Net Sales

Our net sales have increased in each of the past several years, reflecting the growing trend toward outsourcing within the electronics industry. For the year ended August 31, 2001, net sales grew to $18.7 billion, an increase of 32.2% over fiscal 2000. Net sales of $14.1 billion in fiscal 2000 were 46.2% greater than fiscal 1999. The sales growth in fiscal 2001 compared with fiscal 2000 was primarily attributable to increased demand from our personal computer, notebook and consumer automotive business sectors in the first half of fiscal 2001, and our acquisitions during fiscal 2001. The sales growth in fiscal 2000 over fiscal 1999 was primarily due to new program ramp-ups, strong demand from our customers worldwide and acquisitions made during fiscal 2000.

We are organized in three industry segments: global manufacturing business unit, technology solutions business unit, and global services business unit. Our core business group, global manufacturing business unit, provided 91.9%, 87.8%, and 87.5% of net sales, respectively, for fiscal 2001, 2000 and 1999. Our technology solutions business unt, consisting of SMART, Force and our recent acquisition of Centennial, contributed 6.4%, 10.5% and 11.7% of net sales, respectively, for fiscal 2001, 2000 and 1999. Our global services business unit, contributed 1.7%, 1.7% and 0.8% of net sales, respectively, in fiscal 2001, 2000 and 1999.

Global Manufacturing Business Unit

Fiscal year 2001 net sales grew to $17.2 billion, an increase of 38.4% over fiscal year 2000. This increase was due to higher demand growth from our customers during the first half of fiscal 2001 and the acquisitions of NEL and Shinei as well as two Sony manufacturing plants during fiscal year 2001. Fiscal year 2000 net sales grew to $12.4 billion, an increase of 46.8% over fiscal 1999. The increase was primarily due to strong demand growth from our customers and to acquisitions, including Alcatel's telecommunications manufacturing business in Liverpool, Australia, by our subsidiary Bluegum; IBM ECAT in Austin, Texas; Trimble of California; IBM's Netfinity server operations in Greenock, Scotland; Ericsson's telecommunications infrastructure equipment operations in Longuenesse, France, and Ostersund, Sweden; and Zhone Technologies of California; as well as our acquisition of Alcatel's manufacturing business in Aguadilla, Puerto Rico.

Within the Americas, net sales increased to $9.7 billion, a 16% increase in fiscal 2001 over 2000. The Milpitas site in California, Guadalajara site in Mexico and Austin site in Texas were the largest contributors to the sales increase. The increase in fiscal 2001 compared to fiscal 2000 was primarily due to higher demand from our customers in the first half of fiscal 2001 and to our acquisition of Nortel sites in North Carolina, Mexico and Canada, partially offset by the decrease in customer demand in the second half of fiscal 2001. The increase in fiscal 2000 versus 1999 was primarily due to new programs from our customers and sales growth in the Americas. Sales continued to grow in the Milpitas site despite our strategic transfer of personal computer PCB programs and computer peripherals systems assembly programs to Mexico and networking business to Penang, Malaysia.

In Europe, net sales increased to $3.3 billion, a 67.3% increase in fiscal 2001 over fiscal 2000. The increase in net sales was principally due to higher demand in the first half of fiscal 2001 and acquisition of Ericsson's manufacturing assets in Ostersund, Sweden during the third quarter of fiscal 2000. Our France and Ostersund sites were the largest contributors to the sales increase in the region. Net sales stayed relatively flat in fiscal 2000 versus fiscal 1999.

In Asia/Pacific, net sales grew to $4.3 billion, an 89.1% increase in fiscal 2001 over fiscal 2000. The increase over the prior year was primarily due to demand growth from our customers in the first half of fiscal 2001 and acquisitions during fiscal 2001, as well as the transfer of networking business from our Milpitas site to our Penang site in Malaysia. Our Penang site and Suzhou site as well as former NEL and Shinei sites from our acquisitions during fiscal 2001 were the major contributors to the increase. Net sales growth in fiscal 2000 was primarily due to demand growth in mobile phone, networking and personal computer projects. In particular, sales growth in the Penang site was attributable to the growth of networking business. In addition, our subsidiary Bluegum's acquisition of Alcatel's telecommunications manufacturing operations in Liverpool, Australia, also contributed to our sales increase in the region.

Technology Solutions Business Unit

Our technology solutions business unit consists of SMART, Force, and newly acquired Centennial. Our main products in the technology solutions group are specialty and standard memory products, PC cards, embedded computer modules and communications card products. Net sales for fiscal years 2001, 2000 and 1999 were $1.2 billion, $1.5 billion and $1.1 billion, respectively. The decrease in fiscal 2001 of 19.2% from fiscal 2000 was principally due to decrease in demand and declines in average selling prices of memory components partially offset by the acquisition of Centennial. The increase in fiscal 2000 of 31.5% over fiscal 1999 resulted from an overall increase in standard memory products incorporated with average memory densities, as well as an increase in embedded computer modules and communications card products.

Global Services Business Unit

Our global services business unit was established through three business acquisitions, Sequel, NULOGIX and AMERICOM, as well as a small division of Solectron in Milpitas. Net sales were $309.6 million, $232.5 million and $78.5 million in fiscal years 2001, 2000 and 1999, respectively. Net sales increased 33.2% in fiscal 2001 compared to fiscal 2000. The increase in net sales in fiscal 2001 was primarily due to stronger customer demand, acquisitions of Nortel assets and Bluegum Group during fiscal 2000, and acquisitions of IBM Netherlands service facilities as well as MCC-Sequel during fiscal 2001. The increase in fiscal 2000 was due to higher customer demand and the acquisition of AMERICOM.

International Sites

Net sales from our international sites, as a percentage of consolidated net sales, have grown over the last three fiscal years. International locations contributed 51% of consolidated net sales in fiscal 2001, compared with 41% in fiscal 2000 and 33% in fiscal 1999. As a result of our international sales and facilities, our operations are subject to the risks of doing business abroad. While these dynamics have not materially harmed our results of operations, we cannot assure that there will not be such an impact in the future.

Major Customers

Only four major customers accounted for more than 10% of our net sales in fiscal 2001, 2000 and 1999, as summarized in the following table.

                                               YEARS ENDED AUGUST 31,
                                 --------------------------------------------
                                      2001          2000             1999
                                 ------------  ---------------  -------------
Cisco                                   11.5%            12.0%          11.1%
Compaq                                   --               --            11.8%
Ericsson                                13.7%            13.0%           --
Nortel                                  11.9%             --             --

Our top ten customers accounted for 70% of net sales in fiscal 2001, 72% of net sales in fiscal 2000 and 74% of net sales in fiscal 1999. We depend on continued revenues from Ericsson, Compaq, Cisco, Nortel and our other top ten customers. We cannot predict whether these or any other customers will increase or decrease as a percentage of consolidated net sales either individually or as a group. Consequently, any material decrease in sales to these or other customers could materially harm Solectron's results of operations.

We believe that our ability to continue growing depends on increasing sales to existing customers for their current and future product generations, successfully marketing to new customers and expanding geographically. Customer contracts can be canceled and volume levels can be changed or delayed. The timely replacement of delayed, canceled or reduced orders with new business cannot be assured. In addition, we cannot assure that our current customers will continue to utilize our services. Because of these factors, we cannot assure that Solectron's historical revenue growth rate will continue.

Our gross margin percentages were 8.0%, 9.0% and 9.7% respectively, for fiscal 2001, 2000 and 1999. The decrease in gross margin in fiscal 2001 compared to fiscal 2000 was primarily due to under-absorbed fixed costs that could not be taken out immediately in response to the decline in our customers' end market demand. In the second quarter of fiscal 2001, we began to experience manufacturing inefficiencies due to higher-than-normal costs associated with the additional manpower required in the materials management area and under-utilization of capacity which occurred later in the second quarter. Our gross margin was also affected by inefficiencies associated with restructuring. We are shifting capacity to low-cost locations, and programs are being transferred at an accelerated pace. Those transfer costs are accounted for as operational costs versus restructuring costs, consequently they affected our margins. The decrease in fiscal 2000 over fiscal 1999 was attributed primarily to sales derived from lower margin mobile telecommunication equipment, manufacturing inefficiencies due to non-linearity of material receipts, a high level of business development activities and new site integration support expenditures, as well as capacity ramp-up for future demand growth. Our start-up operations also contributed to the decrease. In addition, the amortization of intellectual property resulting from certain acquisitions reduced gross margins.

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

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

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

In absolute dollars, our selling, general and administrative (SG&A) expenses increased 77.2% in fiscal 2001 compared to fiscal 2000, and 23.1% in fiscal 2000 over fiscal 1999. As a percentage of net sales, SG&A expenses were 4.4% in fiscal 2001, 3.3% in fiscal 2000 and 3.9% in fiscal 1999. The increases in absolute dollars and as a percentage of net sales in fiscal 2001 compared to fiscal 2000 were due to higher human resource costs, information systems cost, and higher SG&A resulting from our acquisitions of NEL, Centennial, MCC-Sequel, Shinei and two Sony manufacturing facilities. The increase in absolute dollars in fiscal 2000 compared to 1999 was caused by an increase in head count and information systems costs to support our sales growth and increased costs of acquisition related activities. The primary reasons for the decrease in fiscal 2000 over 1999 in SG&A expenses as a percentage of net sales were the significant increase in sales volume and our continued effort to manage operating expenses, partially offset by the costs associated with investments in our business infrastructure, information systems and start-up costs for new sites. We anticipate SG&A expenses will continue to increase in terms of absolute dollars in the future as we continue to develop the infrastructure necessary to support our current and prospective business.

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

In absolute dollars, R&D expenses increased 15.0% in fiscal 2001 compared to fiscal 2000 and 50.1% in fiscal 2000 over fiscal 1999. As a percentage of net sales, R&D expense was 0.4% of net sales for fiscal 2001, 2000 and 1999. The increases in absolute dollars in R&D expenses in fiscal 2001 and 2000, were primarily due to our increased R&D effort in SMART and Force and new R&D projects initiated at our various sites. We expect that R&D expenses will increase in absolute dollars in the future as SMART and Force continue to invest in their R&D efforts and additional R&D projects are undertaken at certain sites.

The goodwill amortization expense of $139.9 million in fiscal 2001 primarily resulted from the NEL acquisition. During the second quarter of fiscal 2001, we purchased all of the outstanding issued share capital and convertible bonds of NEL for approximately $2.3 billion and $122.4 million, respectively. The NEL acquisition was accounted for under the purchase accounting method and, as a result, we recorded approximately $1.97 billion of goodwill. Goodwill is amortized in equal annual amounts over a ten-year period.

During fiscal 2001, we recorded $29.7 million in acquisition and integration costs, which were primarily related to the NEL acquisition. A charge for acquisition costs of $26.8 million was incurred in fiscal 2000 as a result of the acquisitions of SMART, AMERICOM and Bluegum during fiscal 2000. Our acquisition costs consist of investment banker fees, legal fees, accounting fees, registration fees and other direct costs.

The current fiscal year restructuring and impairment charge was taken in connection with our plan to review our operations in light of the current economic downturn and our plan to undertake several measures to restructure the company. The measures, which included reducing the workforce, consolidating certain facilities and changing the strategic focus of a number of sites, were largely intended to align our capacity and infrastructure to anticipated customer demand as well as rationalize our footprint worldwide.

During fiscal 2001 and primarily in the third and fourth quarters, total restructuring and impairment costs of $517.3 million were charged against earnings. These restructuring and impairment charges included employee severance and benefit costs of approximately $70.0 million, costs related to facilities that will be abandoned and subleased of approximately $56.4 million, costs related to equipment that will be abandoned of approximately $117.5 million, impairment of equipment of approximately $188.2 million, impairment of facilities of approximately $37.7 million, impairment of goodwill, intangible and other assets related to closed facilities of approximately $42.2 million and other exit costs of approximately $5.3 million.

The employee severance and benefit costs related to the elimination of approximately 11,800 positions worldwide. Approximately 67% of the positions eliminated were in the Americas region, 23% were in Europe and 10% were in Asia/Pacific. The employment reductions primarily affected employees in manufacturing and back office support functions. Facilities and equipment subject to restructuring were primarily located in the Americas and Europe. For leased facilities that will be abandoned and subleased, the lease costs represent future lease payments subsequent to abandonment less estimated sublease income. For facilities and equipment, the impairment loss recognized was based on the fair value less costs to sell, with fair value based on estimates of existing market prices for similar assets. As of August 31, 2001, all 11,800 employees have left Solectron under this plan.

We recorded restructuring costs of approximately $11.1 million in fiscal 2000 primarily related to the consolidations of certain facilities acquired in the SMART and Sequel mergers. Approximately $4.4 million related to lease exit costs, $3.4 million related to asset write-offs and other incidental costs, $1.2 million related to severance costs and $2.1 million related to other costs.

Net interest expense was $59.1 million in fiscal 2001 compared to net interest income of $35.3 million in fiscal 2000, and compared to net interest expense of $1.6 million in fiscal 1999. The net interest expense in fiscal 2001 primarily resulted from our 4.0% yield zero-coupon convertible senior notes, 2.75% and 3.25% yield zero-coupon convertible senior notes and 7.38% senior notes, partially offset by interest income earned on deployed cash and investments. The net interest income in fiscal 2000 was attributed primarily to interest income earned on cash and investments from the proceeds of the 2.75% zero-coupon convertible senior notes which were issued in May 2000, offset partially with interest expense on the 4% and 2.75% yield zero-coupon convertible senior notes as well as on the 7-3/8% senior notes. The net interest expense in fiscal 1999 was related to interest expenses from the 4% yield zero coupon convertible senior notes and the 6% convertible subordinated notes.

We reported income tax benefit of $34.2 million in fiscal 2001 arising from the loss incurred in the period. Income tax expense was $238.8 million in fiscal 2000 and $164.2 million in fiscal 1999. Our effective income tax benefit rate was 21.7% in fiscal 2001. Our effective income tax expense rate was 32.3% in fiscal 2000 and 31.9% in fiscal 1999. Our benefit rate was lower than our expense rate in prior years because we did not recognize some of the income tax benefits for which future realization is uncertain.

In general, the effective income tax rate is largely a function of the balance between income from domestic and international operations. Our international operations, taken as a whole, have been taxed at a lower rate than those in the United States, primarily due to tax holidays granted to several of Solectron's overseas sites in Malaysia, Singapore, and China. The Malaysian tax holiday is effective through July 2011, subject to some conditions, including certain levels of research and development expenditures. In addition, Solectron has also been granted a tax holiday for certain operations in Singapore which is effective through March 2011, subject to certain conditions. Solectron has also been granted various tax holidays in China, which are effective for various terms and are subject to certain conditions.

Our net working capital was $6.0 billion at August 31, 2001 compared to $5.4 billion at August 31, 2000. Cash and cash equivalents and short-term investments were $2.8 billion at August 31, 2001, an increase of $0.4 billion from August 31, 2000. The increase was primarily due to proceeds of approximately $1.5 billion from 3.25% yield zero-coupon convertible senior debt issued in November 2000 and the issuance of 35 million shares of common stock for approximately $1.2 billion, as well as the inventory reduction of $577 million, partially offset by investing activities, including the acquisition of NEL's shares and convertible bonds for approximately $2.4 billion, and capital expenditures of $536.8 million.

Accounts receivable increased $297 million during fiscal 2001, inventories decreased $577 million in the same period. The increase in accounts receivable resulted from our sales growth and the acquisitions of NEL, Centennial, Shinei and MCC-Sequel. The decrease in inventory level was primarily due to our customers taking back excess inventory and by our return to normal just-in-time inventory management practices. In addition, we worked with our customers and suppliers to revise the terms and conditions under which we procure and return parts. Those changes will help mitigate inventory imbalances in the future. We continuously manage our inventory levels striving to maintain competitive lead times while balancing the risk of inventory obsolescence due to rapidly changing technology and customer requirements.

As of August 31, 2001, we had available a $100 million unsecured multicurrency revolving line of credit that expires on April 30, 2002. Borrowings under the credit facility bear interest, at our option, at either the bank's prime rate, the London interbank offering rate (LIBOR) plus a margin, or the bank's certificate of deposit (CD) rate plus a margin. The margin under the LIBOR or CD rate options will vary depending on our Standard & Poor's Corporation and/or Moody's Investor Services, Inc. rating for our long-term senior unsecured debt. This margin was 0.4% at August 31, 2001. Under the credit agreement, we must meet certain financial covenants. There were no borrowings outstanding under this line of credit as of August 31, 2001. In addition, we had approximately $181 million and $591 million, respectively, in committed and uncommitted foreign lines of credit and other bank facilities as of August 31, 2001. Borrowings were payable on demand. The interest rates ranged from the bank's prime lending rate to the bank's prime rate plus 2.0%. As of August 31, 2001, borrowings and guaranteed amounts under committed and uncommitted foreign lines of credit were $155 million and $135 million, respectively. The weighted- average interest rate was 4.4% for committed and 4.7% for uncommitted foreign lines of credit. Under these lines of credit agreements, we must meet certain financial covenants. We were in compliance with all of the line of credit financial covenants as of August 31, 2001.

We believe that our current cash and cash equivalents, short- term investments, line of credit, and cash generated from operations coupled with the anticipated proceeds from any offerings under our recently filed shelf registration statements will satisfy our expected working capital, capital expenditure, and investment requirements through at least the next 12 months.

In September 2000, we adopted Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and No. 138. We enter into short- term foreign currency forward contracts and borrowings to hedge only those currency exposures associated with certain assets and liabilities denominated in non-functional currencies.

In addition, we periodically hedge variability in cash flows resulting from fluctuating interest rates. We entered into an interest rate swap agreement with a notional amount of $52 million, maturing on June 3, 2002, to hedge against varying rental payments associated with an operating lease that requires payments based on LIBOR. This swap agreement was designated as a cash flow hedge upon adoption of the standard and the ineffective portion of the hedge was not significant. Accordingly, changes in the fair value of this interest rate swap designated as a cash flow hedge are included in accumulated other comprehensive income. These amounts are subsequently reclassified into rent expense during the period in which the LIBOR-based lease agreement affects earnings. Since adoption, the impact to the financial statements has not been significant.

In July 2001, the Financial Accounting Standard Board (FASB) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. SFAS No. 141 also specifies the criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated lives to their estimated residual values, and be reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to adoption of SFAS No. 142.

In accordance with SFAS No. 141, we are accounting for all business combinations initiated or completed after June 30, 2001 using the purchase method of accounting. We adopted the remaining provisions of SFAS No. 141 and SFAS No. 142 effective September 1, 2001.

SFAS No. 141 requires, upon adoption of SFAS No. 142, that we evaluate our existing intangibles assets and goodwill that were acquired in prior purchase business combinations, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, we are required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and to make any necessary amortization period adjustments by the end of the first interim period after adoption. We are required to test the intangible assets for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss is measured as of the date of adoption and recognized as a cumulative effect of change in accounting principle in the first interim period.

In connection with the transitional goodwill impairment evaluation, SFAS No. 142 requires us to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, we must identify our reporting units and determine the carrying value of each reporting unit by assessing the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The regulation allows up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying value. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and we must perform the second step of the transitional impairment test. In the second step, we must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as a cumulative effect of a change in accounting principle in our statement of operations.

As of September 1, 2001, we had unamortized goodwill of $1.9 billion, unamortized identifiable intangible assets of approximately $500 million, all of which are subject to the transition provisions of SFAS No. 141 and 142. Amortization expense related to goodwill was $139.9 million for fiscal 2001. Because of the extensive effort required to comply with the remaining provisions of SFAS Nos. 141 and 142, it is not practicable to reasonably estimate the impact on our financial statements of these provisions beyond discontinuing amortization.

The FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, in August 2001, and SFAS No.144, Accounting for the Impairment or Disposal of Long-lived Assets, in October 2001. SFAS No. 143 requires that the fair value of an asset retirement obligation be recorded as a liability in the period in which it incurs the obligation. SFAS No. 144 services to clarify and further define the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 does not apply to goodwill and other intangible assets that are not amortized. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We expect to adopt both effective September 1, 2002. The effect of the adopting these statements is not expected to have a material effect on the Company's consolidated financial position or results of operations.

On July 2, 2001, we announced the filing of a registration statement with the Securities and Exchange Commission pursuant to Rule 415 under the Securities Act of 1933, as amended. We may, from time to time, offer our debt securities, shares of our common stock and preferred stock, warrants, stock purchase contracts, stock purchase units and guarantees of preferred securities, which together have an aggregate initial public offering price of up to $3 billion. The Securities may be offered, separately or together, in separate series, in amounts, at prices and on terms to be set forth in the prospectus contained in the registration statement, and in one or more supplements to that prospectus, and may only be offered pursuant thereto.

On June 29, 2001, our board of directors approved the adoption of a stockholder rights plan. Under the plan, we issued a dividend of one right for each share of our common stock, par value of $0.001 per share, held by stockholders of record at the close of business on July 30, 2001.

On August 9, 2001, we announced that we have signed a definitive agreement under which Solectron and C-MAC will combine to create a diversified designer and manufacturer of integrated electronic manufacturing solutions. The combination with C-MAC is expected to enhance Solectron's systems-solution offerings and expand its portfolio. Under the terms of the agreement, Solectron will issue 1.755 shares of Solectron common stock in exchange for each C-MAC common share outstanding. As of the announcement date, the transaction was valued at approximately $2.6 billion. The transaction will be accounted for using the purchase method. The transaction is expected to be completed by the end of calendar 2001. The arrangement is subject to merger notification requirements pursuant to the antitrust laws of the United States, Canada, the European Union and Brazil and subject to review under the Investment Canada Act. As of October 31, 2001, we had received regulatory antitrust approval from the United states, Canada, the European Union and Brazil. The approval under the Investment Canada Act was still pending.

On September 17, 2001, our Board of Directors authorized a $200 million stock repurchase program. Under the program, we may repurchase our common shares in the open market beginning the first day that the New York Stock Exchange resumed. As of October 31, 2001, we had purchased 442,200 shares, approximately, $4.5 million under this program.

On October 16, 2001, we announced that we completed our acquisition of Iphotonics, Inc., a provider of core optical manufacturing services. The acquisition increases our optical services capabilities, and enhances our total systems-solutions offering.

On October 26, 2001, we announced that we completed our acquisition of Stream International Inc., a global customer relationship management outsourcing and support services provider for leading technology companies. The acquisition increases the capabilities of Solectron's global services business unit and enhances our total service offerings.

At various dates through October 25, 2001, Solectron repurchased certain zero coupon convertible senior notes due 2019, with face value of $312 million, and a fair value of $156 million.

Our ratio of earnings to fixed charges for fiscal 2001 was 0.23x as compared to 8.38x for fiscal 2000. This decline in the ratio is primarily due to interest expense growing at a greater rate than income during fiscal 2001. The degree to which we may be leveraged could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control.

We will require substantial amounts of cash to fund scheduled payments of principal and interest on our outstanding indebtedness, as well as future capital expenditures and any increased working capital requirements. If we are unable to meet our cash requirements out of cash flow from operations, there can be no assurance that we will be able to obtain alternative financing, that any such financing would be on favorable terms, or that we will be permitted to do so under the terms of our existing financing arrangements, or our financing arrangements in effect in the future. In the absence of such financing, our ability to respond to changing business and economic conditions, to make future acquisitions, to experience adverse operating results or to fund required capital expenditures or increased working capital requirements may be adversely affected.

Most of our annual net sales comes from a small number of our customers. Our ten largest customers accounted for approximately 70% of net sales in fiscal 2001 and approximately 72% and 74%, of net sales in fiscal 2000 and 1999, respectively. Since we are dependent upon continued net sales from our ten largest customers, any material delay, cancellation or reduction of orders from these or other major customers could cause our net sales to decline significantly. Some of these customers individually account for more than ten percent of our annual net sales. We cannot guarantee that we will be able to retain any of our ten largest customers or any other accounts. In addition, our customers may materially reduce the level of services ordered from us at any time. This could cause a significant decline in our net sales and we may not be able to reduce the accompanying expenses at the same time. Moreover, our business, financial condition and results of operations will continue to depend in significant part on our ability to obtain orders from new customers, as well as on the financial condition and success of our customers. Therefore, any adverse factors affecting any of our customers or their customers could have a material adverse effect on our business, financial condition and results of operations.

Although we have long-term contracts with a few of our top ten customers, including Ericsson, IBM and Nortel under which these customers are obligated to obtain services from us, only Nortel is obligated to purchase any minimum amount of services. As a result, we cannot guarantee that we will receive any net sales from these contracts. In addition, these customers with whom we have long-term contracts may materially reduce the level of services ordered at any time. This could cause a significant decline in our net sales, and we may not be able to reduce our accompanying expenses at the same time.

Our quarterly earnings may fluctuate in the future due to a number of factors including the following:

• Differences in the profitability of the types of manufacturing services we provide. For example, high velocity and low complexity PCB and systems assembly services have lower gross margins than low volume/complex PCB and systems assembly services;
• Our ability to maximize the hours of use of our equipment and facilities is dependent on the duration of the production run time for each job and customer;
• The amount of automation that we can use in the manufacturing process for cost reduction varies, depending upon the complexity of the product being made;
• Our ability to optimize the ordering of inventory as to timing and amount to avoid holding inventory in excess of immediate production needs;
• Fluctuations in demand for our services or the products being manufactured;
• Fluctuations in the availability and pricing of components;
• Timing of expenditures in anticipation of increased sales;
• Cyclicality in our target markets; and
• Expenses associated with acquisitions.

Therefore, our operating results in the future could be below the expectations of securities analysts and investors. If this occurs, the market price of our common stock could be harmed.

Most of our net sales are to companies in the electronics industry, which is subject to rapid technological change and product obsolescence. If our customers are unable to create products that keep pace with the changing technological environment, our customers' products could become obsolete and the demand for our services could decline significantly. If we are unable to offer technologically advanced, cost effective, quick response manufacturing services to customers, demand for our services will also decline. In addition, a substantial portion of our net sales is derived from our ability to offer complete service solutions for our customers. For example, if we fail to maintain high-quality design and engineering services, our net sales would significantly decline.

For our technology solutions business, we have experienced, and may in the future experience, delays from time to time in the development and introduction of new products. Moreover, we cannot assure that we will be successful in selecting, developing, manufacturing and marketing new products or enhancements. We cannot assure that defects or errors will not be found in our products after commencement of commercial shipments, which could result in the delay in market acceptance of such products. The inability to introduce new products or enhancements could harm our business, financial condition and results of operations.

We are dependent on certain suppliers, including limited and sole source suppliers, to provide key components used in our products. We have experienced and may continue to experience delays in component deliveries, which could cause delays in product shipments and require the redesign of certain products. Also for our technology solutions business, we are dependent upon certain limited or sole source suppliers for critical components used for our memory module, communications card and embedded computer products. The electronics industry has experienced in the past, and may experience in the future, shortages in semiconductor devices, including DRAM, SRAM, Flash memory, tantalum capacitors and other commodities that may be caused by such conditions as overall market demand surges or supplier production capacity constraints. Except for certain commodity parts, we generally have no written agreements with our suppliers. We cannot give any assurance that we will receive adequate component supplies on a timely basis in the future. The inability to continue to obtain sufficient components as required, or to develop alternative sources as required, could cause delays, disruptions or reductions in product shipments or require product redesigns which could damage relationships with current or prospective customers, thereby causing harm to our business.

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

We compete with different contract manufacturers, depending on the type of service we provide or the geographic locale of our operations. The memory module, communications card and embedded computer subsystem industries are also intensely competitive. These competitors may have greater manufacturing, financial, R&D and/or marketing resources than we have. In addition, we may not be able to offer prices as low as some of our competitors because those competitors may have lower cost structures as a result of their geographic location or the services they provide. Our inability to provide comparable or better manufacturing services at a lower cost than our competitors could cause our net sales to decline. We also expect our competitors to continue to improve the performance of their current products or services, to reduce their current products or service sales prices and to introduce new products or services that may offer greater performance and improved pricing. Any of these could cause a decline in sales, loss of market acceptance of our products or services, or profit margin compression.

Most of our technology solutions net sales is derived from memory modular products. The market for these products is characterized by frequent transitions in which products rapidly incorporate new features and performance standards. A failure to develop products with required feature sets or performance standards or a delay as short as a few months in bringing a new product to market could reduce our net sales which may have a material adverse effect on our business, financial condition and results of operations. In addition, the market for semiconductor memory devices has been cyclical. The industry has experienced significant economic downturns at various times, characterized by diminished product demand, accelerated erosion of average selling prices and excess production. In the past, there have been significant declines in the prices for DRAM, SRAM and flash memory. Similar occurrences will reduce our profit.

A substantial factor in our revenue growth is attributable to the transfer of manufacturing and supply base management activities from our OEM customers. Future growth is partially dependent on new outsourcing opportunities. To the extent that these opportunities are not available, our future growth would be unfavorably impacted. These outsourcing opportunities may include the transfer of assets such as facilities, equipment and inventory.

We have experienced rapid growth over many years. Our historical growth may not continue. In recent years we have established operations in different locations throughout the world. For example, in fiscal 1998, we opened offices in Taipei, Taiwan; Tel Aviv, Israel; Norrkoping and Stockholm, Sweden; and commenced manufacturing operations in Guadalajara, Mexico; Suzhou, China; and Timisoara, Romania. Also in fiscal 1998, we acquired foreign facilities in Sao Paulo, Brazil and Dublin, Ireland. Furthermore, through acquisitions in fiscal 1998 and 1999, we acquired facilities in Duluth, Georgia; Columbia, South Carolina; Memphis, Tennessee; and enhanced our capabilities in Charlotte, North Carolina; Austin, Texas; and Milpitas, California.

In fiscal 2000, we completed acquisitions of AMERICOM, SMART, and Bluegum. Through additional acquisitions, we also acquired foreign facilities in Aguadilla, Puerto Rico; Monterrey, Mexico; Calgary, Canada; Longuenesse, France; Ostersund, Sweden; Cwmcarn, Wales; Pont de Buis and Douarnenez, France; Monkstown, Northern Ireland; Liverpool, New South Wales; Wangaratta and Melbourne, Victoria; and Sydney and North Melbourne, Australia. During fiscal 2001, we completed acquisitions of NEL, Shinei, Centennial, MCC- Sequel, and Sony's manufacturing facilities in Japan and Taiwan as well as IBM's repair center in the Netherlands.

Our expansion and growth places a heavy strain on our personnel and management, manufacturing and other resources. Our ability to manage the expansion to date, as well as any future expansion, will require progressive increases in manufacturing infrastructure, as well as enhancements or upgrades of accounting and other internal management systems and the implementation of a variety of procedures and controls. We cannot assure that significant problems in these areas will not occur. Any failure to enhance or expand these systems and implement such procedures and controls in an efficient manner and at a pace consistent with our business activities could harm our financial condition and results of operations. Also, in order to achieve anticipated revenue and other financial performance targets, we must manage our assets and operations efficiently. In addition, should we continue to expand geographically, we may experience certain inefficiencies from the management of geographically dispersed facilities.

As we manage and continue to expand new operations, we may incur substantial infrastructure and working capital costs. If we do not achieve sufficient growth to offset increased expenses associated with rapid expansion, our profitability will decline.

On August 9, 2001, we announced that we and C-MAC signed a definitive agreement under which we and C-MAC will combine to create a diversified designer and manufacturer of integrated electronic manufacturing solutions. The transaction is expected to be completed by the end of calendar 2001.

The arrangement is subject to merger notification requirements pursuant to the antitrust laws of the United States, Canada, the European Union and Brazil and subject to review and approval under the Investment Canada Act. The arrangement may be subject to additional foreign antitrust laws to be determined. We may not be able to obtain the necessary approval.

The combined company may be required to agree to various operating restrictions or other conditions, before or after receipt of shareholder approvals in order to obtain the necessary approvals of the arrangement under Canada's investment review laws. No additional shareholder approval is expected to be required or sought for any decision by Solectron or C-MAC, after the C-MAC and Solectron special meetings which are both scheduled for November 28, 2001, to agree to any terms and conditions necessary to resolve any foreign regulatory objections to the transaction, and shareholder approval will not be sought unless such shareholder approval is required to approve such terms and conditions under applicable foreign law.

Operating restrictions or other conditions required to secure regulatory approval may include the imposition of a material limitation on the ability of any of these parties to conduct their businesses or to own or exercise control of such assets, properties and stock. Any of these operating restrictions or conditions could have a material adverse effect on our ability to economically operate the combined company.

In addition to regulatory approvals, the proposed arrangement under the Canada Business Corporations Act requires approval by the Superior Court of Justice (Québec). Prior to the filing of this document, C-MAC obtained an interim order providing for the calling and holding of the C-MAC special meeting and other procedural matters. Subject to the approval of the C- MAC arrangement resolution at the C-MAC meeting and the approval of the Solectron shares issuance at the Solectron special meeting, we may not be able to obtain the approval from our shareholders.

As we expand our operations through acquisitions and continue to evaluate acquisition opportunities and may pursue additional acquisitions over time. These acquisitions involve risks, including:

• Integration and management of the operations;
• Retention of key personnel;
• Integration of purchasing operations and information systems;
• Retention of the customer base of acquired businesses;
• Management of an increasingly larger and more geographically disparate business; and
• Diversion of management's attention from other ongoing business concerns.

Our profitability will suffer if we are unable to successfully integrate and manage recent acquisitions and pending acquisitions including, in particular, the NEL, Shinei, MCC-Sequel, Centennial, and C-MAC transactions, as well as any future acquisitions that we might pursue, or if we do not achieve sufficient revenue to offset the increased expenses associated with these acquisitions.

In fiscal 2001, approximately 51% of net sales came from sites outside the United States, while approximately 41% of net sales came from sites outside the United States in fiscal 2000. As a result of our foreign sales and facilities, our operations are subject to a variety of risks that are unique to international operations, including the following:

• Adverse movement of foreign currencies against the U.S. dollar in which our results are reported;
• Import and export duties, and value added taxes;
• Import and export regulation changes that could erode our profit margins or restrict exports;
• Potential restrictions on the transfer of funds;
• Inflexible employee contracts in the event of business downturns; and
• The burden and cost of compliance with foreign laws.

In addition, we have operations in several locations in emerging or developing economies that have a potential for higher risk. The risks associated with these economies include but are not limited to currency volatility, and other economic or political risks. In the future, these factors may harm our results of operations. Solectron locations in emerging or developing economies include Mexico, Brazil, China, Malaysia, Hungary and Romania. As of August 31, 2001, we recorded $259.4 million in cumulative foreign exchange translation losses on our balance sheet which was primarily due to the devaluation of the Brazilian real. While, to date, these factors have not had a significant adverse impact on our results of operations, we cannot give any assurance that there will not be such an impact. Furthermore, while we may adopt measures to reduce the impact of losses resulting from volatile currencies and other risks of doing business abroad, we cannot assure that such measures will be adequate.

The Malaysian government adopted currency exchange controls, including controls on its currency, the ringgit, held outside Malaysia, and established a fixed exchange rate for the ringgit against the U.S. dollar. The fixed exchange rate provides a stable rate environment when applied to local expenses denominated in ringgit. The long-term impact of such controls is not predictable due to dynamic economic conditions that also affect or are affected by other regional or global economies.

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

We do not use derivative financial instruments for speculative purposes. Our policy is to hedge our foreign currency denominated transactions in a manner that substantially offsets the effects of changes in foreign currency exchange rates. Presently, we use foreign currency borrowings and foreign currency forward contracts to hedge only those currency exposures associated with certain assets and liabilities denominated in non-functional currencies. Corresponding gains and losses on the underlying transaction generally offset the gains and losses on these foreign currency hedges.

As of August 31, 2001, the majority of the foreign currency hedging contracts were scheduled to mature in less than three months and there were no material deferred gains or losses. In addition, our international operations in some instances act as a natural hedge because both operating expenses and a portion of sales are denominated in local currency. In these instances, including our current experience involving the devaluation of the Brazilian real, although an unfavorable change in the exchange rate of a foreign currency against the U.S. dollar will result in lower sales when translated to U.S. dollars, operating expenses will also be lower in these circumstances. Also, since less than 13% of our net sales in fiscal 2001 were denominated in currencies other than U.S. dollar, we do not believe our total exposure to be significant.

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

The primary objective of our investment activities is to preserve principal, while at the same time, maximize yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including both government and corporate obligations, certificates of deposit and money market funds. As of August 31, 2001, approximately 97% of our total portfolio is scheduled to mature in less than six months. In addition, our investments are diversified and of relatively short maturity. A hypothetical 10% increase in interest rates would not have a material effect on our investment portfolios.

The following table presents the amounts of our cash equivalents and short-term investments that are subject to interest rate risk by calendar year of expected maturity and weighted average interest rates as of August 31, 2001:

We have entered into an interest rate swap transaction under which we pay a fixed rate of interest hedging against the variable interest rates implicit in the rent charged by the lessor for the facility lease at Milpitas, California. The interest rate swap expires June 3, 2002, which coincides with the maturity date of the lease term. As we intend to hold the interest rate swap until the maturity date, we are not subject to market risk. In substance, such interest rate swap has fixed the interest rate for the facility lease, thus reducing interest rate risk.

Our long-term debt instruments are subject to fixed interest rates. In addition, the amount of principal to be repaid at maturity is also fixed. In the case of the convertible notes, such notes are based on fixed conversion ratios into common stock. Therefore, we are not exposed to variable interest rates related to our long-term debt instruments.

Our ability to effectively compete may be affected by our ability to protect our proprietary information. We hold a number of patents and other license rights. These patent and license rights may not provide meaningful protection for our manufacturing processes and equipment innovations. In the future, third parties may assert infringement claims against us or our customers. In the event of an infringement claim, we may be required to spend a significant amount of money to develop a non-infringing alternative or to obtain licenses. We may not be successful in developing such an alternative or obtaining a license on reasonable terms, if at all. In addition, any such litigation could be lengthy and costly and could harm our financial condition.

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

A substantial portion of our operating activities and facilities, including our headquarters and principal administrative facilities, as well as certain of our third party service providers are located in California. During acute power shortages, California has implemented, and may in the future continue to implement, rolling blackouts throughout the state. The rolling blackouts that have occurred to date have not materially disrupted the operations of our facilities. Should these blackouts continue or increase in severity, however, they could materially disrupt the operations of one or more of our facilities. Although Solectron currently does not have backup generator or long-term alternate sources of power in the event of a blackout, Solectron does have some flexibility to shift some manufacturing volume to other manufacturing sites around the world. If blackouts interrupt our power supply, we would be temporarily unable to continue operations at our affected facilities. Our current insurance does not provide coverage for any damages our customers or we may suffer as a result of any interruption in our power supply. Consequently, any interruption in our ability to continue operations at our facilities could damage our reputation, harm our ability to retain existing customers and to obtain new customers, and could result in lost revenue, any of which would substantially harm our business and results of operations.

In addition, the utility deregulation program instituted in 1996 by the California government deregulated wholesale prices while continuing to regulate the retail prices charged by the electrical utilities. While wholesale prices have increased dramatically, retail prices have, until recently, not increased at a comparable rate. Our business is substantially dependent on the availability and price of electricity. If retail electricity prices rise dramatically, we would expect our expenses to increase, our operating results to be harmed, and the possible decline of our stock price.

Our stock price could fluctuate due to the following factors, among others:

• Announcements of operating results and business conditions by our customers;
• Announcements by our competitors relating to new customers or technological innovation or new services;
• Economic developments in the electronics industry as a whole;
• Political and economic developments in countries in which we have operations; and
• General market conditions.

On January 27, 2002, we may become obligated to purchase, at the option of the holders, all or a portion of the outstanding 4.0% LYONs at a price of $510.03 per note ("Purchase Price"). We have the option to pay the purchase price of LYONs in cash or common stock or any combination thereof. If we elect to pay the purchase price, in whole or part, in shares of our common stock, the number of shares of common stock to be delivered shall equal the purchase price divided by the average of the sale prices of the common stock for the five trading day period ending on the third business day prior to January 27, 2002. The LYONs are convertible into common stock at a price of $34.13 per share or 14.944 shares per LYON. In the event that our stock price remains below $34.13 per share at January 27, 2002, we may have to issue additional shares to the holders. Accordingly, our earnings per share may be reduced.

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

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

Unaudited Quarterly Financial Information

For each fiscal quarter during the two fiscal years ended August 31, 2001 (in millions, except percentages and per share data):

                                                 First       Second     Third       Fourth
                                                 Quarter      Quarter    Quarter    Quarter
                                              ------------  ---------  ---------  ----------
                     2001
                   -------
Net sales                                    $    5,695.5  $ 5,418.5  $ 3,983.4  $  3,594.9
Gross profit                                        484.7      488.2      305.7       207.5
Gross margin                                          8.5 %      9.0 %      7.7 %       5.8 %
Operating income                                    276.4      192.5     (254.5)     (313.0)
Operating margin                                      4.9 %      3.6 %     (6.4)%      (8.7)%
                                              ------------  ---------  ---------  ----------
Net income (Loss)                            $      190.6  $   121.9  $  (185.7) $   (250.3)
                                              ============  =========  =========  ==========

Basic net income (loss) per share:           $       0.31  $    0.19  $   (0.28) $    (0.38)
                                              ============  =========  =========  ==========

Diluted net income (loss) per share:         $       0.29  $    0.18  $   (0.28) $    (0.38)
                                              ============  =========  =========  ==========


                     2000
                   -------
Net sales                                    $    2,834.6  $ 2,921.7  $ 3,645.0  $  4,736.2
Gross profit                                        277.0      279.9      305.5       412.9
Gross margin                                          9.8 %      9.6 %      8.4 %       8.7 %
Operating income                                    155.3      135.7      170.2       243.0
Operating margin                                      5.5 %      4.6 %      4.7 %       5.1 %
Income before cummulative effect of
   change in accounting principle                   113.3       96.7      119.7       171.0
Cumulative effect of change in accounting
   priniple, net of income tax benefit               (3.5)       --         --          --
                                              ------------  ---------  ---------  ----------
Net income                                   $      109.8  $    96.7  $   119.7  $    171.0
                                              ============  =========  =========  ==========
Basic net income per share: (1)
Income before cummulative effect of
   change in accounting principle                    0.19       0.16       0.20        0.28
Cumulative effect of change in accounting
   priniple                                         (0.01)       --         --          --
                                              ------------  ---------  ---------  ----------
Net Income                                   $       0.18  $    0.16  $    0.20  $     0.28
                                              ============  =========  =========  ==========

Diluted net income per share (1)
  per share
Income before cummulative effect of
   change in accounting principle                    0.18       0.16       0.19        0.27
Cumulative effect of change in accounting
   priniple                                         (0.01)        --        --          --
                                              ------------  ---------  ---------  ----------
Net Income                                   $       0.17  $    0.16  $    0.19  $     0.27
                                              ============  =========  =========  ==========

(1) Adjusted to reflect two-for-one stock splits through March 8, 2000.

SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)

                                                        August 31,     August 31,
                                                           2001          2000
                                                       ------------  ------------

ASSETS
Current assets:
  Cash and cash equivalents                           $    2,482.3  $    1,475.5
  Short-Term investments                                     307.8         958.6
  Accounts receivable, less allowances of
   $40.8 and $8.6, respectively                            2,443.6       2,146.3
  Inventories                                              3,209.9       3,787.3
  Prepaid expenses and other current assets                  260.5         260.5
                                                       ------------  ------------
   Total current assets                                    8,704.1       8,628.2
Net property and equipment                                 1,304.7       1,080.4
Other assets                                                 934.4         627.4
Goodwill, net of accumulated amortization of $145.7
   and $5.8, respectively                                  1,987.2          39.6
                                                       ------------  ------------
Total assets                                          $   12,930.4  $   10,375.6
                                                       ============  ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Short-term debt                                     $      306.2  $       69.2
  Accounts payable                                         1,786.1       2,694.1
  Accrued employee compensation                              166.5         179.8
  Accrued expenses                                           363.7         262.5
  Other current liabilities                                   66.8          11.2
                                                       ------------  ------------
    Total current liabilities                              2,689.3       3,216.8
Long-term debt                                             5,027.5       3,319.5
Other long-term liabilities                                   62.9          37.2
                                                       ------------  ------------
    Total liabilities                                      7,779.7       6,573.5

Stockholders' equity:
  Preferred stock, $.0001 par value; 1.2 shares
    authorized; no shares issued                               --            --
  Common stock, $ .001 par value; 1,600.0 shares
    authorized;  658.2 and 605.0 shares issued and
    outstanding respectively, adjusted for stock split         0.7           0.6
  Additional paid-in capital                               3,877.6       2,259.1
  Retained earnings                                        1,531.6       1,656.8
  Accumulated other comprehensive losses                    (259.2)       (114.4)
                                                       ------------  ------------
     Total stockholders' equity                            5,150.7       3,802.1
                                                       ------------  ------------
Total liabilities and stockholders' equity            $   12,930.4  $   10,375.6
                                                       ============  ============

See accompanying notes to consolidated financial statements.

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

                                                YEARS ENDED AUGUST 31,
                                      ----------------------------------------
                                          2001          2000          1999
                                      ------------  ------------  ------------
Net sales                            $   18,692.3  $   14,137.5  $    9,669.2
Cost of sales                            17,206.2      12,862.2       8,732.9
                                      ------------  ------------  ------------
Gross profit                              1,486.1       1,275.3         936.3
Operating expenses:
  Selling, general and
    administrative                          827.9         467.1         379.2
  Research and development                   69.9          60.8          40.5
  Goodwill amortization expense             139.9           5.3           0.5
  Acquisition costs                          29.7          26.8           --
  Restructuring and
    impairment costs                        517.3          11.1           --
                                      ------------  ------------  ------------
      Operating  income (loss)              (98.6)        704.2         516.1
Interest income                             116.9         106.9          36.7
Interest expense                           (176.0)        (71.6)        (38.3)
                                      ------------  ------------  ------------
Income (loss) before income taxes
  and cumulative effect of
  change in accounting principle           (157.7)        739.5         514.5
Income taxes (benefit)                      (34.2)        238.8         164.2
                                      ------------  ------------  ------------
Income (loss) before cumulative
  effect of change in
  accounting principle                     (123.5)        500.7         350.3
Cumulative effect of change
  in accounting principle
  for start-up costs, net of
  $1.6 income tax benefit                     --           (3.5)          --
                                      ------------  ------------  ------------
     Net  income (loss)              $     (123.5) $      497.2  $      350.3
                                      ============  ============  ============
Basic net income (loss) per share:
 Income (loss) before cumulative
  effect of change in
  accounting principle               $      (0.19) $       0.84  $       0.65
 Cumulative effect of change
  in accounting principle                     --          (0.01)          --
                                      ------------  ------------  ------------
                                     $      (0.19) $       0.83  $       0.65
                                      ============  ============  ============
 Diluted net income (loss) per share:
  Income (loss) before cumulative
   effect of change in
   accounting principle              $      (0.19) $       0.80  $       0.61
  Cumulative effect of change
   in accounting principle                     --           --            --
                                      ------------  ------------  ------------
                                     $      (0.19) $       0.80  $       0.61
                                      ============  ============  ============
Shares used to compute net
 Income (loss) per share:
     Basic                                  641.8         599.4         542.6
                                      ============  ============  ============

     Diluted                                641.8         623.5         579.0
                                      ============  ============  ============

See accompanying notes to consolidated financial statements.

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

                                                                                  Accumulated
                                                                                     Other
                                           Common Stock   Additional              Comprehensive    Total
                                          -------------    Paid-In     Retained      Income     Stockholders'
                                          Shares  Amount   Capital     Earnings     (losses)       Equity
                                          ------  -----  ------------  ---------  ------------  -------------
Balances as of August 31, 1998            519.9  $ 0.6  $      658.6  $   824.4  $       (8.2) $     1,475.4
Net income                                                                350.3                        350.3
Foreign currency translation                                                            (78.6)         (78.6)
Unrealized loss on investments                                                           (1.1)          (1.1)
Stock issued under stock option and
   employee purchase plans                 12.7                 81.5                                    81.5
Conversion of long-term debt, net          27.2                225.3                                   225.3
Issuance of common stock, net of
   issuance costs of $32.5                 34.2              1,069.9                                 1,069.9
Stock issued in business combinations       0.5                 17.8                                    17.8
Dividends                                                                  (1.9)                        (1.9)
Repurchase of common stock                 (0.4)                (7.1)                                   (7.1)
Tax benefit associated with exercise of
   stock options                                                35.4                                    35.4
                                          ------  -----  ------------  ---------  ------------  -------------
Balances as of August 31, 1999            594.1    0.6       2,081.4    1,172.8         (87.9)       3,166.9
Net income                                                                497.2                        497.2
Adjustment to conform fiscal year ends
   of pooled acquisitions                                                 (11.8)                       (11.8)
Foreign currency translation                                                            (32.8)         (32.8)
Unrealized gain on investments                                                            6.3            6.3
Stock issued under stock option and
   employee purchase plans                 10.3                109.0                                   109.0
Stock issued in business combinations       0.2                  6.4                                     6.4
Cancellation of shares                                          (9.0)                                   (9.0)
Issuance of common stock                    0.4                 11.2                                    11.2
Dividends                                                                  (1.4)                        (1.4)
Tax benefit associated with exercise of
   stock options                                                60.1                                    60.1
                                          ------  -----  ------------  ---------  ------------  -------------
Balances as of August 31, 2000            605.0    0.6       2,259.1    1,656.8        (114.4)        3802.1

Net loss                                                                 (123.5)                      (123.5)
Adjustment to conform Texas site year end                                  (1.7)                        (1.7)
Foreign currency translation                                                           (139.8)        (139.8)
Unrealized loss  on investments                                                          (5.0)          (5.0)
Stock issued under stock option and
   employee purchase plans                  8.6                 97.7                                    97.7
Stock issued in business combinations       2.5                 69.8                                    69.8
Issuance of common stock                   42.1    0.1       1,410.5                                 1,410.6
Tax benefit associated with exercise of
   stock options                                                40.5                                    40.5
                                          ------  -----  ------------  ---------  ------------  -------------
Balances as of August 31, 2001            658.2  $ 0.7  $    3,877.6  $ 1,531.6  $     (259.2) $     5,150.7
                                          ======  =====  ============  =========  ============  =============

See accompanying notes to consolidated financial statements.

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

                                                     Years Ended August 31,
                                               ----------------------------------
                                                  2001        2000        1999
                                               ----------  ----------  ----------
Net income (loss)                             $   (123.5) $    497.2  $    350.3
Other comprehensive income (loss):
 Foreign currency translation
  adjustments, net of income
  tax expense of $13.5 in 2001,
  income tax benefit of $15.9 in 2000
  and income tax  benefit of $ 0.4 in 1999        (139.8)      (32.8)      (78.6)

 Unrealized loss on investments,
  net of income tax benefit of $3.1 in 2001,
  income tax expense of $3.8 in 2000
  and income tax benefit of $0.6 in 1999            (5.0)        6.3        (1.1)
                                               ----------  ----------  ----------
Comprehensive  income (loss)                  $   (268.3) $    470.7  $    270.6
                                               ==========  ==========  ==========

Accumulated foreign currency translation losses were $259.4 million at August 31, 2001, $119.6 million at August 31, 2000, and $86.8 million at August 31, 1999. For fiscal year 2001, the foreign currency translation loss primarily resulted from unrealized losses on dollar-denominated debt held by the Company's Brazilian subsidiary. Most of Solectron's remaining foreign currency translation adjustment amounts relate to investments which are permanent in nature. To the extent that such amounts relate to investments which are permanent in nature, no adjustment for income taxes is made. Accumulated unrealized gain on investments was $0.2 million at August 31, 2001 and $5.2 million at August 31, 2000 and $1.1 million at August 31, 1999.

See accompanying notes to consolidated financial statements.

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

                                                                      Twelve Months Ended
                                                                           August 31,
                                                               ---------------------------------
                                                                  2001        2000       1999
                                                               ----------- ---------- ----------
Cash flows from operating activities:
  Net income (loss)                                           $   (123.5) $    497.2 $    350.3
  Adjustments to reconcile net income to net cash
   used in operating activities:
     Depreciation and amortization                                 536.1       251.4      200.4
     Impairment of fixed assets and other long-term assets         268.1         --         --
     Amortization of debt issuance costs and
       accretion of discount on notes payable                      146.5        52.5       18.5
     Tax benefit associated with the exercise of stock options      40.5        60.1       35.4
     Cumulative effect of change in accounting principle
       for start-up cost                                             --          3.5        --
     Adjustment to conform fiscal year ends                         (1.7)      (11.8)       --
     Loss (gain)on disposal of property and equipment              (10.0)       (8.7)      (4.6)
     Other                                                          74.2        20.9        5.5
     Changes in operating assets and liabilities:
       Accounts receivable, net of allowance                        52.4      (934.1)    (505.2)
       Inventories                                               1,024.1    (2,096.0)    (329.7)
       Prepaid expenses and other current assets                   (81.0)     (102.9)      16.2
       Accounts payable                                         (1,287.7)    1,710.7      294.8
       Accrued expenses and other
        current liabilities                                        (10.4)      214.5       15.0
                                                               ----------  ---------- ----------
     Net cash provided by ( used in )
       operating activities                                        627.6      (342.7)      96.6
                                                               ----------  ---------- ----------
Cash flows from investing activities:
  Sales of short-term investments                                1,354.3       982.0      327.8
  Purchases of short-term investments                             (702.0)   (1,498.6)    (598.0)
  Acquisition of business, net of cash acquired                 (2,458.7)      (83.7)     (39.5)
  Acquisition of manufacturing assets and locations                (84.0)   (1,014.2)    (124.7)
  Capital expenditures                                            (536.8)     (506.0)    (449.4)
  Proceeds from sale of property and equipment                      98.7        88.9       41.7
  Other                                                           (149.9)      (35.1)     (32.0)
                                                               ----------  ---------- ----------
     Net cash used in investing
      activities                                                (2,478.4)   (2,066.7)    (874.1)
                                                               ----------  ---------- ----------
Cash flows from financing activities:
  Net proceeds (repayment) from bank lines of credit               (52.3)       16.9       22.1
  Net proceeds from long-term debt                               1,540.7     2,296.3      729.4
  Principal payments on long-term debt                             (18.3)       (0.8)       --
  Repurchase of common stock                                         --          --        (7.1)
  Net proceeds from stock issued under
   option and employee purchase plans                               97.7       121.9       81.5
  Net proceeds from issuance of common stock                     1,381.4        11.2    1,069.9
  Dividends                                                          --         (1.4)      (1.4)
  Other                                                             20.6        29.9       (0.4)
                                                               ----------  ---------- ----------
    Net cash provided by financing
    activities                                                   2,969.8     2,474.0    1,894.0
                                                               ----------  ---------- ----------
Effect of exchange rate changes on
 cash and cash equivalents                                        (112.1)       (6.5)       5.2
                                                               ----------  ---------- ----------
Net increase in cash and cash equivalents                        1,006.9        58.1    1,121.7
Cash and cash equivalents at beginning of period                 1,475.5     1,417.4      306.4
                                                               ----------  ---------- ----------
Cash and cash equivalents at
 end of period                                                $  2,482.4  $  1,475.5 $  1,428.1
                                                               ==========  ========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period:
   Income taxes                                               $    151.4  $    135.7 $    114.5
   Interest                                                   $     11.0  $     17.6 $     27.7
Non-cash investing activities:
   Issuance of common stock for business
     combination, net of cash acquired                        $     61.7  $      6.4 $     14.7
   Issuance of common stock upon
     conversion of long-term debt, net                               --          --       225.4

See accompanying notes to consolidated financial statements.

SOLECTRON CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

On November 30, 1999, Solectron completed its acquisition of SMART Modular Technologies (SMART). Under the terms of the agreement, each share of SMART common stock was exchanged for 0.51 of a share of Solectron common stock. Solectron issued approximately 47.6 million shares of Solectron common stock for the outstanding common stock of SMART and assumed all stock options held by SMART employees. The acquisition was accounted for as a pooling of interests. Accordingly, the Company's historical financial statements have been restated retroactively to include the financial results of SMART. SMART's results of operations for the fiscal year ended October 31, 1999 have been combined with Solectron's results of operations for the year ended August 31, 1999. In addition, SMART's balance sheet as of October 31, 1999 has been combined with Solectron's balance sheet as of August 31, 1999. Since the results of operations for the two month period ended October 31, 1999 for SMART have been included in the fiscal 1999 and fiscal 2000 consolidated statements of income, such results have been adjusted for in retained earnings. SMART changed its fiscal year end to coincide with Solectron's beginning in fiscal 2000.

On April 28, 2000, Solectron completed its acquisition of AMERICOM Wireless Services (AMERICOM), a privately held corporation. Solectron issued approximately 1.8 million shares of its common stock in exchange for all outstanding common stock of AMERICOM and to extinguish obligations under the stock appreciation rights plan of AMERICOM. On July 14, 2000, Solectron completed the acquisition of Bluegum Group (Bluegum), an electronics contract manufacturer in Australia. Solectron issued approximately 2.3 million shares of its common stock in exchange for all outstanding common shares and stock options of Bluegum. Both transactions were accounted for as a pooling of interests. Accordingly, Solectron's historical financial statements have been restated retroactively to include the financial results of AMERICOM and Bluegum. Both AMERICOM and Bluegum had fiscal years different than Solectron's. AMERICOM's fiscal year was from January 1 to December 31 and Bluegum's was from July 1 to June 30. AMERICOM's results of operations for the year ended December 31, 1999 together with Bluegum's results of operations for the year ended June 30, 1999 have been combined with Solectron's results of operations for the year ended August 31, 1999. AMERICOM's balance sheet as of December 31, 1999 together with Bluegum's balance sheet as of June 30, 1999 have been combined with Solectron's balance sheet as of August 31, 1999. Both AMERICOM and Bluegum changed their fiscal year ends to coincide with Solectron's beginning in fiscal 2000. Retained earnings has been adjusted to conform their year ends with Solectron's.

Restated financial information includes certain adjustments for the elimination of net sales and cost of sales related to shipments by Solectron to Bluegum, shipments by SMART to Solectron, as well as for certain reclassifications made to SMART's, AMERICOM's and Bluegum's financial statements to conform with Solectron's financial statement presentation. There were no adjustments necessary to conform the accounting policies of the combining companies.

The results of operations previously reported by the separate enterprises and the combined amounts presented in the accompanying consolidated financial statements are summarized below (in millions):

                                        Years Ended August 31,
                                        ----------------------
                                           2000        1999
                                        ----------  ----------
Net Sales
  Solectron                            $ 13,786.5  $  8,391.4
  SMART *                                   280.4       995.9
  AMERICOM *                                 53.5        63.7
  Bluegum *                                 156.1       247.2
  Eliminations                             (139.0)      (29.0)
                                        ----------  ----------
                                       $ 14,137.5  $  9,669.2
                                        ==========  ==========

Net income
  Solectron                            $    497.0  $    294.0
  SMART *                                    12.2        53.5
  AMERICOM *                                 (2.8)        2.8
  Bluegum *                                  (8.4)        --
  Eliminations                               (0.8)        --
                                        ----------  ----------
                                       $    497.2  $    350.3
                                        ==========  ==========

* Represents the net sales and net income for each of the separate companies prior to the consummation of the acquisitions. The acquisitions were consummated as follows: SMART on November 30, 1999, AMERICOM on April 28, 2000 and Bluegum on July 14, 2000. Results subsequent to the acquisition were included with Solectron.

No adjustments were necessary to conform accounting policies of the combined entities.

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

Cash Equivalents and Short-Term Investments: Cash equivalents are highly liquid investments purchased with a maturity at the date of purchase of less than three months. Short-term investments are investment grade short-term debt instruments with remaining maturities greater than three months.

Investments: Investments in debt securities are classified as available-for-sale securities. Such investments are recorded at fair value as determined from quoted market prices, and the cost of securities sold is determined based on the specific identification method. If material, unrealized gains or losses are reported as a component of comprehensive income or loss, net of related tax effect.

Inventories: Inventories are stated at the lower of weighted average cost or market.

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

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

Other Assets: Other assets consist of intangible assets including intellectual property rights, goodwill and debt issuance costs. Intangible assets are amortized using the straight-line method, over the expected life of the asset - ten years for intellectual property rights and goodwill. Debt issuance costs related to the zero-coupon convertible senior notes are amortized using the effective interest method over twenty years. Debt issuance costs related to the 7 3/8% senior notes are amortized using the straight-line method, which does not differ materially from the effective interest method, over the debt term of ten years.

Impairment of Long-Lived Assets: Solectron reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is considered impaired if its carrying amount (including the unamortized portion of goodwill allocated to the asset) exceeds the future net cash flow the asset is expected to generate. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset, including the allocated goodwill, if any, exceeds its fair market value. Solectron assesses the recoverability of enterprise-level goodwill by determining whether the unamortized goodwill balance can be recovered through undiscounted future net cash flows of the acquired operation. The amount of enterprise-level goodwill impairment, if any, is measured based on projected discounted future net cash flows using a discount rate reflecting the Company's average cost of funds.

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

Net Income Per Share: Basic net income per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted-average number of common shares plus dilutive potential common shares outstanding during the period. Potential common shares consist of stock options that are computed using the treasury stock method and shares issuable upon conversion of Solectron's outstanding convertible notes computed using the as-if-converted method. Share and per-share data presented reflect the two-for-one stock splits effective through March 8, 2000.

Revenue Recognition: Solectron recognizes revenue upon shipment of product to its customers.

Reclassifications: Certain prior-year amounts have been reclassified to conform with the current-year presentation.

Employee Stock Plans: Solectron accounts for its stock option plans and its Employee Stock Purchase Plan using the intrinsic value method.

Foreign Currency: For foreign subsidiaries using the local currency as their functional currency, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expenses are translated at average exchange rates. The effects of these translation adjustments are reported in other comprehensive income. Exchange gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved and remeasurement adjustments for foreign operations where the U.S. dollar is the functional currency are included in income. To date, the effect of such amounts on net income has not been material.

Year End: Solectron's financial reporting year ends on the last Friday in August. Fiscal years 2001 contained 53 weeks while 2000 and 1999 each contained 52 weeks. For purposes of presentation in the accompanying financial statements and notes, Solectron has indicated its accounting years as ending on August 31.

Solectron's subsidiary, Solectron Brasil, Ltda. (Brazil), reports its results one month in arrears. Solectron's consolidated financial position as of August 31, 2001 and 2000, include the financial position of Brazil operation as of July 31, 2001 and 2000. Similarly, Solectron's consolidated results of operations and cash flows for the years ended August 31, 2001, 2000 and 1999, include the results of operations and cash flows of the Brazil operation for the twelve-month periods ended July 31, 2001, 2000 and 1999.

Solectron's subsidiary in Austin, Texas reported its results one month in arrears during fiscal 2000 and 1999. Solectron's consolidated financial position as of August 31, 2000 included the financial position of Austin as of July 31, 2000. Similarly, Solectron's consolidated results of operations and cash flows for the years ended August 31, 2000 and 1999 include the results of operations and cash flows of the Austin subsidiary for the years ended July 31, 2000 and 1999. The Austin subsidiary changed its fiscal year end to conform to the consolidated company beginning in 2001. Retained earnings has been adjusted to reflect this change.

Recent Accounting Pronouncements: Solectron adopted the American Institute of Certified Public Accountants' Statement of Position No. 98-5, Reporting on the Costs of Start-up Activities, on September 1, 1999. This statement required that costs of start-up activities and organizational costs be expensed as incurred. The cumulative effect of this accounting change on years prior to fiscal 2000 was a charge of $3.5 million (net of $1.6 million income tax effect), or $.01 per common share, that was reflected in the first quarter of fiscal 2000. Pro forma information is not presented as the change did not have a material impact on any individual year prior to fiscal 2000.

In September 2000, Solectron adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and No. 138. Solectron enters into short-term foreign currency forward contracts and borrowings to hedge only those currency exposures associated with certain assets and liabilities denominated in non-functional currencies. In addition, the Company periodically hedges variability in cash flows resulting from fluctuating interest rates. Solectron entered into an interest rate swap agreement with a notional amount of $52 million, maturing on June 3, 2002, to hedge against varying rental payments associated with an operating lease that requires payments based on LIBOR. This swap agreement was designated as a cash flow hedge upon adoption of the standard and the ineffective portion of the hedge was not material. Accordingly, changes in the fair value of this interest rate swap designated as a cash flow hedge are included in accumulated other comprehensive income. These amounts are subsequently reclassified into rent expense during the period in which the LIBOR-based lease agreement affect earnings. Since adoption, the impact to the financial statements has not been significant.

In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies the criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives are amortized over their respective estimated lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to adoption of SFAS No. 142.

In accordance with SFAS No. 141, Solectron is accounting for all business combinations initiated or completed after June 30, 2001 using the purchase method of accounting. Solectron adopted the remaining provisions of SFAS No. 141 and SFAS No. 142 effective September 1, 2001.

SFAS No. 141 requires, upon adoption of SFAS No. 142, that Solectron evaluate its existing intangibles assets and goodwill that were acquired in prior purchase business combinations, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, Solectron is required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and to make any necessary amortization period adjustments by the end of the first interim period after adoption. Solectron is required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss is measured as of the date of adoption and recognized as a cumulative effect of accounting principle in the first interim period.

In connection with the transitional goodwill impairment evaluation, SFAS No. 142 requires Solectron to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, Solectron must identify its reporting units and determine the carrying value of each reporting unit by assessing the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. Solectron then has up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying value. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and Solectron must perform the second step of the transitional impairment test. In the second step, Solectron must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as a cumulative effect of a change in accounting principle in our statement of operations.

As of September 1, 2001, Solectron had unamortized goodwill of $1.9 billion, unamortized identifiable intangible assets of approximately $500 million, all of which are subject to the transition provisions of SFAS No. 141 and 142. Amortization expense related to goodwill was $139.9 million for fiscal 2001. Because of the extensive effort required to comply with the remaining provisions of SFAS Nos. 141 and 142, Solectron cannot reasonably estimate the impact on their financial statements of these provisions beyond discontinuing amortization.

The FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, in August 2001, and SFAS No.144, Accounting for the Impairment or Disposal of Long-lived Assets, in October 2001. SFAS No. 143 requires that the fair value of an asset retirement obligation be recorded as a liability in the period in which it incurs the obligation. SFAS No. 144 services to clarify and further define the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 does not apply to goodwill and other intangible assets that are not amortized. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company expects to adopt both effective September 1, 2002. The effect of the adopting these statements is not expected to have a material effect on the Company's consolidated financial position or results of operations.

Cash, cash equivalents and short-term investments as of August 31, 2001, and 2000, consisted of the following:

                                         Cash and
                                           Cash     Short-Term
                                        Equivalents Investments
                                        ----------  ----------
                                             (in millions)
                 2001
                ------
Cash                                   $  2,244.7  $      --
Money market funds                          174.4         --
Certificates of deposit                      63.2         2.5
Market auction securities                     --        181.6
U.S. government securities                    --          4.6
Corporate obligations                         --        102.2
Other                                         --         16.9
                                        ----------  ----------
   Total                               $  2,482.3  $    307.8
                                        ==========  ==========

                 2000
                ------
Cash                                   $    439.6  $      --
Money market funds                          428.0         --
Certificates of deposit                      19.7        60.4
Market auction securities                     --         15.5
U.S. government securities                   26.3       158.7
Corporate obligations                       485.0       697.9
Other                                        76.9        26.1
                                        ----------  ----------
   Total                               $  1,475.5  $    958.6
                                        ==========  ==========

Short-term investments are carried at fair market value, which approximates cost. Realized and unrealized gains and losses for the fiscal years ended August 31, 2001 and 2000 were not material. As of August 31, 2001, approximately 97% of Solectron's portfolio matures in one year or less, with the remainder maturing in less than two years.

NOTE 3. INVENTORIES

Inventories as of August 31, 2001 and 2000, consisted of:

                                                              2001       2000
                                                            ---------  ---------
                                                                  (in millions)



  Raw materials                                            $ 2,503.5  $ 3,043.0
  Work-in-process                                              331.0      558.9
  Finished goods                                               375.4      185.4
                                                            ---------  ---------
  Total                                                    $ 3,209.9  $ 3,787.3
                                                            =========  =========

Property and equipment as of August 31, 2001 and 2000, consisted of:

                                                              2001       2000
                                                            ---------  ---------
                                                                 (in millions)

   Land                                                    $    62.2  $    40.3
   Building and improvements                                   341.1      243.0
   Leasehold improvements                                      133.8      102.2
   Factory equipment                                         1,292.2    1,033.4
   Computer equipment and software                             337.1      195.5
   Furniture, fixture, and other                               274.3      109.6
   Construction-in-process                                      71.1      125.8
                                                            ---------  ---------
                                                             2,511.8    1,849.8
   Less accumulated depreciation
    and amortization                                         1,207.1      769.4
                                                            ---------  ---------
   Net property and equipment                              $ 1,304.7  $ 1,080.4
                                                            =========  =========

NOTE 5. LINES OF CREDIT

Solectron has available a $100 million unsecured multicurrency revolving line of credit that expires April 30, 2002. Borrowings under the credit facility bear interest, at Solectron's option, at either the bank's prime rate, the London interbank offering rate (LIBOR) plus a margin, or the bank's certificate of deposit (CD) rate plus a margin. The margin under the LIBOR or CD rate options will vary depending on Solectron's Standard & Poor's Corporation and/or Moody's Investor Services, Inc. rating for its long-term senior unsecured debt. This margin was 0.4% at August 31, 2001. Under the credit agreement, the Company must meet certain financial covenants. As of August 31, 2001 and 2000, there were no borrowings outstanding under this line of credit.

                                                2001           2000
                                            ------------  -------------
                                                          (in millions)
Zero coupon convertible senior notes
  Due 2020, face value $4,025.0,
  Fair value of $2,047.5 in 2001,
  and $2,648.9 in 2000                     $    2,416.1  $     2,350.5
Zero coupon convertible senior notes
  Due 2020, face value $2,900.0,
  Fair value of $1,212.8 in 2001                1,560.5            --
Zero coupon convertible senior notes
  Due 2019, face value $1,656.0,
  Fair value of $817.9 in 2001
  and $1,195.8 in 2000                           831.3          798.5
7 3/8% senior notes due 2006, face value
  $150.0, fair value of $150.3 in 2001
  and $146.9 in 2000                             149.8          149.8
Other, fair value of $69.8 in 2001 and
  $20.7 in 2000                                   69.8           20.7
                                            ------------  -------------
 Total long-term debt                      $    5,027.5  $     3,319.5
                                            ============  =============

                                     2001         2000        1999
                                  ----------  ------------  ---------
Current:                                      (in millions)

          Federal                $     11.9  $      151.3  $   114.4
          State                         2.6          28.2       17.8
          Foreign                      39.2          48.6       29.7
                                  ----------  ------------  ---------
                                       53.7         228.1      161.9

Deferred:
          Federal                     (78.9)        (10.6)      (3.1)
          State                       (14.3)         (0.7)       1.4
          Foreign                       5.3          22.0        4.0
                                  ----------  ------------  ---------
                                      (87.9)         10.7        2.3
                                  ----------  ------------  ---------
          Total                  $    (34.2) $      238.8  $   164.2
                                  ==========  ============  =========

                                     2001         2000         1999
                                  ----------  ------------  ---------

Federal tax rate                       35.0  %       35.0 %     35.0 %
State income tax, net of
  federal tax benefit                   4.8           2.4        2.4
Income of international
  subsidiaries taxed at
  different rates                     (32.9)          0.1        0.1
Tax holiday                            41.6          (7.4)      (5.9)
Tax credits                               -          (0.5)      (0.1)
Tax exempt interest income              2.8          (0.1)      (0.3)
FSC benefit                               -          (0.1)      (0.1)
Nondeductible goodwill
  and acquisition costs                (7.9)          1.1          -

Loss for which no benefit
  is realized                         (17.8)            -          -
Intercompany interest charges          (3.4)          0.3        0.2
Other                                  (0.5)          1.5        0.6
                                  ----------  ------------  ---------
Effective income tax rate              21.7  %       32.3 %     31.9 %
                                  ==========  ============  =========

                                                  2001        2000
                                              ------------  ---------
                                                   (in millions)

Deferred tax assets:
  Accruals, allowances and reserves          $      103.9  $    19.3
  State income tax                                   18.8        9.2
  Acquired intangible assets                         39.3        5.9
  Net undistributed profits of
    subsidiaries                                        -        3.8
  Net operating loss carryover                      133.1       83.6
  Restructuring reserves                             77.3          -
  Other                                               1.9          -
                                              ------------  ---------
Deferred tax assets                                 374.3      121.8
Valuation allowance                                 (71.6)         -
                                              ------------  ---------
Total deferred tax assets                    $      302.7  $   121.8
                                              ------------  ---------
Deferred tax liabilities:
  Foreign inventories expenses for tax              (81.9)     (55.6)
  Depreciation                                      (29.8)      (4.0)
  Realized translation gains                        (30.8)     (12.1)
  Foreign import incentives                          (3.1)      (7.0)
  Other                                              (0.1)      (2.7)
                                              ------------  ---------
Total deferred tax liabilities                     (145.7)     (81.4)
                                              ------------  ---------
Net deferred tax assets                      $      157.0  $    40.4
                                              ============  =========

             Jurisdiction      Amount                 Expiration
           ----------------   --------- --------------------------------------

           Australia        $     22.6                   N/A
           Brazil                 77.4                   N/A
           Canada                 18.2                  2008
           Indonesia               9.1                  2006
           Ireland                25.3                   N/A
           Malaysia               19.7                   N/A
           Mexico                 76.0               2007 - 2011
           Romania                44.4               2003 - 2006
           Turkey                  5.6                  2004
           United Kingdom          4.0                   N/A

                                     2001         2000        1999
                                  ----------  ------------  ---------

                       U.S.      $   (287.2) $      392.1  $   349.7
                       Non-U.S.       129.5         347.4      164.8
                                  ----------  ------------  ---------
                       Total     $   (157.7) $      739.5  $   514.5
                                  ==========  ============  =========

                                                              2001       2000        1999
                                                            ---------  ---------  ----------
                                                         (in millions, except per share daata)
Net income (loss):                            As reported   ($123.50)   $497.20     $350.30
                                              Pro forma     ($209.90)   $444.00     $314.30

Net income (loss) per share:
Basic                                         As reported     ($0.19)     $0.83       $0.65
                                              Pro forma       ($0.33)     $0.74       $0.58
Diluted                                       As reported     ($0.19)     $0.80       $0.61
                                              Pro forma       ($0.33)     $0.71       $0.55

                                                  2001         2000         1999
                                              ------------  -----------  -----------

Expected life of Options                       3.5 years     3.5 years    3.5 years
Expected life of purchase rights                6 months      3 months     3 months
Volatility                                        65%           52%          44%
Risk-free interest rate                       3.4% to 6.34% 4.8% to 6.8% 4.5% to 5.8%
Dividend yield                                    zero         zero         zero

                                        2001                  2000                  1999
                               ---------------------  --------------------  --------------------
                                           Weighted              Weighted              Weighted
                                Number      Average    Number     Average    Number     Average
                                   of      Exercise      of      Exercise      of      Exercise
                                 Shares      Price     Shares      Price     Shares      Price
Oustanding,                    ----------  ---------  ---------  ---------  ---------  ---------
   beginning of year                44.1  $   17.72       45.9  $   11.29       45.5  $    7.37
Granted                             14.4  $   32.98       13.4  $   34.21       15.6  $   18.04
Exercised                           (7.0) $    8.77      (10.8) $    8.18      (11.5) $    5.69
Canceled                            (3.6) $   30.23       (4.4) $   21.94       (3.7) $    8.39
                               ----------             ---------             ---------
Outstanding,
  end of year                       47.9  $   22.61       44.1  $   17.72       45.9  $   11.29
                               ==========             =========             =========
Exercisable
  end of year                       27.0  $   16.53       23.6  $   11.23       22.2  $    7.61
                               ==========             =========             =========

Weighted-average
   fair value of options
   granted during the year                $   17.91             $   15.92             $    7.07

                                   Outstanding                     Exercisable
                       -------------------------------------  -----------------------
                                     Weighted
                                     Average      Weighted                 Weighted
                                   Remaining       Average                  Average
Range of               Number of   Contractual    Exercise     Number of    Exercise
Exercise Prices          Shares        Life         Price       Shares       Price
---------------------- ----------  ------------  -----------  -----------  ----------
$0.33 - $5.98             5.8       1.60 years        $5.22          5.8       $5.21
$6.13 - $10.95            6.6       3.15 years        $9.34          6.5       $9.32
$11.08 - $12.69           2.8       4.56 years       $11.95          2.1      $11.86
$13.27 - $13.30           4.7       4.26 years       $13.30          3.3      $13.30
$13.44 - $18.13           5.4       6.48 years       $16.96          1.2      $16.18
$18.23 - $31.00           7.7       5.78 years       $25.01          3.6      $23.91
$32.29 - $35.31           5.5       5.40 years       $35.07          2.1      $34.97
$36.09 - $46.13           8.3       5.85 years       $44.03          2.2      $43.60
$46.94 - $51.67           1.0       6.15 years       $46.99          0.2      $47.17
                       ----------                             -----------
$0.33  - $51.67          47.9       4.75 years       $22.61         27.0      $16.53
                       ==========                             ===========

                                                ----------------------------------
                                                   2001        2000        1999
                                                ----------  ----------  ----------
                                                          (in millions)
Net sales:
 Manufacturing and operations                  $ 17,181.6  $ 12,418.5  $  8,460.3
 Technology solutions                             1,201.1     1,486.5     1,130.4
 Global services                                    309.6       232.5        78.5
                                                ----------  ----------  ----------
                                               $ 18,692.3  $ 14,137.5  $  9,669.2
                                                ==========  ==========  ==========
Depreciation and amortization:
 Manufacturing and operations                  $    450.8  $    194.1  $    167.8
 Technology solutions                                22.1        26.1        21.5
 Global services                                     10.0        12.8         2.2
 Corporate                                           53.2        18.4         8.9
                                                ----------  ----------  ----------
                                               $    536.1  $    251.4  $    200.4
                                                ==========  ==========  ==========

Interest income:
 Manufacturing and operations                  $     18.8  $      8.6  $      8.0
 Technology solutions                                 1.9         5.7         7.2
 Global services                                      0.1         0.2         --
 Corporate                                           96.1        92.4        21.5
                                                ----------  ----------  ----------
                                               $    116.9  $    106.9  $     36.7
                                                ==========  ==========  ==========

Interest expense:
 Manufacturing and operations                  $     19.7  $      6.9  $      3.4
 Technology solutions.                                0.8         1.1         0.7
 Global services                                     (0.1)        0.9         --
 Corporate                                          155.6        62.7        34.2
                                                ----------  ----------  ----------
                                               $    176.0  $     71.6  $     38.3
                                                ==========  ==========  ==========
Income before income taxes and cumulative
 effect of change in accounting principle:
 Manufacturing and operations                  $    (42.8) $    668.7  $    484.0
 Technology solutions                                20.4        78.4        82.6
 Global services                                     38.8         2.6         9.6
 Corporate                                         (174.1)      (10.2)      (61.7)
                                                ----------  ----------  ----------
                                               $   (157.7) $    739.5  $    514.5
                                                ==========  ==========  ==========


Capital expenditures:
 Manufacturing and operations                  $    454.3  $    432.3  $    392.0
 Technology solutions                                22.7        29.0        24.1
 Global services                                     12.3        15.7         3.8
 Corporate                                           47.5        29.0        29.5
                                                ----------  ----------  ----------
                                               $    536.8  $    506.0  $    449.4
                                                ==========  ==========  ==========

Total Assets:
 Manufacturing and operations                  $  9,752.4  $  5,303.4  $  2,712.7
 Technology solutions                               587.5       500.2       451.5
 Global services                                    184.9       222.2        52.6
 Corporate                                        2,405.6     4,349.8     2,203.7
                                                ----------  ----------  ----------

                                               $ 12,930.4  $ 10,375.6  $  5,420.5
                                                ==========  ==========  ==========

                                                   2001        2000        1999
                                                ----------  ----------  ----------
                                                         (in millions)
Net sales derived from:
 PCB assembly                                  $ 13,738.3  $  9,940.5  $  6,502.0
 Systems build                                    3,434.6     2,516.1     2,058.6
 Technology solutions prodcuts                    1,207.9     1,501.1     1,108.6
 Global services                                    311.5       179.5         --
                                                ----------  ----------  ----------
                                               $ 18,692.3  $ 14,137.2  $  9,669.2
                                                ==========  ==========  ==========
Geographic net sales:
 United States                                 $  9,205.3  $  8,328.9  $  6,491.2
 Europe                                           3,398.8     3,440.9     1,952.4
 Asia/Pacific and other                           6,088.2     2,367.7     1,225.6
                                                ----------  ----------  ----------
                                               $ 18,692.3  $ 14,137.5  $  9,669.2
                                                ==========  ==========  ==========
Long-lived assets (physical location):
 United States                                 $  1,592.8  $    837.8  $    523.2
 Europe                                             378.1       607.2       100.1
 Asia/Pacific and other                           2,255.4       302.4       314.8
                                                ----------  ----------  ----------
                                               $  4,226.3  $  1,747.4  $    938.1
                                                ==========  ==========  ==========

                                               YEARS ENDED AUGUST 31,
                                 --------------------------------------------
                                     2001          2000             1999
                                 ------------  ---------------  -------------
Cisco                                   11.5%            12.0%          11.1%
Compaq                                   --               --            11.8%
Ericsson                                13.7%            13.0%           --
Nortel                                  11.9%             --             --

Asset acquired                            $1,172.6
Goodwill                                   1,974.9
Liabilities assumed                         (692.8)
                                      -------------
   Total purchase price                   $2,454.7
                                      =============

                                            2001            2000
                                     ---------------  ------------------
                                    (in millions, except per share data)

Net Sales                                $19,734.7       $16,258.8

Net income (loss)                          ($210.1)         $536.1

Basic income (loss) per share               ($0.33)          $0.85

Diluted income (loss) per share             ($0.33)          $0.81

                                  Severance    Lease Payments   Lease Payments
                                  and Benefits  on Facilities   on Equipment      Other         Total
                                 ------------  ---------------  -------------  ------------  -----------
Begining balance                $        --   $           --   $         --   $        --   $       --
Current year provision                  70.0             56.4          117.5           5.3        249.2
Cash payments                          (70.0)            (5.5)          (5.0)         (0.9)       (81.4)
                                 ------------  ---------------  -------------  ------------  -----------
Balance at August 31, 2001      $        --   $          50.9  $       112.5  $        4.4  $     167.8
                                 ============  ===============  =============  ============  ===========

                                                      Years Ended August 31,
                                        --------------------------------------

                                            2001         2000          1999
                                        ------------  -----------  -----------
                                         (in millions, except per share data)

Net income (loss) before cumulative
  effect of change in accounting
  principle, net of taxes              $     (123.5) $     500.7 $      350.3
Cumulative effect of change
  in accounting principle,
  net of taxes                                  --         (3.50)         --
                                        ------------  -----------  -----------
Net  income (loss) - basic             $     (123.5) $     497.2 $      350.3

Interest expense from convertible
  subordinated notes, net of taxes                -            -          5.0
                                        ------------  -----------  -----------
Net  income (loss) - diluted           $     (123.5) $     497.2 $      355.3
                                        ============  ===========  ===========


Weighted average shares - basic               641.8        599.4        542.6
Common shares issuable upon
  exercise of stock options                       -         24.1         22.6
Common shares issuable upon conversion
  of convertible subordinated notes               -            -         13.8
                                        ------------  -----------  -----------
Weighted average shares
  diluted                                     641.8        623.5        579.0
                                        ============  ===========  ===========

Basic net  income (loss) per share:
 Income (loss) before cumulative
   effect of change in
   accounting principle                $      (0.19) $      0.84 $       0.65
 Cumulative effect of change
   in accounting principle                      --         (0.01)         --
                                        ------------  -----------  -----------
    Net  income (loss) per share       $      (0.19) $      0.83 $       0.65
                                        ============  ===========  ===========

Diluted net income (loss) per share:
 Income (loss) before cumulative
   effect of change in
   accounting principle                $      (0.19) $      0.80 $       0.61
 Cumulative effect of change
   in accounting principle                      --           --           --
                                        ------------  -----------  -----------
     Net  income (loss) per share      $      (0.19) $      0.80 $       0.61
                                        ============  ===========  ===========