deferred losses of approximately $4.7 million relating to the Company’s foreign currency forward contracts. These losses 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.

     On November 17, 2004, the Company issued $500.0 million of 6.25% senior subordinated notes due in November 2014. Interest is payable semiannually on May 15 and November 15. The Company entered into interest rate swap transactions to effectively convert a portion of the fixed interest rate debt to a variable rate debt. The swaps, which expire in 2014, are accounted for as fair value hedges under SFAS 133. The notional amounts of the swaps total $400.0 million. Under the terms of the swaps, the Company will pay an interest rate equal to the six- 

month LIBOR rate, set in arrears, plus a fixed spread of 1.37% to 1.52%. In exchange, the Company will receive a payment based on a fixed rate of 6.25%. At June 30, 2005, $7.5 million has been recorded in other current assets to record the fair value of the interest rate swaps, with a corresponding increase to the carrying value of the 6.25% senior subordinated notes on the Consolidated Balance Sheet.

NOTE F — 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 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 annual facility and commitment fees of up to 0.24% for unused amounts and program fees of up to 0.34% of outstanding amounts. 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 2006, is subject to annual renewal.

     At June 30, 2005, the unaffiliated financial institution’s maximum investment limit was $250 million. The Company has sold $182.4 million and $249.9 million of its accounts receivable as of June 30, 2005 and March 31, 2005, respectively, which represent the face amount of the total outstanding trade receivables on all designated customer accounts on that dates. The Company received net cash proceeds of $97.7 million and $134.7 million from the unaffiliated financial institutions for the sale of these receivables during the three months ended June 30, 2005 and March 31, 2005, respectively. 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 $91.6 million and $123.1 million as of June 30, 2005 and March 31, 2005, respectively.

     Additionally, during the three months ended June 30, 2005, the Company sold approximately $203.8 million of receivables to a banking institution with limited recourse, which management believes is nominal. The outstanding balance of sold receivables, not yet collected, was $203.3 million as of June 30, 2005.

     In accordance with Statement of Financial Accounting Standards No. 140 (SFAS 140) “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liability,” 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 G — RESTRUCTURING CHARGES

     In recent years, the Company has initiated a series of restructuring activities in light of the global economic downturn. These activities, which are intended to realign the Company’s global capacity and infrastructure with demand by its OEM customers and thereby improve operational efficiency, include reducing excess workforce and capacity, and consolidating and relocating certain manufacturing and administrative facilities to lower cost regions.

     The restructuring costs include employee severance, costs related to leased facilities, owned facilities that are no longer in use and are to be disposed of, leased equipment that is no longer in use and will be disposed of, and other costs associated with the exit of certain contractual agreements due to facility closures. The overall impact of these activities is that the Company has shifted its manufacturing capacity to locations with higher efficiencies and, in some instances, lower costs, and is better utilizing its overall existing manufacturing capacity. This has enhanced the Company’s ability to provide cost-effective manufacturing service offerings, which enables it to retain and expand the Company’s existing relationships with customers and attract new business. These restructuring activities were substantially complete as of March 31, 2004, however, the Company continues to execute various smaller-scale and follow-on activities.

     Liability for costs associated with exit or disposal of activities are recognized when the liabilities are incurred.

     As of June 30, 2005 and March 31, 2005, assets that were no longer in use and held for sale totaled approximately $65.2 million and $59.3 million, respectively, primarily representing manufacturing facilities located in the Americas that have been closed as part of the facility consolidations. For assets held for sale, depreciation ceases and an impairment loss is recognized if the carrying amount of the asset exceeds its fair value less cost to sell. Assets held for sale are included in other assets on the consolidated balance sheet.

Three months ended June 30, 2005

     The Company recognized restructuring charges of approximately $32.7 million during the first quarter of fiscal year 2006 related to the impairment of certain long-term assets and other costs resulting from closures and consolidations of various manufacturing facilities. The Company has classified $27.6 million of the charges associated with facility closures as a component of cost of sales during the first quarter of fiscal year 2006.

     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 activities, except for certain long-term contractual obligations. During the first quarter of fiscal year 2006, the Company recorded approximately $14.5 million of other exit costs associated with contractual obligations, of which approximately $2.3 million is classified as long-term obligation and will be paid throughout the term of the terminated leases.

     The components of the restructuring charges during the first quarter of fiscal year 2006 were as follows:

		First
		Quarter
		(In thousands)
Americas
Severance		$	2,442
Long-lived assets impairment			3,847
Other exit costs			6,421
Total restructuring charges		$	12,710
Europe
Severance		$	11,483
Long-lived assets impairment			456
Other exit costs			8,040
Total restructuring charges		$	19,979
Total
Severance		$	13,925
Long-lived assets impairment			4,303
Other exit costs			14,461
Total restructuring charges		$	32,689

     During the first quarter of fiscal year 2006, the Company recorded approximately $13.9 million of employee termination costs associated with the involuntary terminations of 1,715 identified employees in connection with the various facility closures and consolidations. The identified involuntary employee terminations by reportable geographic region amounted to 65 and 1,650 for the Americas and Europe, respectively. Approximately $9.9 million of the net charges were classified as a component of cost of sales.

     The Company also recorded approximately $4.3 million for the write-down of property and equipment associated with various manufacturing and administrative facility closures. Approximately $4.1 million of this amount was classified as a component of cost of sales. The restructuring charges recorded during the first quarter of fiscal year 2006 also included approximately $14.5 million for other exit costs, of which, $13.6 million was classified as a component of cost of sales. This amount was primarily comprised of facility lease obligations of approximately $10.5 million, customer disengagement costs of $1.2 million, and facility abandonment and refurbishment costs accounted for approximately $0.4 million.

     The following table summarizes the provisions relating to restructuring costs incurred during the three months ended June 30, 2005 and payments and the accrual balance during the three months ended June 30, 2005 for all restructuring costs:

						Long-Lived
						Asset				Other
		Severance				Impairment				Exit Costs				Total
						(In thousands)
Balance as of March 31, 2005		$	13,551			$	—			$	24,337			$	37,888
Activities during the quarter:
Provision for charges incurred in fiscal year 2006			13,925				4,303				14,461				32,689
Cash payments for charges incurred in fiscal year 2006			(2,163	)			—				(1,100	)			(3,263	)
Cash payments for charges incurred in fiscal year 2005			(3,426	)			—				(472	)			(3,898	)
Cash payments for charges incurred in fiscal year 2004			(1,179	)			—				(2,386	)			(3,565	)
Cash payments for charges incurred in fiscal year 2003 and prior			(24	)			—				(684	)			(708	)
Non-cash charges incurred in fiscal year 2006			—				(4,303	)			(3,421	)			(7,724	)
Balance as of June 30, 2005			20,684				—				30,735				51,419
Less:
Current portion (classified as other current liabilities)			(19,766	)			—				(16,741	)			(36,507	)
Accrued facility closure costs, net of current portion (classified as other long-term liabilities)		$	918			$	—			$	13,994			$	14,912

Fiscal Year 2005

     The Company recognized restructuring charges of approximately $95.4 million during fiscal year 2005 related to severance, the impairment of certain long-term assets and other costs resulting from closures and consolidations of various manufacturing facilities. The Company has classified $78.4 million of the charges associated with facility closures as a component of cost of sales during fiscal year 2005.

     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 activities, except for certain long-term contractual obligations. During fiscal year 2005, the Company recorded approximately $16.3 million of other exit costs associated with contractual obligations. As of March 31, 2005, approximately $1.9 million is classified as long-term obligation and will be paid throughout the term of the terminated leases.

     The components of the restructuring charges during fiscal year 2005 were as follows:

		First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter				Total				Nature
		(In thousands)
America:
Severance		$	1,793			$	—			$	—			$	—			$	1,793
Long-lived assets impairment			365				125				—				5,300				5,790
Other exit costs			1,598				321				170				—				2,089
Total restructuring charges		$	3,756			$	446			$	170			$	5,300			$	9,672
Asia:
Severance			—			$	872				—				—			$	872
Long-lived assets impairment			—				267				—				—				267
Other exit costs			—				1,220				—				—				1,220
Total restructuring charges			—			$	2,359				—				—			$	2,359
Europe:
Severance		$	17,447			$	15,613			$	29,092			$	1,515			$	63,667
Long-lived assets impairment			100				5,743				—				795				6,638
Other exit costs			2,285				9,341				1,397				—				13,023
Total restructuring charges		$	19,832			$	30,697			$	30,489			$	2,310			$	83,328
Total:
Severance		$	19,240			$	16,485			$	29,092			$	1,515			$	66,332			Cash
Long-lived assets impairment			465				6,135				—				6,095				12,695			Non-Cash
Other exit costs			3,883				10,882				1,567				—				16,332			Cash & Non-Cash
Total restructuring charges		$	23,588			$	33,502			$	30,659			$	7,610			$	95,359

     During fiscal year 2005, the Company recorded approximately $66.3 million of employee termination costs associated with the involuntary terminations of 3,000 identified employees in connection with the various facility closures and consolidations. The identified involuntary employee terminations by reportable geographic region amounted to 300, 200, and 2,500 for the Americas, Asia and Europe, respectively. As of June 30, 2005, approximately 2,970 employees have been terminated under these plans, while approximately 30 employees have been notified but not yet terminated. Approximately $54.7 million of the charges were classified as a component of cost of sales. The Company also recorded approximately $12.7 million for the write-down of property and equipment associated with various manufacturing and administrative facility closures. Approximately $11.2 million of this amount was classified as a component of cost of sales. The restructuring charges recorded during fiscal year 2005 also included approximately $16.3 million for other exit costs. Approximately $12.5 million of the amount was classified as a component of cost of sales. Of this amount, customer disengagement costs amounted to approximately $5.5 million; facility lease obligations accounted for approximately $2.3 million and facility abandonment and refurbishment costs accounted for approximately $3.7 million. During the three months period ended June 30, 2005, the Company paid $3.9 million for restructuring charges incurred in fiscal year 2005. As of June 30, 2005, accrued facility closure costs were $1.9 million, net of current portion of $5.5 million related to restructuring charges incurred in fiscal year 2005.

     The following table summarizes the provisions, payments and the accrual balance relating to restructuring costs incurred during fiscal year ended March 31, 2005:

						Long-Lived
						Asset				Other
		Severance				Impairment				Exit Costs				Total
						(In thousands)
Activities during the year:
Provision		$	66,332			$	12,695			$	16,332			$	95,359
Cash payments			(57,758	)			—				(6,977	)			(64,735	)
Non-cash charges			—				(12,695	)			(6,624	)			(19,319	)
Balance as of March 31, 2005		$	8,574			$	—			$	2,731			$	11,305

Fiscal Year 2004 and 2003

     The Company recognized restructuring charges of approximately $540.3 million during fiscal year 2004 related to the impairment of certain long-term assets and other costs resulting from closures and consolidations of various manufacturing facilities. The Company has classified $477.3 million of the charges associated with facility closures as a component of cost of sales during fiscal year 2004. During the three months period ended June 30, 2005, the Company paid $3.6 million for restructuring charges incurred in fiscal year 2004. As of June 30, 2005, accrued facility closure costs were $6.1 million, net of current portion of $8.9 million related to restructuring charges incurred in fiscal year 2004.

     The Company recognized restructuring and other charges of approximately $304.4 million during fiscal year 2003, of which $297.0 million related to the closures and consolidations of various manufacturing facilities and $7.4 million related to the impairment of investments in certain technology companies. The Company classified $266.3 million of the charges associated with the facility closures as a component of cost of sales during fiscal year 2003. During the three months period ended June 30, 2005, the Company paid $708,000 for restructuring and other charges incurred in fiscal year 2003 and prior. As of June 30, 2005, accrued facility closure costs were $4.7 million, net of current portion of $2.7 million related to restructuring charges incurred in fiscal year 2003 and prior.

     For further discussion of the Company’s historical restructuring activities, refer to Note 10 “Restructuring Charges” to the Consolidated Financial Statements in the Company’s 2005 Annual Report on Form 10-K for the fiscal year ended March 31, 2005.

NOTE H — SEGMENT 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.

     Geographic information is as follows:

		Three Months Ended June 30,
		2005				2004
		(In thousands)
Net sales:
Asia		$	2,101,686			$	1,924,002
Americas			737,937				622,294
Europe			1,118,512				1,556,755
Intercompany eliminations			(60,604	)			(222,603	)
		$	3,897,531			$	3,880,448

		Three Months Ended June 30,
		2005				2004
		(In thousands)
Income before income taxes:
Asia		$	73,864			$	81,112
Americas			(228	)			11,759
Europe			6,376				(15,408	)
Intercompany eliminations			(21,916	)			(22,662	)
		$	58,096			$	54,801

		June 30, 2005				March 31, 2005
		(In thousands)
Long-lived assets:
Asia		$	818,836			$	806,617
Americas			419,744				422,644
Europe			430,557				475,255
		$	1,669,137			$	1,704,516

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

     For purposes of the preceding tables, “Asia” includes Bangladesh, China, Japan, India, Indonesia, Korea, Malaysia, Mauritius, Pakistan, Singapore, Taiwan and Thailand; “Americas” includes Argentina, Brazil, Canada, Colombia, Mexico, Venezuela, and the United States; “Europe” includes Austria, the Czech Republic, Denmark, Finland, France, Germany, Hungary, Ireland, Israel, Italy, Netherlands, Norway, Poland, Portugal, Scotland, South Africa, Sweden, Switzerland, Ukraine, and the United Kingdom.

     During the three months ended June 30, 2005 and 2004, net sales generated from Singapore, the principal country of domicile, were approximately $52.0 and $57.0 million, respectively.

NOTE I — COMMITMENTS AND CONTINGENCIES

     On June 29, 2004, the Company entered into an asset purchase agreement with Nortel providing for Flextronics’s purchase of certain of Nortel’s optical, wireless, wireline and enterprise manufacturing operations and

optical design operations. The purchase of these assets will occur in stages, with the first and second stages completed in November 2004 and February 2005, and further stages scheduled in multiple phases during fiscal year 2006. Refer to Note J – Business Acquisitions and Divestitures for further discussion.

     The Company had a revolving credit facility in the amount of $1.1 billion as of March 31, 2005. On May 27, 2005, the Company amended the credit facility to increase the amount of the facility to $1.35 billion and to make certain other changes. The amended credit facility consists of two separate credit agreements, one providing for up to $1.105 billion principal amount of revolving credit loans to the Company and its designated subsidiaries; and one providing for up to $245.0 million principal amount of revolving credit loans to a U.S. subsidiary of the Company. The amended credit facility is a five-year facility expiring in May 2010. Borrowings under the amended credit facility bear interest, at the Company’s option, either at (i) the base rate (the greater of the agent’s prime rate or 0.50% plus the federal funds rate) plus the applicable margin for base rate loans ranging between 0.0% and 0.125%, based on the Company’s credit ratings; or (ii) the LIBOR rate plus the applicable margin for LIBOR loans ranging between 0.625% and 1.125%, based on the Company’s credit ratings. The Company is required to pay a quarterly commitment fee ranging from 0.125% to 0.250% per annum of the unutilized portion of the credit facility and, if the utilized portion of the facility exceeds 33% of the total commitment, a quarterly utilization fee ranging between 0.125% to 0.250% on such utilized portion, in each case based on the Company’s credit ratings. The Company is also required to pay letter of credit usage fees ranging between 0.625% and 1.125% per annum (based on the Company’s credit ratings) on the amount of the daily average outstanding letters of credit and issuance fees of 0.125% per annum on the daily average undrawn amount of letters of credit. The Company has no borrowings outstanding as of June 30, 2005.

     The amended credit facility is unsecured, and contains certain restrictions on the Company’s and its subsidiaries’ ability to (i) incur certain debt, (ii) make certain investments, (iii) make certain acquisitions of other entities, (iv) incur liens, (v) dispose of assets, (vi) make non-cash distributions to shareholders, and (vii) engage in transactions with affiliates. These covenants are subject to a number of significant exceptions and limitations. The amended credit facility also requires that the Company maintain a maximum ratio of total indebtedness to EBITDA (earnings before interest expense, taxes, depreciation and amortization), and a minimum fixed charge coverage ratio, as defined, during the term of the credit facility. Borrowings under the credit facility are guaranteed by the Company and certain of its subsidiaries.

     The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company defends itself vigorously against any such claims. Although 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 its consolidated financial position, results of operations, or cash flows.

NOTE J — BUSINESS ACQUISITIONS AND DIVESTITURES

Business acquisitions

     During the three months ended June 30, 2005, the Company completed certain acquisitions that were not individually significant to the Company’s results of operations and financial position. The aggregate cash purchase price for the acquisitions amounted to approximately $60.0 million, net of cash acquired. Goodwill and intangibles resulting from the acquisitions during the three months ended June 30, 2005, as well as contingent purchase price adjustments for certain historical acquisitions, totaled approximately $54.6 million. The purchase prices of the acquisitions have been allocated on the basis of the estimated fair value of assets acquired and liabilities assumed. The Company has not finalized the allocation of the consideration for certain of its recently completed acquisitions pending the completion of third-party valuations. The purchase price for certain of these acquisitions is subject to adjustments for contingent consideration, based upon the businesses achieving specified levels of earnings through December 31, 2010. The contingent consideration has not been recorded as part of the purchase price, pending the outcome of the contingency.

     During the three months ended June 30, 2005, the Company paid approximately $10.5 million in cash for contingent purchase price adjustments relating to certain historical acquisitions.

     On June 29, 2004, the Company entered into an asset purchase agreement with Nortel providing for Flextronics’s purchase of certain of Nortel’s optical, wireless, wireline and enterprise manufacturing operations and optical design operations. The assets to be acquired consist primarily of inventory and capital equipment currently in use. The purchase of these assets will occur in stages, with the first and second stages completed in November 2004 and February 2005, and further stages scheduled in multiple phases during fiscal year 2006.

     The Company anticipates that the aggregate purchase price for the assets acquired from Nortel will be in the range of approximately $650 million to $700 million. The purchase price will be allocated to the fair value of the acquired assets, which management currently estimates will be approximately $415 million to $465 million for inventory, approximately $35 million for fixed assets, and the remaining $200 million for intangible assets. The Company completed the closing of the optical design businesses in Canada and Northern Ireland on November 1, 2004, which resulted in the payment of $12.8 million to Nortel. On February 8, 2005 the Company also completed the closing of the manufacturing operations and related assets (including product integration, testing, repair and logistics operations) in Montreal, Quebec, which resulted in the payment of $83.7 million to Nortel. In connection with these closings, the Company entered into promissory notes amounting to $185.7 million, which are due in three quarterly payments in calendar year 2005. The Company made a payment of $62.8 million relating to the promissory notes during the three months ended June 30, 2005. The balance of $122.9 million in promissory notes is classified as other current liabilities as of June 30, 2005.

     In October 2004, the Company completed the acquisition of approximately 70% of the total outstanding shares of Hughes Software Systems Limited (now known as Flextronics Software Systems Limited (FSS)).

     The following unaudited pro forma financial information presents the combined results of operations of Flextronics and FSS as if the acquisition had occurred as of the beginning of fiscal year 2005, after giving effect to certain adjustments and related income tax effects:

		Three months ended
		June 30, 2004
		(In thousands, except per share data)
Net sales		$	3,904,593
Net income		$	75,709
Basic earnings per share		$	0.14
Diluted earnings per share		$	0.13

     On May 4, 2005, the Company announced its proposal to acquire all of the outstanding publicly-held shares (approximately 10.4 million shares or 30%) of FSS. The Company offered to acquire the shares at Rs. 575 per share ($13.23 per share), subject to shareholder and regulatory approvals, including the number of shares required for delisting being offered at this price. There is no obligation for shareholders to accept this open offer and there is no assurance that any shares will be offered for sale to the Company. The Company reserves the right not to acquire the offered shares if the final price, as determined by the Securities and Exchange Board of India, is more than Rs. 575 per share.

Divestitures

     The Company signed an agreement on June 15, 2005 to merge its Flextronics Network Services (FNS) business with Telavie AS, a company wholly-owned by Altor, a private equity firm focusing on investments in the Nordic region. Under the terms of the proposed merger, the Company will receive an upfront cash payment, and deferred and contingent payments along with ownership of 30% of the merged company. For the three months ended June 30, 2005, the revenue and operating loss inclusive of amortization and restructuring charges of FNS were approximately $185.7 million and $4.2 million respectively.

     On June 15, 2005, the Company also entered into an agreement for the sale of Flextronics Semiconductor for cash to AMIS Holdings, Inc. (AMIS), the parent company of AMI Semiconductor, Inc. The Company is in the process of determining the net asset of Flextronics Semiconductor to be sold and transferred to AMIS. As of June 30, 2005, the assets and liabilities of Flextronics Semiconductor amounted to approximately $83.7 million and $19.6 million, respectively. For the three months ended June 30, 2005, revenue and operating income were not material to the consolidated results of operations.

     As a result of these two transactions, the Company expects to receive an aggregate upfront cash payment of approximately $550 million plus additional deferred and contingent payments. Both transactions are expected to close during the second quarter of fiscal year 2006 and are subject to certain closing conditions, including certain governmental approvals.

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

     Unless otherwise specifically stated, references in this report to “Flextronics,” “the Company,” “we,” “us,” our” and similar terms mean Flextronics International Ltd. and its subsidiaries.

     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 and in “Risk Factors.” Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements.

OVERVIEW

     We are a leading provider of advanced electronics manufacturing services (EMS) to original equipment manufacturers (OEMs) of a broad range of products in the following industries: handheld devices; computer and office automation; communications infrastructure; information technology infrastructure; consumer devices; and a variety of other industries, including the industrial, automotive and medical industries. We provide a full range of vertically-integrated global supply chain services through which we design, build, and ship a complete packaged product for our OEM customers. Our OEM customers leverage our services to meet their product requirements throughout their products’ entire product life cycle. Our vertically-integrated service offerings include: design services; printed circuit board and flexible circuit fabrication; systems assembly and manufacturing; logistics; and after-market services.

     We are one of the world’s largest EMS providers, with revenues of $15.9 billion in fiscal year 2005. As of March 31, 2005, our total manufacturing capacity was approximately 12.8 million square feet in over 30 countries across five continents. We have established an extensive network of manufacturing facilities in the world’s major electronics markets (the Americas, Europe, and Asia) in order to serve the growing outsourcing needs of both multinational and regional OEMs. In fiscal year 2005, our net sales in the Americas, Europe, and Asia represented 17%, 35% and 48% of our total net sales, respectively.

     We believe that the combination of our extensive design and engineering services, global presence, vertically-integrated end-to-end services, advanced supply chain management and operational track record provide us with a competitive advantage in the market for designing and manufacturing electronic products for leading multinational OEMs. Through these services and facilities, we simplify the global product development process and provide meaningful time and cost savings for our OEM customers.

     We have actively pursued acquisitions and purchases of manufacturing facilities, design and engineering resources and technologies in order to expand our worldwide operations, broaden our service offerings, diversify and strengthen our customer relationships, and enhance our competitive position as a leading provider of comprehensive outsourcing solutions. We have completed numerous strategic transactions with OEM customers, including, among others, Nortel, Xerox, Alcatel, Casio and Ericsson, over the past several years. These strategic transactions have expanded our customer base, provided end-market diversification, and contributed to a significant portion of our revenue growth. Under these 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 will continue to selectively pursue strategic opportunities that we believe will further our business objectives and enhance shareholder value.

     On June 29, 2004, we entered into an asset purchase agreement with Nortel providing for our purchase of certain of Nortel’s optical, wireless, wireline and enterprise manufacturing operations and optical design operations. The assets to be acquired consist primarily of inventory and capital equipment currently in use. The purchase of these assets will occur in stages, with the first and second stages completed in November 2004 and February 2005, and further stages scheduled in multiple phases during fiscal year 2006. We anticipate that the aggregate purchase price for the assets acquired from Nortel will be in the range of approximately $650 million to $700 million. The purchase price will be allocated to the fair value of the acquired assets, which management currently estimates will be approximately $415 million to $465 million for inventory, approximately $35 million for fixed assets, and the remaining $200 million for intangible assets. We completed the closing of the optical design businesses in Canada and Northern Ireland on November 1, 2004, which resulted in the payment of $12.8 million to Nortel. On February 8, 2005 we also completed the closing of the manufacturing operations and related assets (including product integration, testing, repair and logistics operations) in Montreal, Quebec, which resulted in the payment of $83.7 million to Nortel. In connection with these closings, we entered into promissory notes amounting to $185.7 million, which are due in three quarterly payments in calendar year 2005. As of June 30, 2005 the outstanding balance on these notes were $122.9 million, reflecting payments of $62.8 million during the first quarter of fiscal year 2006. The timing of the remaining cash payments by us to Nortel relating to the remaining factory transfers from Nortel to us is still being negotiated.

     Subject to closing the remaining asset acquisitions, we will provide the majority of Nortel’s systems integration activities, final assembly, testing and repair operations, along with the management of the related supply chain and suppliers, under a four-year manufacturing agreement. Additionally, under a three-year design services agreement, we will provide Nortel with design services for end-to-end, carrier grade optical network products.

     Although we expect that our gross margin and operating margin on sales to Nortel will initially be less than that generally realized by us in fiscal 2005, we also expect that we will be able to increase these gross margins over time through cost reductions and by internally sourcing our vertically integrated supply chain solutions, which include the fabrication and assembly of printed circuit boards and enclosures, as well as logistics and repair services. Additionally, the impact of lower gross margins may be partially offset by the effect of anticipated lower selling, general and administrative expenses, as a percentage of net sales. There can be no assurance that we will realize lower expenses or increased operating efficiencies as anticipated.

     The completion of the Nortel transaction is subject to a number of closing conditions, including regulatory approvals, conversion of information technology systems, and the completion of the required information and consultation process with employee representatives in Europe. As with other strategic transactions, we believe the completion of this transaction may have significant impacts on our sales, end-market diversification, margins, results from operations, financial position and working capital.

     The EMS industry has experienced rapid change and growth over the past decade. The demand for advanced manufacturing capabilities and related supply chain management services has escalated, as an increasing number of OEMs outsourced some or all of their design and manufacturing requirements. Price pressure on our customers’ products in their end markets has led to increased demand for EMS production capacity in the lower cost regions of the world, such as China, Mexico, and Eastern Europe, where we have a significant presence. We have responded by making strategic decisions to realign our global capacity and infrastructure with the demand of our OEM customers so as to optimize the operating efficiencies that can be provided by our global presence. The overall impact of these activities is that we have shifted our manufacturing capacity to locations with higher efficiencies and in some instances, lower costs, thereby enhancing our ability to provide cost-effective manufacturing service in order for us to retain and expand our existing relationships with customers and attract new business. As a result, we have recognized $95.4 million, $540.3 million and $297.0 million of restructuring charges in fiscal years 2005, 2004 and 2003, respectively, in connection with the realignment of our global capacity and infrastructure. Additionally, we expect to recognize approximately $100 million of restructuring charges in fiscal year 2006 and we may be required to take additional charges in the future as a result of these activities. During the three months ended June 30, 2005 we recognized $32.7 million of restructuring charges.

     Our revenue is generated from sales of our services to our customers, which include industry leaders such as Casio Computer Co., Ltd., Dell Computer Corporation, Ericsson Telecom AB, Hewlett-Packard Company, Microsoft Corporation, Motorola, Inc., Nortel Networks Limited, Sony-Ericsson, Telia Companies, and Xerox Corporation. We currently depend, and expect to continue to depend, upon a small number of customers for a significant portion of our revenues. For the three months ended June 30, 2005, our ten largest customers accounted for approximately 62% of net sales. Sony Ericsson was the only customer accounting for more than 10% of sales. For any particular customer, we may be engaged in programs to design or manufacture a number of products, or may be designing or manufacturing a single product or product line. In addition, our revenue is generated from a variety of industries. For the three months ended June 30, 2005, we derived:

	•		approximately 24% of our revenues from customers in the handheld devices industry, whose products include cellular phones, pagers and personal digital assistants;
	•		approximately 24% 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 24% 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 10% of our revenues from the consumer devices industry, whose products include set-top boxes, home entertainment equipment, cameras and home appliances;
	•		approximately 6% of our revenues from providers of information technologies infrastructure, whose products include servers, workstations, storage systems, mainframes, hubs and routers; and
	•		approximately 12% of our revenues from customers in a variety of other industries, including the medical, automotive, industrial and instrumentation industries.

     Our operating results are affected by a number of factors, including the following:

	•		our customers may not be successful in marketing their products, their products may not gain widespread commercial acceptance, and our customers’ products have short product life cycles;
	•		our customers may cancel or delay orders or change production quantities;
	•		our operating results vary significantly from period to period due to the mix of the manufacturing services we are providing, the number and size of new manufacturing programs, the degree to which we utilize our manufacturing capacity, seasonal demand, shortages of components and other factors;
	•		integration of acquired businesses and facilities; and
	•		managing growth and changes in our operations.

     We also are subject to other risks, including risks associated with operating in foreign countries, changes in our tax rates, and fluctuations in currency exchange rates. Please see “Risk Factors.”

     We continuously evaluate the strategic and financial contributions of each of our operations and focus our primary growth objectives on our core EMS vertically-integrated business activities. We also assess opportunities to maximize shareholder value with respect to our non-core activities through divestitures, initial public offerings, spin-offs and other strategic transactions.

     Consistent with this strategy, on June 15, 2005 we announced that we have signed separate agreements for the sale of Flextronics Network Services (FNS) and Flextronics Semiconductor. FNS will merge with Telavie AS, a company wholly owned by Altor, a private equity firm focusing on investments in the Nordic region. Under the terms of the proposed merger, we will receive an upfront cash payment, and deferred and contingent payments, along with ownership of 30% of the merged company. For the three months ended June 30, 2005, the revenue and operating loss inclusive of amortization and restructuring charges of FNS were approximately $185.7 million and $4.2 million respectively. The impact of the proposed merger on consolidated net assets is not expected to be material. In a separate agreement, we will sell our semiconductor division for cash to AMIS Holdings, Inc., the parent company of AMI Semiconductor, Inc. We are in the process of determining the net asset of Flextronics Semiconductor to be sold and transferred to AMIS. As of June 30, 2005, the assets and liabilities of Flextronics Semiconductor amounted to approximately $83.7 million and $19.6 million respectively. For the three months ended June 30, 2005, revenue and operating income of Flextronics Semiconductor were not material to the consolidated results of operations.

     As a result of these two transactions, we expect to receive an aggregate upfront cash payment of approximately $550 million plus additional deferred and contingent payments. Both transactions are expected to close during the second quarter of fiscal year 2006 and are subject to certain closing conditions, including certain governmental approvals.

     On May 4, 2005, we announced our proposal to acquire all of the outstanding publicly-held shares (approximately 10.4 million shares or 30%) of our India-based subsidiary, Flextronics Software Systems Limited. We offered to acquire the shares at Rs. 575 per share ($13.23 per share), subject to shareholder and regulatory approvals, including the number of shares required for delisting being offered at this price. There is no obligation for shareholders to accept this open offer and there is no assurance that any shares will be offered for sale to us. We reserve the right not to acquire the offered shares if the final price, as determined by the Securities and Exchange Board of India, is more than Rs. 575 per share.

     On June 3, 2005 we received requisite shareholder approval and can proceed with the de-listing offer at any time. As of June 30, 2005 the publicly traded share price of Flextronics Software Systems closed at Rs. 596.15 (US$13.70). We have not proceeded with the de-listing offer to date.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     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, 2005. 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 collectability 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 Costs

     We recognized restructuring charges during the first quarter of fiscal year 2006, in fiscal year 2005 and fiscal year 2004, 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 restructuring-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 G — Restructuring 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 to realize these deferred income tax assets. 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 or decrease our valuation allowance against the deferred tax assets resulting in additional or lesser income tax expense.

Recent Accounting Pronouncements

     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”. SFAS No. 154 is a replacement of Accounting Principles Board Opinion (“APB”) No. 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by us in the first quarter of fiscal 2007. We are currently evaluating the effect that the adoption of SFAS No. 154 will have on our consolidated results of operations and financial condition but do not expect it to have a material impact.

     In March 2005, the FASB issued FIN 47 as an interpretation of FASB Statement No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143). This interpretation clarifies that the term conditional asset retirement obligation as used in SFAS No. 143, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even through uncertainly exists about the timing and/or method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We are currently assessing the impact of the adoption of FIN 47.

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, certain statements of operations data expressed as a percentage of net sales. The financial information and the discussion below should be read in conjunction with the consolidated financial statements and notes thereto included in this document. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2005 Annual Report on Form 10-K.

		Three Months Ended June 30,
		2005				2004
Net sales			100.0	%			100.0	%
Cost of sales			92.8				93.7
Restructuring charges			0.7				0.5
Gross profit			6.5				5.8
Selling, general and administrative expenses			3.8				3.6
Intangibles amortization			0.4				0.2
Restructuring charges			0.1				0.1
Interest and other expense, net			0.7				0.5
Income before income taxes			1.5				1.4
Benefit from income taxes			(0.0	)			(0.5	)
Net income			1.5	%			1.9	%

Net Sales

     Net sales for the first quarter of fiscal year 2006 totaled $3.9 billion, representing an increase of $17.1 million over the first quarter of fiscal year 2005. Net sales for the first quarter of fiscal year 2006 increased by $262.9 million and $162.4 million in the Americas and Asia, respectively, offset by a decline of $408.2 million in Europe. The increase in net sales was primarily attributable to (i) an increase of $287.2 million to providers of communication infrastructure products, (ii) our continued expansion of business with new and existing customers in the industrial, medical and automotive industries, which resulted in an increase of $123.5 million,

(iii) an increase of $89.4 million to customers in the computer and office automation industries, offset by (iv) a decrease of $498.1 million to customers in the handheld device industry.

     Our ten largest customers during the three months ended June 30, 2005 and 2004 accounted for approximately 62% and 64% of net sales, respectively. Sony-Ericsson was the only customer that accounted for 10% or more of our net sales during the first quarter of fiscal year 2006 and 2005.

Gross Margin

     Our gross profit is affected by a number of factors, including the number and size of new manufacturing programs, product mix, component costs and availability, product life cycles, unit volumes, pricing, competition, new product introductions, capacity utilization and the expansion and consolidation of manufacturing facilities. Typically, a new program will contribute relatively less to our gross margin in its early stages, as manufacturing volumes are low and result in inefficiencies and unabsorbed manufacturing overhead costs. As volumes increase, the contribution to gross margin often increases due to the ability to leverage improved utilization rates and overhead absorption. In addition, different programs can contribute different gross margins depending on factors such as the types of services involved, location of production, size of the program, complexity of the product, and level of material costs associated with the associated products. As a result, our gross margin varies from period to period.

     Gross profit in the first quarter of fiscal year 2006 increased $25.7 million to $251.6 million, or 6.5% of net sales, from $225.9 million, or 5.8% of net sales, in the first quarter of fiscal year 2005. The 70 basis point increase in gross margin was mainly attributed to a 90 basis point decrease in cost of sales resulting primarily from the increased level of value-add provided through design and engineering, network services, software services and printed circuit board fabrication, along with better absorption of fixed costs driven by our restructuring efforts, offset by a 20 basis point increase in restructuring charges. Restructuring charges relate to the consolidation and closure of various facilities and are described in more detail below in the section entitled, “Restructuring Charges.”

Restructuring Charges

     In recent years, we have initiated a series of restructuring activities in light of the global economic downturn. These activities, which are intended to realign our global capacity and infrastructure with demand by our OEM customers and thereby improve our operational efficiency, include:

	•		reducing excess workforce and capacity;
	•		consolidating and relocating certain manufacturing facilities to lower-cost regions; and
	•		consolidating and relocating certain administrative facilities.

     The restructuring costs include employee severance, costs related to leased facilities, owned facilities that are no longer in use and are to be disposed of, leased equipment that is no longer in use and will be disposed of, and other costs associated with the exit of certain contractual agreements due to facility closures. The overall impact of these activities is that we have shifted our manufacturing capacity to locations with higher efficiencies and, in some instances, lower costs, and are better utilizing our overall existing manufacturing capacity. This has enhanced our ability to provide cost-effective manufacturing service offerings, which enables us to retain and expand our existing relationships with customers and attract new business. Although we believe we are realizing our anticipated benefits from these efforts, we continue to monitor our operational efficiency and capacity requirements and will utilize similar measures in the future to realign our operations relative to future customer demand. We expect to recognize approximately $100 million of restructuring charges in fiscal year 2006 and we may be required to take additional charges in the future as a result of these activities, which could have a material adverse impact on our operating results, financial position and cash flows. We cannot predict the timing or amount of any future restructuring charges.

     During the first quarter of fiscal year 2006, we recognized restructuring charges of approximately $32.7 million. Restructuring charges recorded by reportable geographic region amounted to $12.7 million and $20.0 million for the

Americas and Europe, respectively. The involuntary employee terminations identified by reportable geographic region amounted to 65 and 1,650 for the Americas and Europe, respectively. Approximately $27.6 million of the restructuring charges were classified as a component of cost of sales.

     During the first quarter of fiscal year 2005, we recognized restructuring charges of approximately $23.6 million relating to the closure and consolidations, and impairment of certain long-lived assets, at various manufacturing facilities. Restructuring charges recorded by reportable geographic regions totaled $3.8 million and $19.8 million for Americas and Europe, respectively. The associated involuntary employee terminations identified by geographic regions were 270 and 684 for Europe and Americas, respectively. Approximately $21.0 million of the restructuring charges were classified as a component of cost of sales.

     We believe that the potential savings in cost of goods sold 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 future periods.

     Refer to Note G — Restructuring and Other Charges, of the Notes to Condensed Consolidated Financial Statements in Item 1, “Financial Information” for further discussion of our restructuring activities.

Selling, General and Administrative Expenses

     Selling, general and administrative expenses, or SG&A, in the first quarter of fiscal year 2006 amounted to $147.8 million, or 3.8% of net sales, compared to $141.6 million, or 3.6% of net sales, in the first quarter of fiscal year 2005. The increase in SG&A was primarily attributable to the continuing expansion of our design and engineering services, network services, software services and printed circuit board fabrication. The corporate and administrative expenses, primarily sales and supply-chain management, also increased to support the continued growth of our business.

Intangibles Amortization

     Amortization of intangible assets in the first quarter of fiscal year 2006 increased to $14.6 million from $8.7 million in the first quarter of fiscal year 2005. The increase is due to the amortization expense associated with intangible assets acquired through various business acquisitions during the second half of fiscal year 2005 and first quarter of 2006.

Interest and Other Expense, Net

     Interest and other expense, net was $26.0 million in the first quarter of fiscal year 2006 compared to $18.3 million in the first quarter of fiscal year 2005, an increase of $7.7 million. The increase is driven by higher minority interest expense resulting primarily from our Hughes Software Systems Ltd acquisition, foreign exchange losses in the first quarter of fiscal year 2006 as compared to foreign exchange gains in the same quarter in fiscal year 2005 and interest expense associated with the issuance of $500.0 million of 6.25% senior subordinated notes in November 2004, partially offset by lower interest cost due to our redemption of €144.2 million of 9.75% euro senior subordinated notes in March 2005.

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 benefit of 1.1% and 35.6% in the first quarter of fiscal year 2006 and 2005, respectively. The tax benefit in the first quarter of fiscal year 2006 includes a one-time tax benefit of $3.2 million as a result of renewing our Malaysian pioneer tax status for the next 15 years. The tax benefit in the first quarter of fiscal year 2005 was primarily due to the establishment of a $25.0 million deferred tax asset resulting from a tax law change in Hungary that replaced a tax holiday incentive with a tax credit incentive. 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 our subsidiaries primarily in China, Hungary, India and Malaysia.

     In evaluating the realizability of the deferred tax assets, management considers the recent history of operating income and losses by jurisdiction, exclusive of items that it believes are non-recurring in nature such as restructuring charges and losses associated with early extinguishment of debt. Management also considers the future projected operating income in the relevant jurisdiction and the effect of any tax planning strategies. Based on this analysis, management believes that the current valuation allowance is adequate.

LIQUIDITY AND CAPITAL RESOURCES

     At June 30, 2005 we had cash and cash equivalents amounted to $830.2 million and bank and other debts amounted to $1.8 billion. We also had a revolving credit facility of $1.35 billion, under which we had no borrowings outstanding as of June 30, 2005. The credit facility is subject to compliance with certain financial covenants and expires in March 2010.

     Cash provided by operating activities was $51.7 million and $166.2 million during the three months ended June 30, 2005 and 2004, respectively. During the first quarter of fiscal year 2006, cash provided by operating activities was primarily generated by net income of $58.7 million, an increase in trade payables and other accrued liabilities of approximately $100.7 million and a decrease in inventory of approximately $10.0 million, offset by an increase in accounts receivable of approximately $237.7 million. The increase in accounts payable and other current liabilities was primarily due to our continued expansion of our business. The increase in accounts receivable was primarily due to the reduction in sales of accounts receivable.

     Cash used in investing activities was $163.1 million and $416.4 million in the first quarter of fiscal years 2006 and 2005, respectively. Cash used in investing activities during the first quarter of fiscal year 2006 primarily related to the following:

	•		net capital expenditures of $52.9 million for the purchase of equipment and for the continued expansion of various manufacturing facilities in certain low cost, high volume centers, primarily in Asia;
	•		our payments of Nortel promissory notes of $62.8 million and $70.5 million for various other acquisitions of businesses and contingent purchase price adjustments relating to certain historic acquisitions;
	•		$4.8 million of investments in certain non-publicly traded technology companies; and
	•		$27.9 million of proceeds from our participation in our trade receivables securitization program.

     Financing activities generated $43.4 million and $284.9 million in the first quarter of fiscal years 2006 and 2005, respectively. Cash provided by financing activities in the first quarter of fiscal year 2006 primarily related to proceeds of $23.0 million from the sale of ordinary shares under our employee stock plans and net proceeds of borrowings under bank borrowings of $20.4 million.

     On June 29, 2004, we entered into an asset purchase agreement with Nortel providing for our purchase of certain of Nortel’s optical, wireless, wireline and enterprise manufacturing operations and optical design operations. The purchase of these assets will occur in stages, with the first and second stage completed in November 2004 and February 2005 and further stages scheduled in multiple phases during fiscal year 2006. We anticipate that the aggregate cash purchase price for the assets acquired will be in the range of approximately $650 million to $700 million. We completed the closing of the optical design businesses in Canada and Northern Ireland on November 1, 2004, which resulted in the payment of $12.8 million to Nortel. On February 8, 2005, we also completed the closing of the manufacturing operations and related assets (including product integration, testing, repair and logistics operations) in Montreal, Quebec, which resulted in the payment of $83.7 million to Nortel. In connection with these closings, we entered into promissory notes amounting to $185.7 million. During the first quarter of fiscal year 2006,

we made a payment of $62.8 million on the promissory notes. The remaining payments due in two quarterly installments in calendar year 2005. We are currently in discussion with Nortel regarding the timing of the cash payments associated with the remaining factory transfers. We intend to use our cash balances and revolving line of credit to fund the remaining purchase price for the assets yet to be acquired.

     Our working capital requirements and capital expenditures could continue to increase in order to support future expansions of our operations. In addition to the Nortel acquisition discussed above, it is possible that future acquisitions may be significant and may require the payment of cash. 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.

     On May 4, 2005, we announced our proposal to acquire all of the outstanding publicly-held shares (approximately 10.4 million shares or 30%) of our India-based subsidiary, Flextronics Software Systems Limited. We offered to acquire the shares at Rs. 575 per share ($13.23 per share), subject to shareholder and regulatory approvals, including the number of shares required for delisting being offered at this price. There is no obligation for shareholders to accept this open offer and there is no assurance that any shares will be offered for sale to us. We reserve the right not to acquire the offered shares if the final price, as determined by the Securities and Exchange Board of India, is more than Rs. 575 per share.

     We continuously evaluate the strategic and financial contributions of each of our operations and focus our primary growth objectives on our core EMS vertically-integrated business activities. We also assess opportunities to maximize shareholder value with respect to our non-core activities through divestitures, initial public offerings, spin-offs and other strategic transactions. Consistent with this strategy, we signed an agreement on June 15, 2005 to merge our Flextronics Network Services business with Telavie AS, a company wholly-owned by Altor, a private equity firm focusing on investments in the Nordic region. Under the terms of the proposed merger, we will receive an upfront cash payment, and deferred and contingent payments along with ownership of 30% of the merged company. For the three months ended June 30, 2005, the revenue and operating loss inclusive of amortization and restructuring charges of FNS were approximately $185.7 million and $4.2 million respectively. The impact of the proposed merger on consolidated net assets is not expected to be material. On June 15, 2005, we also entered into an agreement for the sale of Flextronics Semiconductor for cash to AMIS Holdings, Inc., parent company of AMI Semiconductor, Inc. We are in the process of determining the net assets of Flextronic Semiconductor to be sold and transferred to AMIS. As of June 30, 2005, the assets and liabilities of Flextronics Semiconductor amounted to approximately $83.7 million and $19.6 million respectively. For the three months ended June 30, 2005, revenue and operating income of Flextronics Semiconductor were not material to the consolidated results of operations. As a result of these two transactions, we expect to receive an aggregate upfront cash payment of approximately $550 million plus additional deferred and contingent payments. Both transactions are expected to close during the second quarter of fiscal year 2006 and are subject to certain closing conditions, including certain governmental approvals.

     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

     Information regarding our long-term debt payments, operating lease payments, capital lease payments and other commitments is provided in Item 7 “Management’s Discussion and Analysis of Results of Operations and Financial Condition” of our Annual Report on our Form 10-K for the fiscal year ended March 31, 2005. There have been no material changes in contractual obligations since March 31, 2005. In July 2005, $5 million of the $200 million zero coupon convertible junior subordinated notes due 2008 was converted into ordinary shares of the Company. Information regarding our other financial commitments at June 30, 2005 is provided in “Notes to Condensed Consolidated Financial Statements, Note F — Trade Receivables Securitization.”

RELATED PARTY TRANSACTIONS

     Since June 30, 2003, 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 1.49% to 5.85%. There were no loans outstanding from the Company’s executive officers as of June 30, 2005 and March 31, 2005. 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 June 30, 2005 was approximately $2.0 million.

RISK FACTORS

We depend on industries that 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.

     We derive our revenues from the following industries:

	•		handheld devices, with products such as cellular phones and personal digital assistants;
	•		computer and office automation, with products such as copiers, scanners, graphics cards, desktop and notebook computers, and peripheral devices such as printers and projectors;
	•		communications infrastructure, with products such as equipment for optical networks, wireless base stations, access/edge routers and switches, and broadband access equipment;
	•		consumer devices, with products such as set-top boxes, home entertainment equipment, cameras and home appliances;
	•		information technology infrastructure, with products such as servers, workstations, storage systems, mainframes, hubs and routers; and
	•		a variety of other industries, including the industrial, automotive and medical industries.

     Factors affecting any of these industries in general, or our customers in particular, could seriously harm us. These factors include:

	•		rapid changes in technology, evolving industry standards and requirements for continuous improvement in products and services, result in short product life cycles;
	•		demand for our customers’ products may be seasonal;
	•		our customers may fail to successfully market their products, and our customers’ products may fail to gain widespread commercial acceptance; and
	•		there may be recessionary periods in our customers’ markets.

Our customers may 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 time 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. Uncertain economic and geopolitical conditions have 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 we manufacture and deliver for these customers, by causing a delay in the repayment of our expenditures for inventory in preparation for customer orders and by lowering our asset utilization resulting in lower gross margins. In addition, customers often 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 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 reduces our ability to accurately estimate the future requirements of those customers. This makes it difficult to schedule production and maximize utilization of our manufacturing capacity.

     On occasion, customers require rapid increases in production, which stress our resources and reduce our 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 the fluctuations in our annual and quarterly operating results are:

	•		adverse changes in general economic conditions;
	•		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;
	•		local conditions and events that may affect our production volumes, such as labor conditions, political instability and local holidays; and
	•		changes in demand in our customers’ end markets.

     Two of our significant end-markets are the handheld electronics 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.

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

     We have completed numerous 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, and we are in the process of completing the acquisition of Nortel’s optical, and wireless and enterprise manufacturing operations and related supply chain activities, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.” We do not have any other definitive agreements to make any material acquisitions or strategic customer transactions. Any future acquisitions may require additional debt or equity financing. 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 in the past, or at all.

     To integrate acquired businesses, we must implement our management information systems and operating systems and assimilate and manage the personnel of the acquired operations. The difficulties of this integration may be further complicated by geographic distances. The integration of acquired businesses may not be successful and could result in disruption to other parts of our business.

     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, which is a particular concern in the acquisition of companies engaged in product and software design;
	•		difficulties managing and integrating operations in geographically dispersed locations;
	•		lack of experience operating in the geographic market or industry sector of the acquired business;
	•		the risk of deficiencies in internal controls at acquired companies;
	•		increases in our expenses and working capital requirements, which reduce our return on invested capital; and
	•		exposure to unanticipated liabilities of acquired companies.

     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 new strategic relationship with Nortel involves a number of risks, and we may not succeed in realizing the anticipated benefits of this relationship.

     The transaction with Nortel described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” is subject to a number of closing conditions, including regulatory approvals, conversion of information technology systems, and the completion of the required information and consultation process with employee representatives in Europe. Some of the processes involved in converting information technology systems (including the integration of related systems and internal controls) are complex and time consuming, and may present unanticipated difficulties. As a result, we currently expect that this transaction will not be completed before the March 2006 quarter. Further delays may arise if the conversion of information technology systems requires more time than presently anticipated. In addition, completion of the required information and consultation process with employee representatives in Europe may result in additional delays and in difficulties in retaining employees.

     After closing, the success of this transaction will depend on our ability to successfully integrate the acquired operations with our existing operations. This will involve integrating Nortel’s operations into our existing procurement activities, and assimilating and managing existing personnel. In addition, this transaction will increase our expenses and working capital requirements, and place burdens on our management resources. In the event we

are unsuccessful in integrating the acquired operations, we would not achieve the anticipated benefits of this transaction, and our results of operations would be adversely affected.

     As a result of the new strategic relationship, we expect that Nortel will become our largest single customer, and will represent over 10% of our net sales. The manufacturing relationship with Nortel is not exclusive, and they are entitled to use other suppliers for a portion of their requirements of these products. Although Nortel has agreed to use us to manufacture a majority of its requirements for these existing products, for so long as our services are competitive, our services may not remain competitive, and there can be no assurance that we will continue to manufacture a majority of Nortel’s requirements for these products. In addition, sales of these products depend on a number of factors, including global economic conditions, competition, new technologies that could render these products obsolete, the level of sales and marketing resources devoted by Nortel with respect to these products, and the success of these sales and marketing activities. If demand for these products should decline, we would experience reduced sales and gross margins from these products.

     We have agreed to cost reduction targets and price limitations and to certain manufacturing quality requirements. We may not be able to reduce costs over time as required, and Nortel would be entitled to certain reductions in their product prices, which would adversely affect our margins from this program. In addition, we may encounter difficulties in meeting Nortel’s expectations as to product quality and timeliness. If Nortel’s requirements exceed the volume we anticipate, we may be unable to meet these requirements on a timely basis. Our inability to meet Nortel’s volume, quality, timeliness and cost requirements could have a material adverse effect on our results of operations. Additionally, Nortel may not purchase a sufficient quantity of products from us to meet our expectations and we may not utilize a sufficient portion of the acquired capacity to achieve profitable operations, which could have a material adverse effect on our results of operations.

     We completed the closing of the acquisition of Nortel’s optical design operations in November 2004, and as a result we employed approximately 150 of Nortel’s former optical design employees. In addition, in February 2005, we also completed the closing of the manufacturing operations and related assets (including product integration, testing, repair and logistics operations) in Montreal, Quebec, Canada. We may fail to retain and motivate these employees or to successfully integrate them into our operations.

     Although we expect that our gross margin and operating margin on sales to Nortel will initially be less than that generally realized by the Company in fiscal 2005, we also expect that we will be able to increase these gross margins over time through cost reductions and by internally sourcing our vertically integrated supply chain solutions, which include the fabrication and assembly of printed circuit boards and enclosures, as well as logistics and repair services. Additionally, the impact of lower gross margins may be partially offset by the effect of anticipated lower selling, general and administrative expenses, as a percentage of net sales. There can be no assurance that we will realize lower expenses or increased operating efficiencies as anticipated.

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, Alcatel, Casio, Ericsson and Xerox, and we are currently in the process of completing a strategic transaction with Nortel. Under these 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. 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. 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 of the acquired assets and facilities into our business 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;
	•		our supply agreements with the OEMs generally do not require any minimum volumes of purchase by the OEMs, and the actual volume of purchases may be less than anticipated; and
	•		if demand for the OEMs’ 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. In addition, these strategic arrangements have not, and in the future may not, result in any material revenues or contribute positively to our earnings per share.

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

     We have experienced growth in our business through a combination of internal growth and acquisitions, and we expect to make additional acquisitions in the future, including our pending completion of the acquisition of assets from Nortel described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.” Our global workforce has more than doubled in size since the beginning of fiscal year 2001. During that time, we have also reduced our workforce at some locations and closed certain facilities in connection with our restructuring activities. These changes have placed considerable strain on 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 and we may be required to take additional restructuring charges in the future as a result of these activities. We also intend to increase our manufacturing capacity in our low-cost regions by expanding our facilities and adding new equipment. Acquisitions and expansions involve 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 newly-acquired or 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 charges related to our expansion activities;
	•		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 acquisitions and expansions on attractive terms, 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. Our transition to low-cost manufacturing regions has contributed to significant restructuring and other charges that have resulted from reducing our workforce and capacity at higher-cost locations. We recognized restructuring charges of approximately

$32.7 million in first three months of fiscal year 2006, and $95.4 million and $540.3 million of restructuring charges in fiscal years 2005 and 2004, respectively, associated with the consolidation and closure of several manufacturing facilities, and related impairment of certain long-lived assets. We expect to recognize approximately $100 million of restructuring charges in fiscal 2006 and we may be required to take additional charges in the future as a result of these activities. 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, it could have a material adverse impact on operating results, financial position and cash flows.

Our increased design services offering may reduce our profitability.

     As part of our strategy to enhance our vertically-integrated end-to-end service offerings, we are actively pursuing the expansion of our design and engineering capabilities, 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 design services 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. Certain of the products we design and develop must satisfy safety and regulatory standards and some must receive government certifications. If we fail to obtain these approvals or certifications on a timely basis, we would be unable to sell these products, which would harm our sales, profitability and reputation. In addition, design 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 a product, these contracts may allow the customer to delay or cancel deliveries and may not obligate the customer to any volume of purchases. These contracts can generally be terminated by either party on short notice. Due to the increased risks associated with our design services offerings, we may not be able to achieve a high enough level of sales for this business to be profitable. Due to the initial costs of investing in the resources necessary to expand our design and engineering capabilities, and in particular to support our ODM services offerings, our profitability during fiscal years 2005 was adversely affected. We continue to make investments in these capabilities, which could adversely affect our profitability during fiscal year 2006 and beyond.

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

     Our design services involve the creation and use of intellectual property rights, which subject us to the risk of claims of intellectual property infringement from third parties, as well as claims arising from the allocation of intellectual property rights among us and our design services customers. In addition, customers for our ODM and components design 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.

The success of certain of our design activities depends on our ability to protect our intellectual property rights.

     We retain certain intellectual property rights to certain technologies that we develop as part of our engineering and design activities. As the level of our engineering and design activities 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.

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

     A defect in a design could result in product or component failures or a product liability claim. In our contracts with our ODM products or components customers we generally provide a warranty against defects in our designs. Since we provide this warranty to these customers we are exposed to an increased risk of warranty claims. If we design a product or component that is found to have a design defect, we could spend a significant amount of money to resolve these design warranty claims. We may also incur considerable costs in connection with product liability claims that may arise as a result of our design and engineering activities. We have limited product liability insurance coverage, however it is expensive and may not be available with respect to all of our design services offerings 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 is denied or limited or is 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 attributable to acquisitions and represent the difference between the purchase price paid for the acquired businesses and the fair value of the 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. 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 depend on the continuing trend of outsourcing by OEMs.

     Future growth in our revenues 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 represent a significant percentage of our net sales. Our ten largest customers accounted for approximately 62% of net sales during the three months ended June 30, 2005 and in fiscal year 2005, and 64% of net sales in fiscal year 2004. During the three months ended June 30, 2005, our largest customer, Sony-Ericsson, accounted for greater than 10% of net sales. Our largest customers in fiscal years 2005 and 2004 were Sony-Ericsson and Hewlett-Packard, each accounting for greater than 10% of net sales. No other customer accounted for more than 10% of net sales during the three months ended June 30, 2005, in fiscal year 2005 or in fiscal year 2004.

     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 many companies, several of which have achieved substantial market share. Current and prospective customers also evaluate our capabilities against the merits of manufacturing products themselves. Some of our competitors may have greater design, manufacturing, financial or other resources than we do. Additionally, we face competition from Taiwanese ODM suppliers, which have a substantial share of the global market for information technology hardware production, primarily related to notebook and desktop computers and personal computer motherboards, and which manufacture consumer products and provide other technology manufacturing services.

     The overall demand for electronics manufacturing services decreased in recent years, resulting in increased capacity and substantial pricing pressures, which have harmed our operating results. Certain sectors of the EMS industry have experienced increased price competition, and if we experience such increased level of competition in the future, 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 the Company to experience a reduction in sales, increase in inventory levels and costs, and could adversely affect relationships with existing and 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.

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 2005 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 $10 billion of our total revenues for the fiscal year ended March 31, 2005. 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 or divestitures may cause our effective tax rate to increase.

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 the Company. 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 and political 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 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.

Fluctuations in foreign currency exchange rates could increase our operating costs.

     Our manufacturing operations and industrial parks are located in lower cost regions of the world, such as Asia, Eastern Europe and Mexico; however, most of our purchase and sale transactions are denominated in United States Dollars or Euros. As a result, we are exposed to fluctuations in the functional currencies of our fixed cost overhead or our supply base relative to the currencies in which we conduct transactions.

     Currency exchange rates fluctuate on a daily basis as a result of a number of factors, including changes in a country’s political and economic policies. Volatility in the functional currencies of our entities and the Euro or United States Dollar could seriously harm our business, operating results and financial condition. The primary impact of currency exchange fluctuations is on our cash, receivables, and payables of our operating entities. As part of our currency hedging strategy, we use financial instruments, primarily forward purchase contracts, to hedge United States Dollar and other currency commitments in order to reduce the short-term impact of foreign currency fluctuations on current assets and liabilities. Additionally, we manage our foreign currency exposure by borrowing money in various foreign currencies. If our hedging activities are not successful or if we change or reduce these hedging activities in the future, we may experience significant unexpected expenses from fluctuations in exchange rates.

     We are also exposed to risks related to the valuation of the Chinese currency relative to other foreign currencies. The Chinese currency is the renminbi yuan (RMB). The Chinese government relaxed its control over the exchange rate of the RMB relative to the United States Dollar by managing the fluctuation of the RMB within a range of 0.3% per day and pegging its value to the value of a basket of currencies, which currencies have not been identified. The RMB was previously pegged to the value of the United States Dollar. There is no certainty as to whether the Chinese government will elect to revalue the RMB again in the near future, or at all. A significant increase in the value of the RMB could adversely affect our financial results and cash flows by increasing both our manufacturing costs and the costs of our local supply base.

We depend on our executive officers and skilled management personnel.

     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 you 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 design services offerings, we must attract and retain experienced design engineers. Although we and 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 design services offerings, 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 hazardous substance product content regulations, and regulations governing the use, storage, discharge and disposal of hazardous substances in the ordinary course of our manufacturing process. We are exposed to liabilities related to hazardous substance content regulations as some customers are requiring that we take responsibility for the risk of non-compliance for the components that we procure for those customers’ products. To address this risk, we require that component suppliers comply with relevant hazardous substance product content regulations and we engage in other standard mitigating activities. However, these efforts may be unsuccessful and we may incur significant liabilities and be required to expend substantial amounts of money on behalf of our customers to enforce or otherwise satisfy the obligations of the component suppliers.

     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. 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.

It may be difficult for investors to effect services of process within the United States on us or to enforce civil liabilities under the federal securities laws of the United States against us.

     We are incorporated in Singapore under the Companies Act, Chapter 50 of Singapore, or Singapore Companies Act. Some of our officers reside outside the United States. A substantial portion of the assets of Flextronics International Ltd. are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon us or to enforce against us in United States courts, judgments obtained in such courts predicated upon the civil liability provisions of the federal securities laws of the United States. Judgments of United States courts based upon the civil liability provisions of the federal securities laws of the United States are not directly enforceable in Singapore courts and there can be no assurance as to whether Singapore courts will enter judgments in original actions brought in Singapore courts based solely upon the civil liability provisions of the federal securities laws of the United States.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     There were no material changes during the three months ended June 30, 2005 since last fiscal year 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. 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 June 30, 2005 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 June 30, 2005 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) Evaluation of Disclosure Controls and Procedures

     We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2005, the end of the quarterly fiscal period covered by this quarterly report. The controls evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported on a timely basis.

(b) Changes in Internal Control Over Financial Reporting

     There were no changes in our internal control over financial reporting that occurred during our first quarter of fiscal year 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     We are subject to legal proceedings, claims, and litigation arising in the ordinary course of business. We defend ourselves vigorously against any such claims. Although 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

Exhibit
No.		Exhibit
4.01		Credit Agreement dated as of May 27, 2005 among Flextronics International Ltd., the lenders named therein, ABN AMRO Bank N.V., as administrative agent, ABN AMRO Incorporated, as lead arranger and sole bookrunner, The Bank of Nova Scotia, as co-lead arranger and syndication agent, Bank of America, N.A., Citicorp USA, Inc., Deutsche Bank AG, New York Branch and BNP Paribas, as co-documentation agents, Credit Suisse, Cayman Islands Branch, Merrill Lynch Capital Corporation and Skandinaviska Enskilda Banken AB, as senior managing agents, HSBC Bank USA, National Association, Barclays Bank PLC, KeyBank National Association, Royal Bank of Canada and UBS Securities LLC, as managing agents, and Bank of America, N.A., as the issuer of letters of credit thereunder.*
4.02		Credit Agreement dated as of May 27, 2005 among Flextronics International USA, Inc., the lenders named therein, ABN AMRO Bank N.V., as administrative agent, ABN AMRO Incorporated, as lead arranger and sole bookrunner, The Bank of Nova Scotia, as co-lead arranger and syndication agent, Bank of America, N.A., Citicorp USA, Inc., Deutsche Bank AG, New York Branch and BNP Paribas, as co-documentation agents, Credit Suisse, Cayman