Sanmina (SANM) 10-Q 2006 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended December 31, 2005
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from        to

Commission File Number 0-21272

Sanmina-SCI Corporation

(Exact name of registrant as specified in its charter)

Delaware	77-0228183
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
2700 N. First St., San Jose, CA	95134
(Address of principal executive offices)	(Zip Code)
(408) 964-3500
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act).  Yes   ý        No  o

As of January 31, 2006, there were 532,168,271 shares outstanding of the issuer’s common stock, $0.01 par value per share.

SANMINA-SCI CORPORATION

INDEX

		Page
	PART I FINANCIAL INFORMATION
Item 1.	Interim Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	49
Item 4.	Controls and Procedures	50
	PART II OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 4.	Submission of Matters to a Vote of Security Holders	51
Item 6.	Exhibits	51
Signatures		52

2

SANMINA-SCI CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2005			October 1, 2005
	(Unaudited)
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	1,011,098		$	1,068,053
Short-term investments	28,178			57,281
Accounts receivable, net	1,612,325			1,477,401
Inventories	1,122,773			1,015,035
Deferred income taxes	39,107			42,767
Prepaid expenses and other current assets	104,142			86,620
Total current assets	3,917,623			3,747,157
Property, plant and equipment, net	606,895			662,101
Goodwill	1,654,126			1,689,198
Other intangible assets, net	33,658			35,907
Other non-current assets	80,363			81,874
Restricted cash	25,538			25,538
Total assets	$	6,318,203		$	6,241,775
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	1,259		$	1,439
Accounts payable	1,636,397			1,559,172
Accrued liabilities	353,322			366,920
Accrued payroll and related benefits	141,141			146,687
Total current liabilities	2,132,119			2,074,218
Long-term liabilities:
Long-term debt, net of current portion	1,635,847			1,644,666
Other	152,774			143,873
Total long-term liabilities	1,788,621			1,788,539
Commitments and contingencies
Stockholders’ equity:
Preferred stock	—			—
Common stock $.01 par value, authorized 1,000,000 shares, 550,040 and 526,837 shares, issued and outstanding, respectively	5,475			5,457
Treasury stock, 18,834 and 18,853 shares, respectively, at cost	(188,200		)	(188,519		)
Additional paid-in capital	5,749,864			5,745,125
Accumulated other comprehensive income	25,623			36,886
Accumulated deficit	(3,195,299		)	(3,219,931		)
Total stockholders’ equity	2,397,463			2,379,018
Total liabilities and stockholders’ equity	$	6,318,203		$	6,241,775

See accompanying notes.

3

SANMINA-SCI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended
	December 31, 2005					January 1, 2005
	(Unaudited)
	(In thousands, except per share data)
Net sales		$	2,861,797		$		3,252,706
Cost of sales		2,692,117			3,075,739
Gross profit		169,680			176,967
Operating expenses:
Selling, general and administrative		88,535			87,309
Research and development		8,917			7,490
Amortization of intangible assets		2,233			2,030
Integration costs		175			114
Restructuring costs		35,628			20,425
Total operating expenses		135,488			117,368
Operating income		34,192			59,599
Interest income		5,925			3,507
Interest expense		(34,248		)	(30,056			)
Other income, net		1,054			270
Interest and other expense, net		(27,269		)	(26,279			)
Income before income taxes and cumulative effect of accounting change		6,923			33,320
Provision for (benefit from) income taxes		(12,957		)	8,954
Income before cumulative effect of accounting change		19,880			24,366
Cumulative effect of accounting change, net of tax		4,752			—
Net income		$	24,632		$		24,366
Income per share before cumulative effect of accounting change:
Basic		$	0.04		$		0.05
Diluted		$	0.04		$		0.05
Net income per share:
Basic		$	0.05		$		0.05
Diluted		$	0.05		$		0.05
Weighted average shares used in computing per share amounts:
Basic		524,311			519,205
Diluted		524,703			525,008

See accompanying notes.

4

SANMINA-SCI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	December 31, 2005			January 1, 2005
	(Unaudited)
	(In thousands)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income	$	24,632		$	24,366
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Restructuring non-cash costs	15,585			1,982
Depreciation and amortization	35,170			47,706
Recovery of provision for doubtful accounts	(51		)	(918		)
Stock-based compensation	3,902			2,790
Cumulative effect of accounting change, net of tax	(4,752		)	—
(Gain)/loss on disposal of property, plant and equipment	(1,177		)	759
Proceeds from sale of accounts receivable	348,201			—
Other, net	307			959
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(487,179		)	(95,214		)
Inventories	(110,576		)	88,901
Prepaid expenses and other current and non-current assets	9,648			(24,957		)
Income tax accounts	(8,823		)	5,294
Restricted cash	—			(8		)
Accounts payable and accrued liabilities	108,866			480
Cash provided by (used in) operating activities	(66,247		)	52,140
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of short-term investments	(16,562		)	(14,160		)
Proceeds from maturities and sale of short-term investments	45,432			7,034
Purchases of long-term investments	(128		)	(314		)
Purchases of property, plant and equipment	(22,546		)	(14,742		)
Proceeds from sale of property, plant and equipment	4,310			7,715
Cash paid for businesses acquired, net of cash acquired	(157		)	(77,093		)
Cash provided by (used in) investing activities	10,349			(91,560		)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Payments of long-term debt	—			(12,119		)
Payments of long-term liabilities	—			(715		)
Payments of notes and credit facilities	(262		)	(536		)
Proceeds from sale of common stock	5,607			2,244
Cash provided by (used in) financing activities	5,345			(11,126		)
Effect of exchange rate changes	(6,402		)	(2,129		)
Decrease in cash and cash equivalents	(56,955		)	(52,675		)
Cash and cash equivalents at beginning of period	1,068,053			1,069,447
Cash and cash equivalents at end of period	$	1,011,098		$	1,016,772
Supplemental disclosures of cash flow information:
Cash paid during the quarter
Interest	$	1,159		$	3,365
Income taxes	$	9,078		$	2,707

See accompanying notes.

5

SANMINA-SCI CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.  Basis of Presentation

The accompanying condensed consolidated financial statements of Sanmina-SCI Corporation (“Sanmina-SCI”, “we”, “our”, “the Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules or regulations. The interim financial statements are unaudited, but reflect all normal recurring adjustments and non-recurring adjustments that are, in the opinion of management, necessary for a fair presentation.

We operate on a 52- or 53-week fiscal year that ends on the Saturday nearest September 30. Fiscal year 2006 and 2005 are 52-week fiscal years in which the first quarter was a 13-week quarter. All general references to years relate to fiscal years unless otherwise noted.

The results of operations for the three months ended December 31, 2005 are not necessarily indicative of the results that may be expected for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto for the year ended October 1, 2005, included in Sanmina-SCI’s Annual Report on Form 10-K.

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 amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

Auction rate securities in the amount of $8.1 million have been reclassified from cash and cash equivalents to short-term investments as of  January 1, 2005. The purchases and sales of these auction rate securities have been reclassified in the Condensed Consolidated Statements of Cash Flows, which increased cash flows used in investing activities by $0.9 million for the quarter ended January 1, 2005.

Cash and cash equivalents and long-term debt decreased by approximately $13.0 million at January 1, 2005, which subsequently decreased payments of notes and credit facilities in the Condensed Consolidated Statements of Cash Flows by approximately $1.0 million for the quarter ended January 1, 2005 due to the reclassification of certain overdraft facilities to cash.

Recent Accounting Pronouncements.

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

6

Note 2.  Stock-Based Compensation

Effective October 2, 2005, the Company began recording compensation expense associated with stock options and other forms of equity compensation in accordance with SFAS No. 123R, “Share-Based Payment”, and Securities and Exchange Commission Staff Accounting Bulletin No. 107. Prior to October 2, 2005, the Company accounted for equity compensation according to the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and therefore no related compensation expense was recorded in the statements of operations for awards granted with no intrinsic value. We adopted the modified prospective transition method pursuant to SFAS No. 123R, and consequently have not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with equity compensation recognized in the first quarter of fiscal year 2006 now includes: 1) quarterly amortization related to the remaining unvested portion of all equity compensation awards granted prior to October 2, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123; and 2) quarterly amortization related to all stock option awards granted subsequent to October 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. In addition, we record expense over the offering period and the vesting term, respectively, in connection with: 1) shares issued under our employee stock purchase plan and 2) restricted stock awards.  The compensation expense for stock based compensation awards includes an estimate for forfeitures and is recognized over the expected term of the options using the straight line method. Prior to our adoption of SFAS No. 123R, benefits of tax deductions in excess of recognized compensation costs were reported as operating cash flows. SFAS No. 123R requires that they be recorded as a financing cash inflow rather than as a reduction of taxes paid.  For the quarter ended December 31, 2005, no excess tax benefits were generated from option exercises.  The Company recorded a cumulative effect adjustment for estimated forfeitures for previously issued restricted stock upon the adoption of SFAS No. 123R.

As a result of the adoption of SFAS No. 123R, our earnings from continuing operations before income taxes and cumulative effect of accounting change were $1.5 million lower and our net income for the quarter ended December 31, 2005 was $3.2 million higher, than under our previous accounting methodology for share-based compensation. In addition, we recorded a benefit from a cumulative effect of accounting change, net of tax of $4.8 million.

If compensation expense for the Company’s various equity compensation plans had been determined based upon estimated fair values at the grant dates in accordance with SFAS No. 123, the Company’s pro forma net earnings, and basic and diluted earnings per common share for stock options granted prior to the adoption of SFAS No. 123R would have been as follows (in thousands, except for per share data):

	Three Months
	Ended
	January 1, 2005
Net Earnings:
As reported	$	24,366
Stock-based employee compensation expense included in reported net income, net of tax	2,036
Stock-based employee compensation expense determined under fair value method, net of tax	(13,838		)
Pro forma	$	12,564
Basic earnings per share:
As reported	$	0.05
Pro forma	$	0.02
Diluted earnings per share:
As reported	$	0.05
Pro forma	$	0.02

Total stock compensation expense for the first quarter of fiscal 2006 of $3.9 million represents $1.4 million of cost of sales, $2.4 million of selling, general and administrative expenses and $0.1 million of research and development. Total stock compensation expense recognized in the Condensed Consolidated Statement of Operations for the three month period ended January 1, 2005, was $2.4 million and represents $0.8 million of cost of sales and $1.6 million of selling, general and administrative expenses. These expenses were related to our restricted stock.

7

Stock Options

Our stock option plans provide our employees the right to purchase common stock at the fair market value of such shares on the grant date.  New hire options cliff vest 20% at the end of year one and then vest ratably each month, thereafter, for the remaining four years. Merit options vest ratably each month over a five-year period. The contract term of the options is ten years.

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table. The expected life of options is based on observed historical exercise patterns. The expected volatility is an equally weighted blend of implied volatilities from traded options on our stock having a life of more than one year and historical volatility over the expected life of the options. The risk free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The dividend yield reflects that we have not paid any dividends and have no intention to pay dividends in the foreseeable future.

The assumptions used for the three months ended December 31, 2005 and January 1, 2005 are presented below:

	Three Months Ended
	December 31, 2005		January 1, 2005
Volatility	53	%	60	%
Risk-free interest rate	4.35	%	3.64	%
Dividend yield	0	%	0	%
Expected life of options	5.4 yea	rs	4.4 yea	rs

We recorded approximately $577,000 of compensation expense related to stock options for the quarter ended December 31, 2005 in accordance with SFAS No. 123R. A summary of stock option activity under the plans for the three months ended December 31, 2005 is presented as follows:

Summary Details for Plan Share Options

	Number of Shares		Weighted- Average Exercise Price ($)	Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value of In-The-Money Options ($)
Outstanding , October 1, 2005	57,238,066		8.98	—	—
Granted	2,289,700		4.12	—	—
Exercised	(1,809,700	)	3.10	—	—
Cancelled/Forfeited/Expired	(1,905,146	)	7.71	—	—
Outstanding, December 31, 2005	55,812,920		9.01	6.66	1,724,438
Exercisable, December 31, 2005	50,124,650		9.42	6.60	1,240,866

The weighted-average grant date fair value of stock options granted during the three months ended December 31, 2005 and January 1, 2005, was $2.16 and $5.01, respectively. The total intrinsic value of stock options exercised during the three months ended December 31, 2005 and January 1, 2005, was $2.4 million and $1.8 million, respectively. The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value of in-the-money options based on the Company’s closing stock price of $4.26 as of December 31, 2005, which would have been received by the option holders had all option holders exercised their options as of that date.  The total number of in-the-money options exercisable as of December 31, 2005 was 3.4 million and the weighted average exercise price was $3.89.

Had we applied the estimated forfeiture rate upon options at the date of grant that had been subject to previous pro-forma disclosure, we would have recognized a cumulative benefit, net of taxes, of approximately $4.6 million.

8

At December 31, 2005, an aggregate of 88.8 million shares were authorized for future issuance under our stock plans, which covers stock options, employee stock purchase plans, and restricted stock awards. A total of 31.4 million shares of common stock were available for grant under our stock option plans as of December 31, 2005. Awards that expire or are cancelled without delivery of shares generally become available for issuance under the plans.

As of December 31, 2005, there was $4.4 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 3.7 years.

Employee Stock Purchase Plan

In fiscal 2003, the Board of Directors and stockholders of the Company approved the 2003 Employee Stock Purchase Plan (the “2003 ESPP”). The maximum number of shares of common stock available for issuance under the 2003 ESPP is nine million shares. Under the 2003 ESPP, employees may purchase, on a periodic basis, a limited number of shares of common stock through payroll deductions over a six-month period. The per share purchase price is 85% of the fair market value of the stock at the beginning or end of the offering period, whichever is lower.

We have treated the Employee Stock Purchase Plan as a compensatory plan and have recorded compensation expense of approximately $1.3 million for the quarter ended December 31, 2005 in accordance with SFAS No. 123R. No shares were purchased in the quarter ended December 31, 2005.

The assumptions used for the three months ended December 31, 2005 and January 1, 2005 are presented below:

	Three Months Ended
	December 31, 2005		January 1, 2005
Volatility	51	%	60	%
Risk-free interest rate	4.37	%	3.64	%
Dividend yield	0	%	0	%
Expected life	0.5 yea	rs	0.5 yea	rs

Restricted Stock Awards

We grant awards of restricted stock to executive officers, directors and certain management employees. The restricted stock awards cliff vest after four years.

Compensation expense computed under the fair value method for the three months ended December 31, 2005, and the intrinsic value method for the three months ended January 1, 2005, is being amortized over the vesting period and was approximately $1.9 million and $2.4 million, respectively.

The weighted-average grant date fair value of the restricted stock options granted in the three month period ended December 31, 2005 and January 1, 2005 was $4.37 and $7.43, respectively. At December 31, 2005, unrecognized cost related to restricted stock awards totaled approximately $12.7 million. These costs are expected to be recognized over a weighted average period of 1.9 years.

A one-time, non-cash benefit of approximately $4.8 million for estimated future forfeitures of restricted stock previously expensed was recorded as of the SFAS No. 123R implementation date as a one-time benefit cumulative effect of accounting change, net of tax. Pursuant to Accounting Principles Board Opinion No. 25 (“APB 25”), stock compensation expense was not reduced for estimated future forfeitures, but instead was reversed upon actual forfeiture.

9

A summary of the status of the Company’s nonvested shares as of December 31, 2005 and changes during the three month period ended December 31, 2005, are presented below:

	Number of Shares		Weighted Average Grant-Date Fair Value ($)
Nonvested at October 1, 2005	3,845,292		9.82
Granted	50,000		4.37
Vested	—		—
Forfeited	(528,000	)	10.44
Nonvested at December 31, 2005	3,367,292		9.64

Performance Restricted Share Plan

During the three month period ended December 31, 2005, the Company’s Compensation Committee approved the issuance of approximately 2.5 million performance restricted shares at a weighted-average grant date fair value of $4.02 per share to selected executives and other key employees. The vesting of the restricted shares is contingent upon meeting certain earnings per share targets.

The amount of compensation recognized for the three month period ended December 31, 2005 was not material to the Condensed Consolidated Statement of Operations.

Note 3.  Derivative Instruments and Hedging Activities

We enter into short-term foreign currency forward contracts to hedge only those currency exposures associated with certain assets and liabilities denominated in foreign currencies. These contracts typically have maturities of three months or less. At December 31, 2005 and October 1, 2005, we had open forward contracts to exchange various foreign currencies for U.S. dollars in the aggregate notional amount of $421.8 million and $519.9 million, respectively. The net unrealized loss on the contracts at December 31, 2005 is not material and is recorded in accrued liabilities on the Condensed Consolidated Balance Sheets. Market value gains and losses on forward exchange contracts are recognized in the Condensed Consolidated Statement of Operations as offsets to the exchange gains and losses on the hedged transactions. The impact of these foreign exchange contracts was not material to the results of operations for the three months ended December 31, 2005.

We also utilized foreign currency forward and option contracts to hedge certain forecasted foreign currency sales and cost of sales referred to as cash flow hedges and these contracts typically expire within 12 months. Gains and losses on these contracts related to the effective portion of the hedges are recorded in other comprehensive income until the forecasted transactions occur. When the contracts expire, any amounts recorded in comprehensive income are reclassified to earnings. Gains and losses related to the ineffective portion of the hedges are immediately recognized on the Condensed Consolidated Statement of Operations. At December 31, 2005, we had forward and option contracts related to cash flow hedges in various foreign currencies in the aggregate notional amount of $69.6 million. The net unrealized gain on the contracts at December 31, 2005 is not material and is recorded in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. The impact of the foreign currency forward and option contracts was not material to the results of operations for the three months ended December 31, 2005.

The fair value of interest rate swap transactions, with a notional amount of $1,150.0 million, were recorded in long-term liabilities with the corresponding decrease in the carrying value of long-term debt at December 31, 2005 and October 1, 2005 was $41.6 million and $32.7 million, respectively.

Our foreign exchange forward and option contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We minimize such risk by limiting our counterparties to major financial institutions. We do not expect material losses as a result of default by counterparties.

10

Note 4.  Inventories

The components of inventories, net of provisions, are as follows:

	As of
	December 31, 2005		October 1, 2005
	(In thousands)
Raw materials	$	725,524	$	654,384
Work-in-process	255,341		242,659
Finished goods	141,908		117,992
	$	1,122,773	$	1,015,035

In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as current period charges, and that fixed production overheads should be allocated to inventory based on normal capacity of production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a significant impact on our results of operations or financial position.

Note 5.  Goodwill and Other Intangibles Assets

During fiscal 2005 year end, we realigned our reporting structure based on different types of manufacturing services offered to our customers.  As a result, our operating segments changed (refer to footnote 13 of the Notes to Condensed Consolidated Financial Statements). Pursuant to SFAS No. 142 “Goodwill and Other Intangible Assets”, the change in operating segments resulted in the identification of two new reportable units. In the previous fiscal year, our reporting units were based on geographical locations (domestic and international). Management is in the process of determining the allocation of goodwill for its two new reporting units (Personal Computing and Standard Electronic Manufacturing Services) using the relative fair value method. Total consolidated goodwill as of December 31, 2005 was $1,654 million. On a consolidated basis, goodwill decreased from $1,689 million to $1,654 million as a result of adjustments to goodwill of $37.7 million, offset by additions to goodwill of $2.7 million.

Adjustments to goodwill primarily represent a one-time favorable income tax adjustment relating to the conclusion of our U.S. tax audits with the Congressional Joint Committee on Taxation (refer to footnote 12 of the Notes to Condensed Consolidated Financial Statements). The conclusion of the tax audits resulted in a benefit of $27.9 million to the income tax provision and in addition, $36.1 million was recorded as an adjustment to goodwill for pre-merger tax items associated with SCI Systems, a subsidiary of the Company. The additions to goodwill are primarily due to contingent earnouts.

The gross and net carrying values of other intangible assets at December 31, 2005 and October 1, 2005 are as follows (in thousands):

	As of December 31, 2005							As of October 1, 2005
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Other intangible assets	$	59,977	$	(26,319	)	$	33,658	$	59,977	$	(24,070	)	$	35,907

The decrease in other intangible assets from October 1, 2005 to December 31, 2005 was due to amortization of approximately $2.2 million.

11

Estimated annual amortization expense for other intangible assets at December 31, 2005 is as follows:

Fiscal Years:	(In thousands)
2006 (remainder)	$	6,079
2007	8,113
2008	8,113
2009	3,865
2010	2,209
2011	1,837
Thereafter	3,442
	$	33,658

Note 6.  Comprehensive Income

SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for the reporting of comprehensive income and its components. SFAS No. 130 requires companies to report “comprehensive income” that includes unrealized holding gains and losses and other items that have previously been excluded from net income and reflected instead in stockholders’ equity.

The components of other comprehensive income for the three months ended December 31, 2005 and January 1, 2005 were as follows:

	Three Months Ended
	December 31, 2005			January 1, 2005
	(In thousands)
Net income	$	24,632		$	24,366
Other comprehensive income (loss):
Foreign currency translation adjustment	(11,047		)	17,356
Unrealized holding gains (losses) on investments	(233		)	299
Minimum pension liability	17			74
Comprehensive income	$	13,369		$	42,095

Accumulated other comprehensive income, net of tax as applicable, consists of the following:

	As of
	December 31, 2005			October 1, 2005
	(In thousands)
Foreign currency translation adjustment	$	35,184		$	46,231
Unrealized holding gains on investments and derivative financial instruments	7			240
Minimum pension liability	(9,568		)	(9,585		)
Total accumulated other comprehensive income	$	25,623		$	36,886

Note 7.  Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share includes dilutive common stock equivalents, using the treasury stock method, and assumes that the convertible debt instruments were converted into common stock upon issuance, if dilutive. While the conceptual computation of earnings per share is not changed by SFAS No. 123R (“Share-Based Payment”), the inclusion of compensation cost will affect the mechanics of the calculation. The compensation cost will be recognized under SFAS No. 123R only for awards that are expected to vest (determined by applying the pre-vesting forfeiture rate assumption), all options or shares outstanding that have not been forfeited would be included in diluted earnings per share. The amount of stock-based compensation cost in the numerator includes a forfeiture rate assumption while the number of shares in the denominator does not.

Basic and diluted net earnings per common share for the quarter ended December 31, 2005, were not materially impacted by the change in accounting method.

12

The following table sets forth the calculation of basic and diluted income per share:

	Three Months Ended
	December 31, 2005		January 1, 2005
	(In thousands, except per share data)
Numerator:
Income before cumulative effect of accounting change	$	19,880	$	24,366
Cumulative effect of accounting change, net of tax	4,752		—
Net income	$	24,632	$	24,366
Denominator:
Weighted average number of shares—basic	524,311		519,205
Effect of dilutive potential common shares	392		5,803
Weighted average number of shares—diluted	524,703		525,008
Income per share before cumulative effect of accounting change
—basic	$	0.04	$	0.05
—diluted	$	0.04	$	0.05
Net income per share
—basic	$	0.05	$	0.05
—diluted	$	0.05	$	0.05

The following table summarizes the weighted average dilutive securities that were excluded from the above computation of diluted net income per share because their inclusion would have an anti-dilutive effect:

	Three Months Ended
	December 31, 2005	January 1, 2005
Employee stock options	54,058,124	39,556,239
Restricted stock	3,511,764	104,731
Shares issuable upon conversion of 4% notes	6,269	7,415,070
Shares issuable upon conversion of 3% notes	12,697,848	12,697,848
Total anti-dilutive shares	70,274,005	59,773,888

After-tax interest expense of $2.7 million and $9.3 million related to the Zero Coupon Convertible Subordinated Debentures and 3% Convertible Subordinated Notes for the three months ended December 31, 2005 and January 1, 2005, respectively, were not included in the computation of diluted income per share because to do so would be anti-dilutive.  In addition, the related share equivalents on conversion of the debt were not included as to do so would be anti-dilutive.

Note 8.  Debt

We entered into interest rate swaps to hedge our mix of short-term and long-term interest rate exposures resulting from certain of our outstanding debt obligations. The swaps were designated as fair value hedges under SFAS No. 133. Management believes that the interest rate swaps meet the criteria established by SFAS No. 133 for short cut accounting; therefore, no portion of the swaps are treated as ineffective. At December 31, 2005 and October 1, 2005, $41.6 million and $32.7 million, respectively, has been recorded in other long-term liabilities to record the fair value of the interest rate swap transactions, with a corresponding decrease to the carrying values of the 10.375% and 6.75% Notes, respectively on the Condensed Consolidated Balance Sheet.

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We have up to $500 million available for borrowings under our senior secured credit facility which includes up to $150 million for letters of credit. We entered into an Amended and Restated Credit and Guaranty Agreement, dated as of December 16, 2005, among us, certain of our subsidiaries, as guarantors, and the lenders that are parties thereto from time to time (the “Restated Credit Agreement”). The Restated Credit Agreement amended and restated our Credit and Guaranty Agreement, dated as of October 26, 2004 (the “Original Credit Agreement”) among other things, to:

•Extend the maturity date from October 26, 2007 to December 16, 2008;

•Amend the leverage ratio;

•Permit us and the guarantors to sell domestic receivables pursuant to factoring or similar arrangements if certain conditions are met; and

•Revise the collateral release provisions.

At any time the aggregate face amount of domestic receivables sold by us and the guarantors together with any outstanding amounts exceeds the thresholds set forth in the Restated Credit Agreement, the revolving credit commitments for purposes of making loans and issuing letters of credit will be zero. The Restated Credit Agreement provides for the release of the security interests in our and the guarantors’ accounts receivable at such time as specified conditions are met, including that we have paid at least 85% of the original principal amount of our 10.375% Senior Secured Notes due 2010, the liens granted there under have been released and our credit ratings meet specified thresholds. The Restated Credit Agreement provides for the collateral (other than stock pledges and other collateral we request not to be released) to be released at such time as specified conditions are met, including that we have paid at least 85% of the principal amount of the SCI Systems 3% Convertible Subordinated Notes due 2007 and our credit ratings meet specified thresholds. If following the release of any portion of the collateral pursuant to the provisions of the credit agreement described above, our credit ratings fall below specified thresholds, then we are required to take such actions as are necessary to grant and perfect a security interest in the assets and properties that would at that time comprise the collateral if the relevant collateral documents were still in effect.

There are currently no loans outstanding under the senior secured credit facility as of December 31, 2005.

Note 9.  Sale of Accounts Receivable

Certain of the Company’s Subsidiaries have entered into agreements that permit them to sell specified accounts receivable. The purchase price for receivables sold under these Agreements is equal to 100% of its face amount less a discount charge (based on LIBOR plus a spread) for the period from the date the receivable is sold to its collection date. These agreements provide for a commitment fee based on the unused portion of the facility. Accounts receivable sales under these Agreements was $348.2 million for the three month period ended December 31, 2005. The sold receivables are subject to certain limited recourse provisions. As of December 31, 2005, $193.0 million of sold accounts receivable remain subject to certain recourse provisions. We have not experienced any credit losses under these recourse provisions.

Note 10.  Commitments and Contingencies

Environmental Matters.  Primarily as a result of certain of our acquisitions, we have exposures associated with environmental contamination at facilities. These exposures include ongoing investigation and remediation activities at a number of sites.

We use an environmental consultant to assist in evaluating the environmental costs of the companies that we acquire as well as those associated with our ongoing operations, site contamination issues and historical disposal activities in order to establish appropriate accruals in our financial statements. As of December 31, 2005 and October 1, 2005, we had accrued $12.2 million and $13.5 million, respectively, for such environmental liabilities, which is recorded as other long-term liabilities in the Condensed Consolidated Balance Sheets.

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Warranty Reserve.  The following tables summarize the warranty reserve balance:

Balance as of							Balance as of
October 1,		Additions to		Accrual			December 31,
2005		Accrual		Utilized			2005
		(in thousands)
$	20,867	$	2,938	$	(401	)	$	23,404

Balance as of							Balance as of
October 2,		Additions to		Accrual			January 1,
2004		Accrual		Utilized			2005
		(in thousands)
$	15,827	$	3,687	$	(3,291	)	$	16,223

Litigation and other contingencies.  From time to time, we are a party to litigation and other contingencies, including examinations by taxing authorities, which arise in the ordinary course of business. We believe that the resolution of such litigation and other contingencies will not materially harm our business, financial condition or results of operations.

Note 11.  Restructuring Costs

Costs associated with restructuring activities initiated on or after January 1, 2003, other than those activities related to purchase business combinations, are accounted for in accordance with SFAS No. 146 and SFAS No. 112 where applicable. Accordingly, costs associated with such plans are recorded as restructuring costs in the consolidated statements of operations when a liability is incurred, pursuant to SFAS No. 146 and pursuant to SFAS No. 112, restructuring costs are recorded when probable and estimatable. Accrued restructuring costs are included in “accrued liabilities” in the Condensed Consolidated Balance Sheets. Below is a summary of the activity related to restructuring costs recorded pursuant to SFAS No. 146 and SFAS No. 112 through the first quarter of fiscal year 2006:

	Employee Termination Benefits			Lease and Contract Termination Costs			Other Restructuring Costs			Impairment of Fixed Assets			Total
							(In thousands)
	Cash			Cash			Cash			Non-Cash
Balance at September 27, 2003	$	3,870		$	1,462		$	—		$	—		$	5,332
Charges to operations	59,076			11,186			18,890			18,079			107,231
Charges utilized	(45,618		)	(9,677		)	(18,848		)	(18,079		)	(92,222		)
Reversal of accrual	(1,832		)	(1,384		)	—			—			(3,216		)
Balance at October 2, 2004	15,496			1,587			42			—			17,125
Charges to operations	84,651			14,070			6,404			6,932			112,057
Charges utilized	(64,823		)	(12,533		)	(6,446		)	(6,932		)	(90,734		)
Reversal of accrual	(2,508		)	—			—			—			(2,508		)
Balance at October 1, 2005	32,816			3,124			—			—			35,940
Charges to operations	16,364			792			2,704			15,324			35,184
Charges utilized	(12,233		)	(108		)	(2,704		)	(15,324		)	(30,369		)
Reversal of accrual	(331		)	—			—			—			(331		)
Balance at December 31, 2005	$	36,616		$	3,808		$	—		$	—		$	40,424

During the three month period ended December 31, 2005, we recorded restructuring charges of approximately $34.9 million (net of $331,000 reversal of accrual) related to our phase three restructuring plan. These charges included employee termination benefits of approximately $16.4 million, lease and contract termination costs of approximately $792,000, other restructuring costs of approximately $2.7 million, incurred primarily to prepare facilities for closure, and impairment of fixed assets of approximately $15.3 million pursuant to SFAS No. 144, “Impairment of Long-Lived Assets”, mainly consisting of a building complex.  These facilities have been reclassified as assets held for sale and included in Prepaid Expenses and Other Current Assets in our Condensed Consolidated Balance Sheets. The employee termination benefits were related to involuntary termination of employees, the majority of which were involved in manufacturing activities. Approximately $12.2 million of employee termination

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benefits were utilized and 1,763 employees were terminated during the three months ended December 31, 2005 pursuant to this restructuring plan. We also utilized $108,000 of lease and contract termination costs and $2.7 million of the other restructuring costs during the three month period ended December 31, 2005. In addition, we reversed $331,000 of employee termination benefits due to completion of our restructuring plan in one of our plants.

In fiscal 2005, we recorded charges of approximately $109.5 million (net of $2.5 million reversal of accrual) related to restructuring activities pursuant to SFAS No. 146 and SFAS No. 112, of which $106.5 million related to our phase three restructuring plan and $3.0 million related to our phase two restructuring plan. These charges included employee termination benefits of approximately $84.7 million, lease and contract termination costs of approximately $14.1 million, other restructuring costs of approximately $6.4 million, incurred primarily to prepare facilities for closure, and impairment of fixed assets of approximately $6.9 million consisting of excess facilities and equipment to be disposed of. The employee termination benefits were related to the involuntary termination of employees, the majority of which were involved in manufacturing activities. Approximately $64.8 million of employee termination benefits were utilized and total of approximately 11,800 employees were terminated in fiscal 2005. We also utilized $12.5 million of lease and contract termination costs and $6.4 million of the other restructuring costs in fiscal 2005. We incurred charges to operations of $6.9 million in fiscal 2005 for the impairment of excess fixed assets at the vacated facilities, all of which were utilized as of October 1, 2005. We reversed approximately $2.5 million of accrued employee termination benefits.  The reversal of the accrual was a result of the changes in estimates and economic circumstances.

In fiscal 2004, we recorded restructuring charges of approximately $107.2 million related to restructuring activities initiated after January 1, 2003. With the exception of $7.8 million of restructuring charges associated with our phase three restructuring plan announced in July 2004, these restructuring charges were incurred in connection with our phase two restructuring plan announced in October 2002. These charges included employee termination benefits of approximately $59.0 million, lease and contract termination costs of approximately $11.2 million, other restructuring costs of approximately $18.9 million, primarily costs incurred to prepare facilities for closure, and impairment of fixed assets of $18.1 million consisting of excess facilities and equipment to be disposed of. The employee termination benefits were related to the involuntarily termination of approximately 2,000 employees, the majority of which were involved in manufacturing activities. Approximately $45.6 million of employee termination benefits were utilized during fiscal 2004 for the termination of approximately 1,900 employees. We also utilized $9.7 million of lease and contract termination costs and $18.8 million of the other restructuring costs during fiscal 2004. In fiscal 2004, we reversed approximately $1.8 million of accrued employee termination benefits and approximately $1.4 million of accrued lease costs due to revisions of estimates.

Costs associated with restructuring activities initiated prior to January 1, 2003, other than those activities related to purchase business combinations, are accounted for in accordance with EITF 94-3 and SFAS No. 112 where applicable. Accordingly, costs associated with such plans are recorded as restructuring costs in the Condensed Consolidated Statements of Operations generally at the commitment date.  The accrued restructuring costs are included in “accrued liabilities” in the Condensed Consolidated Balance Sheets.  Below is a summary of the activity related to restructuring costs recorded pursuant to EITF 94-3 and SFAS No. 112 through the first quarter of fiscal year 2006:

	Employee Severance and Related Expenses			Facilities Shutdown and Consolidation Costs			Write-off Impaired or Redundant Fixed Assets			Total
				(In thousands)
	Cash			Cash			Non-Cash
Balance at September 27, 2003	$	9,739		$	14,490		$	—		$	24,229
Charges to operations	4,071			35,730			3,500			43,301
Charges utilized	(5,533		)	(28,279		)	(3,500		)	(37,312		)
Reversal of accrual	(7,050		)	(7,016		)	—			(14,066		)
Balance at October 2, 2004	1,227			14,925			—			16,152
Charges to operations	2,285			2,522			4,107			8,914
Charges utilized	(3,010		)	(7,890		)	(4,107		)	(15,007		)
Balance at October 1, 2005	502			9,557			—			10,059
Charges to operations	—			514			261			775
Charges utilized	—			(1,261		)	(261		)	(1,522		)
Balance at December 31, 2005	$	502		$	8,810		$	—		$	9,312

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The following sections separately present the charges to the restructuring liability and charges utilized that are set forth in the above table on an aggregate basis.

Fiscal 2002 Plans

September 2002 Restructuring.  During the three month period ended December 31, 2005, we utilized approximately $475,000 of accrued costs related to the shutdown of facilities.  Approximately $27,000 was charged to operations and utilized due to the write-off of impaired fixed assets.  There were no employees terminated during the three month period ended December 31, 2005 pursuant to this restructuring plan.

In fiscal 2005, we recorded charges to operations of approximately $203,000 and utilized $216,000 for employee severance expenses.  There was no reduction of work force during fiscal 2005 pursuant to this restructuring plan.  In fiscal 2005, we also recorded charges to operations of approximately $544,000 and utilized approximately $2.7 million for non-cancelable lease payments, lease termination costs and related costs for the shutdown of facilities.  In addition, $800,000 was charged to operations and utilized due to the impairment of fixed assets to be disposed of.  The closing of the plants discussed above as well as employee terminations and other related activities have been completed, however, the leases of the related facilities expire in 2009; therefore, the remaining accrual will be reduced over time as the lease payments, net of sublease income, are incurred.

In fiscal 2004, we recorded charges to operations of approximately $1.9 million and utilized $2.6 million for employee severance expenses. Approximately 10 employees were terminated during fiscal 2004. In fiscal 2004, we also recorded charges to operations of approximately $26.7 million and utilized approximately $16.1 million for non-cancelable lease payments, lease termination costs and related costs for the shutdown of facilities. In addition, in fiscal 2004 we reversed approximately $3.6 million of accrued employee severance due to lower than anticipated payments at various plants and approximately $5.8 million of accrued facilities shutdown costs due to a change in use of the facilities or greater sublease income than anticipated. We also incurred and utilized charges to operations of $3.7 million related to the impairment of buildings and leasehold improvements at permanently vacated facilities in fiscal 2004.

October 2001 Restructuring.  There were no significant activities incurred during the first quarter of fiscal year 2006.

In fiscal 2005, we recorded charges to operations of approximately $2.0 million for employee severance costs, of which $1.9 million was related to the settlement of a pension plan.  We also recorded approximately $82,000 for non-cancelable lease payments and other costs related to the shutdown of facilities. We utilized accrued severance charges of approximately $2.7 million and accrued facilities shutdown related charges of $811,000 in fiscal 2005. In addition, we incurred and utilized charges of $633,000 in fiscal 2005 related to write-offs of fixed assets consisting of excess equipment and leasehold improvements to facilities that were permanently vacated.  Manufacturing activities at the facilities affected by this plan ceased in fiscal year 2003 or prior; however, final payments of accrued costs may not occur until later periods.

In fiscal 2004, we recorded charges to operations of approximately $1.1 million for employee severance costs and approximately $4.8 million for non-cancelable lease payments and other costs related to the shutdown of facilities. We utilized accrued severance charges of approximately $2.5 million and accrued facilities shutdown related charges of $3.7 million during fiscal 2004. In fiscal 2004, we reversed approximately $1.3 million of accrued severance and approximately $530,000 of accrued lease costs due to lower than expected payments at various sites. Approximately 5,400 employees were associated with these plant closures and we had terminated all employees affected under this plan.

Fiscal 2001 Plans

July 2001 Restructuring.  During the three month period ended December 31, 2005, we recorded approximately $662,000 and utilized approximately $804,000 of accrued costs related to the shutdown of facilities.  We also recorded charges to operations and fully utilized $234,000 for write-off of impaired fixed assets.

In fiscal 2005, we recorded approximately $43,000 and utilized approximately $100,000 of accrued severance.  In addition, we recorded approximately $1.9 million and utilized approximately $3.5 million of accrued costs related to the shutdown of facilities.  We also incurred and utilized $2.7 million for the impairment of fixed assets to be disposed of.  Manufacturing activities at the plants affected by this plan had ceased by the fourth quarter of fiscal 2002; however, the leases of the related facilities expire between 2005 and 2010, therefore, the remaining accrual will be reduced over time as the lease payments, net of sublease income, are made.

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In fiscal 2004, we recorded approximately $4.1 million and utilized approximately $7.7 million of accrued costs related to the shutdown of facilities.  In addition, we recorded charges to operations of approximately $1.1 million, utilized $164,000 and reversed approximately $2.1 million of accrued severance due to lower than anticipated payments in fiscal 2004.

Cost associated with restructuring activities related to purchase business combinations are accounted for in accordance with EITF 95-3.  Below is a summary of the activity related to restructuring costs recorded pursuant to EITF 95-3 through the first quarter of fiscal year 2006:

	Employee Severance and Related Expenses			Facilities Shutdown and Consolidation Costs			Write-off Impaired or Redundant Fixed Assets			Total
				(In thousands)
	Cash			Cash			Non-Cash
Balance at September 27, 2003	$	12,052		$	13,612		$	—		$	25,664
Additions to restructuring accrual	10,858			—			6,024			16,882
Accrual utilized	(20,826		)	(11,434		)	(6,024		)	(38,284		)
Balance at October 2, 2004	2,084			2,178			—			4,262
Accrued utilized	(773		)	(393		)	—			(1,166		)
Balance at October 1, 2005	1,311			1,785			—			3,096
Accrued utilized	(25		)	(1,623		)	—			(1,648		)
Balance at December 31, 2005	$	1,286		$	162		$	—		$	1,448

The following sections separately present the charges to the restructuring liability and charges utilized that are set forth in the above table on an aggregate basis.

Other Acquisition Related Restructuring Actions.  In fiscal 2004, we utilized $6.6 million of accrued severance to terminate 60 employees.  In addition, we recorded charges to the restructuring liability of $10.9 million, and utilized $10.8 million, related to employee terminations. The charges were related to the elimination of approximately 340 employees.  We also recorded and utilized charges to the restructuring liability of approximately $6.0 million related to excess machinery and equipment to be disposed of.

SCI Acquisition Restructuring.  During the three month period ended December 31, 2005, we utilized $25,000 related to employee severance and utilized $1.6 million of accrued facility costs due to expiration of leases.

In fiscal 2005, we utilized $731,000 related to employee severance and utilized $393,000 due to facilities shutdown.  In fiscal 2004, we utilized a total of approximately $11.4 million of facilities related accruals and $3.4 million of accrued severance.

At the end of fiscal 2005, we realigned our reporting structure based on different types of manufacturing services offered to our customers. As a result, our operating segments have changed resulting in the identification of two new reportable segments (Standard Electronic Manufacturing Services and Personal Computing). The following table summarizes the total restructuring costs incurred with respect to our reported segments through the first quarter of fiscal year 2006 (in thousands):

	December 31, 2005		January 1, 2005
Personal Computing	$	20,701	$	1,361
Standard Electronic Manufacturing Services	14,927		19,064
Total	$	35,628	20,425
Cash	$	20,042	$	18,442
Non-cash	15,586		1,983
Total	$	35,628	$	20,425

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Note 12.  Income Taxes

For the three months ended December 31, 2005, the Company recorded an income tax benefit of $13.0 million. The income tax benefit for the three months ended December 31, 2005 included a one-time favorable income tax adjustment of $27.9 million relating to previously accrued income taxes that were reversed as a result of a settlement reached with the U.S. Internal Revenue Service.  The settlement was in relation to certain U.S. tax audits. Notification of approval of the settlement by the Congressional Joint Committee on Taxation was received following the filing of the Company’s Annual Report on Form 10-K for fiscal 2005.  The total adjustment to previously accrued income taxes was $64.0 million of which $27.9 million was recorded as an income tax benefit to earnings.  The remaining $36.1 million was recorded as an adjustment to goodwill for pre-merger tax items associated with SCI Systems, a subsidiary of the Company.

Note 13.  Business Segment, Geographic and Customer Information

SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information”, establishes standards for reporting information about operating segments, products and services, geographic areas of operations and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker or decision making group in deciding how to allocate resources and in assessing performance.

During fiscal 2005 year end, we realigned our reporting structure based on different types of manufacturing services offered to our customers. As a result, our operating segments have changed resulting in the identification of two new reportable segments (Standard Electronic Manufacturing Services and Personal Computing). Certain of our segments have been aggregated.  Prior to the fourth quarter of fiscal 2005, we reported our segment information based on geographical locations (domestic and international).  As required by SFAS No. 131, the prior year information in this footnote has been restated to conform to the current year’s presentation.

The following table presents information about reportable segments for the following fiscal years:

	Three Months Ended
	December 31, 2005		January 1, 2005(restated)
	(In thousands)
Net sales:
Standard Electronic Manufacturing Services	$	1,911,570	$	1,978,623
Personal Computing	950,227		1,274,083
Total net sales	$	2,861,797	$	3,252,706
Gross profit:
Standard Electronic Manufacturing Services	$	151,911	$	144,665
Personal Computing	17,769		32,302
Total gross profit	$	169,680	$	176,967

One customer in the Personal Computing reporting segment that accounted for less than 10% of total consolidated revenues for fiscal year ended October 1, 2005, accounted for 12.1% of consolidated revenue for the three month period ended December 31, 2005. For the quarters ended December 31, 2005 and January 1, 2005, there were no inter-segment sales between Standard Electronic Manufacturing Services and Personal Computing.

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The following summarizes financial information by geographic segment:

	Three Months Ended
	December 31, 2005		January 1, 2005
	(In thousands)
Net sales:
Domestic	$	723,301	$	734,100
International	2,138,496		2,518,606
Total net sales	$	2,861,797	$	3,252,706

	Three Months Ended
	December 31, 2005		January 1, 2005
	(In thousands)
Gross Profit:
Domestic	$	53,420	$	48,208
International	116,260		128,759
Total gross profit	$	169,680	$	176,967

Note 14.  Subsequent Events

On January 30, 2006, the Company priced an offering of $600 million aggregate principal amount of 8.125% Senior Subordinated Notes due 2016.  The issue price of the notes is 100% and the offering is expected to close on February 15, 2006. The Company has commenced a cash tender offer and consent solicitation for any and all $750 million aggregate principal amount of its outstanding 10.375% Senior Secured Notes due 2010 (the “10.375% Notes”). The tender offer will be financed with the proceeds of the offering of senior subordinated notes together with up to approximately $250 million of cash on hand.

In connection with the tender offer, the Company is soliciting consents to proposed amendments to the indenture governing the 10.375% Notes, which would eliminate substantially all of the restrictive covenants and certain events of default in the indenture.

The tender offer and consent solicitation are subject to the satisfaction of certain conditions, including the receipt of sufficient financing to consummate the tender offer and consent solicitation on terms satisfactory to the Company and the receipt of consents from holders of a majority in principal amount of the outstanding 10.375% Notes. The closing of the offering of the senior subordinated notes is subject to customary closing conditions.

As a result of the extinguishment of the 10.375% Notes, assuming the entire $750 million of 10.375% Notes are tendered, the Company will record a charge for loss on debt extinguishment and conversion totaling approximately $115 million during the quarter ending April 1, 2006, comprised of the non-cash charges for the write-off of debt issuance costs totaling approximately $15 million and approximately $100 million for cash redemption, interest rate swap unwind cost and transaction costs.

Note 15.  Supplemental Guarantors Condensed Consolidating Financial Information

On December 23, 2002, Sanmina-SCI issued $750.0 million of its 10.375% Notes as part of a refinancing transaction.

The condensed consolidating financial statements are presented below and should be read in connection with our consolidated financial statements. Separate financial statements of the Guarantors are not presented because (i) the Guarantors are wholly-owned and have fully and unconditionally guaranteed the 10.375% Notes on a joint and several basis, and (ii) Sanmina-SCI’s management has determined such separate financial statements are not material to investors. There are no significant restrictions on the ability of Sanmina-SCI or any Guarantor to obtain funds from its subsidiaries by dividend or loan.

The following condensed consolidating financial information presents: the Condensed Consolidating Balance Sheets as of December 31, 2005 and October 1, 2005, and the Condensed Consolidating Statements of Operations and Statements of Cash Flows for the three month periods ended December 31, 2005 and January 1, 2005 of (a) Sanmina-SCI, the parent; (b) the guarantor subsidiaries; (c) the non-guarantor subsidiaries; (d) elimination entries necessary to consolidate Sanmina-SCI with the guarantor

20

subsidiaries and the non-guarantor subsidiaries; and (e) Sanmina-SCI, the guarantor subsidiaries and the non-guarantor subsidiaries on a consolidated basis.

Investments in subsidiaries are accounted for on the equity method. The principal elimination entries eliminate investments in subsidiaries, intercompany balances and intercompany sales.

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CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2005

	Sanmina-SCI		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Eliminations			Consolidated Total
	(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents	$	415,967	$	14,024	$	581,107	$	—		$	1,011,098
Short-term investments	28,178		—		—		—			28,178
Accounts receivable, net	95,364		277,609		1,239,352		—			1,612,325
Accounts receivable—intercompany	213,251		—		—		(213,251		)	—
Inventories	92,209		333,858		696,706		—			1,122,773
Deferred income taxes	—		—		39,107		—			39,107
Prepaid expenses and other current assets	24,910		7,253		71,979		—			104,142
Total current assets	869,879		632,744		2,628,251		(213,251		)	3,917,623
Property, plant and equipment, net	116,266		97,622		393,007		—			606,895
Goodwill	15,463		571,836		1,066,827		—			1,654,126
Other intangible assets, net	—		29,659		3,999		—			33,658
Intercompany accounts	493,164		454,594		—		(947,758		)	—
Investment in subsidiaries	2,356,357		1,615,911		—		(3,972,268		)	—
Other non-current assets	39,446		24,199		16,718		—			80,363
Restricted cash	25,538		—		—		—			25,538
Total assets	$	3,916,113	$	3,426,565	$	4,108,802	$	(5,133,277	)	$	6,318,203
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Current portion of long-term debt	$	830	$	—	$	429	$	—		$	1,259
Accounts payable	187,314		432,842		1,016,241		—			1,636,397
Accounts payable—intercompany	—		181,767		31,484		(213,251		)	—
Accrued liabilities	111,415		58,478		183,429		—			353,322
Accrued payroll and related benefits	49,801		15,122		76,218		—			141,141
Total current liabilities	349,360		688,209		1,307,801		(213,251		)	2,132,119
Long-term liabilities:
Long-term debt, net of current portion	1,111,415		523,010		1,422		—			1,635,847
Intercompany accounts noncurrent	—		—		947,758		(947,758		)	—
Other	57,875		51,113		43,786		—			152,774
Total long-term liabilities	1,169,290		574,123		992,966		(947,758		)	1,788,621
Stockholders’ equity:
Common stock	5,475		70,558		337,115		(407,673		)	5,475
Other stockholders’ equity accounts	2,391,988		2,093,675		1,470,920		(3,564,595		)	2,391,988
Total stockholders’ equity	2,397,463		2,164,233		1,808,035		(3,972,268		)	2,397,463
Total liabilities and stockholders’ equity	$	3,916,113	$	3,426,565	$	4,108,802	$	(5,133,277	)	$	6,318,203

22

CONDENSED CONSOLIDATING BALANCE SHEET

As of October 1, 2005

	Sanmina-SCI		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Eliminations			Consolidated Total
	(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents	$	303,510	$	6,674	$	757,869	$	—		$	1,068,053
Short-term investments	57,281		—		—		—			57,281
Accounts receivable, net	35,125		286,304		1,155,972		—			1,477,401
Accounts receivable—intercompany	226,786		—		—		(226,786		)	—
Inventories	100,291		303,989		610,755		—			1,015,035
Deferred income taxes	—		—		42,767		—			42,767
Prepaid expenses and other current assets	32,876		7,278		46,466		—			86,620
Total current assets	755,869		604,245		2,613,829		(226,786		)	3,747,157
Property, plant and equipment, net	124,869		94,308		442,924		—			662,101
Goodwill	15,463		604,618		1,069,117		—			1,689,198
Other intangible assets, net	214		31,546		4,147		—			35,907
Intercompany accounts	589,306		477,857		—		(1,067,163		)	—
Investment in subsidiaries	2,356,523		1,534,381		—		(3,890,904		)	—
Other non-current assets	39,856		24,755		17,263		—			81,874
Restricted cash	25,538		—		—		—			25,538
Total assets	$	3,907,638	$	3,371,710	$	4,147,280	$	(5,184,853	)	$	6,241,775
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Current portion of long-term debt	$	830	$	—	$	609	$	—		$	1,439
Accounts payable	207,878		380,756		970,538		—			1,559,172
Accounts payable—intercompany	—		199,309		27,477		(226,786		)	—
Accrued liabilities	100,069		94,280		172,571		—			366,920
Accrued payroll and related benefits	50,567		17,363		78,757		—			146,687
Total current liabilities	359,344		691,708		1,249,952		(226,786		)	2,074,218
Long-term liabilities:
Long-term debt, net of current portion	1,120,542		522,572		1,552		—			1,644,666
Intercompany accounts noncurrent	—		—		1,067,163		(1,067,163		)	—
Other	48,734		52,157		42,982		—			143,873
Total long-term liabilities	1,169,276		574,729		1,111,697		(1,067,163		)	1,788,539
Stockholders’ equity:
Common stock	5,457		70,558		337,115		(407,673		)	5,457
Other stockholders’ equity accounts	2,373,561		2,034,715		1,448,516		(3,483,231		)	2,373,561
Total stockholders’ equity	2,379,018		2,105,273		1,785,631		(3,890,904		)	2,379,018
Total liabilities and stockholders’ equity	$	3,907,638	$	3,371,710	$	4,147,280	$	(5,184,853	)	$	6,241,775

23

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended December 31, 2005

	Sanmina-SCI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Eliminations			Consolidated Total
	(In thousands)
Net sales	$	184,564		$	598,581		$	2,238,145		$	(159,493	)	$	2,861,797
Cost of sales	169,821			559,904			2,121,885			(159,493		)	2,692,117
Gross profit	14,743			38,677			116,260			—			169,680
Operating expenses:
Selling, general and administrative and research and development	14,902			47,033			35,517			—			97,452
Amortization of intangible assets	912			1,182			139			—			2,233
Integration costs	—			15			160			—			175
Restructuring costs	2,760			436			32,432			—			35,628
Total operating expenses	18,574			48,666			68,248			—			135,488
Operating income (loss)	(3,831		)	(9,989		)	48,012			—			34,192
Interest income	2,727			801			2,397			—			5,925
Interest expense	(29,316		)	(4,479		)	(453		)	—			(34,248		)
Intercompany income (expense), net	12,978			(3,653		)	(9,325		)	—			—
Other income (expense), net	7,737			(1,855		)	(4,828		)	—			1,054
Other expense, net	(5,874		)	(9,186		)	(12,209		)	—			(27,269		)
Income (loss) before income taxes, cumulative effect of accounting changes and equity in income (loss) of subsidiaries	(9,705		)	(19,175		)	35,803			—			6,923
Provision for (benefit from) income taxes	(25,071		)	(741		)	12,855			—			(12,957		)
Income (loss) before cumulative effect of accounting changes and equity in income (loss) of subsidiaries	15,366			(18,434		)	22,948			—			19,880
Cumulative effect of accounting changes, net of tax	4,752			—			—			—			4,752
Equity in income (loss) of subsidiaries	4,514			78,076			—			(82,590		)	—
Net income (loss)	$	24,632		$	59,642		$	22,948		$	(82,590	)	$	24,632

24

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended January 1, 2005

	Sanmina-SCI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Eliminations			Consolidated Total
	(In thousands)
Net sales	$	196,709		$	1,012,395		$	2,597,410		$	(553,808	)	$	3,252,706
Cost of sales	194,762			966,134			2,468,651			(553,808		)	3,075,739
Gross profit	1,947			46,261			128,759			—			176,967
Operating expenses:
Selling, general and administrative and research and development	6,392			35,229			53,178			—			94,799
Amortization of intangible assets	847			1,183			—			—			2,030
Integration costs	—			28			86			—			114
Restructuring costs	7,576			4,499			8,350			—			20,425
Total operating expenses	14,815			40,939			61,614			—			117,368
Operating income (loss)	(12,868		)	5,322			67,145			—			59,599
Interest income	1,309			121			2,077			—			3,507
Interest expense	(24,206		)	(4,505		)	(1,345		)	—			(30,056		)
Intercompany income (expense), net	14,133			(7,788		)	(6,345		)	—			—
Other income (expense), net	(8,970		)	9,211			29			—			270
Other expense, net	(17,734		)	(2,961		)	(5,584		)	—			(26,279		)
Income (loss) before income taxes and equity in income (loss) of subsidiaries	(30,602		)	2,361			61,561			—			33,320
Provision for (benefit from) income taxes	(11,899		)	918			19,935			—			8,954
Equity in income (loss) of subsidiaries	43,069			60,064			—			(103,133		)	—
Net income (loss)	$	24,366		$	61,507		$	41,626		$	(103,133	)	$	24,366

25

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Three Months Ended December 31, 2005

	Sanmina-SCI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Eliminations		Consolidated Total
	(In thousands)
Cash provided by (used in) operating activities	$	(25,335	)	$	8,483		$	(49,395	)	$	—	$	(66,247	)
Cash flows provided by (used in) investing activities:
Purchases of short-term investments	(16,562		)	—			—			—		(16,562		)
Proceeds from maturities and sales of short-term investments	45,432			—			—			—		45,432
Purchases of long term investments	(128		)	—			—			—		(128		)
Purchases of property, plant and equipment	(302		)	(3,807		)	(18,437		)	—		(22,546		)
Proceeds from sale of property, plant and equipment	411			1,258			2,641			—		4,310
Cash paid for businesses acquired, net	5			(168		)	6			—		(157		)
Cash provided by (used in) investing activities	28,856			(2,717		)	(15,790		)	—		10,349
Cash flows provided by (used in) financing activities:
Payments of notes and credit facilities	—			—			(262		)	—		(262		)
Proceeds from sale of common stock	5,607			—			—			—		5,607
Proceeds from (repayment of) intercompany debt	103,328			1,584			(104,912		)	—		—
Cash provided by (used in) financing activities	108,935			1,584			(105,174		)	—		5,345
Effect of exchange rate changes	—			—			(6,402		)	—		(6,402		)
Increase (decrease) in cash and cash equivalents	112,456			7,350			(176,761		)	—		(56,955		)
Cash and cash equivalents at beginning of period	303,511			6,674			757,868			—		1,068,053
Cash and cash equivalents at end of period	$	415,967		$	14,024		$	581,107		$	—	$	1,011,098

26

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Three Months Ended January 1, 2005

	Sanmina-SCI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Eliminations		Consolidated Total
	(In thousands)
Cash provided by (used in) operating activities	$	124,375		$	(28,057	)	$	(44,178	)	$	—	$	52,140
Cash flows provided by (used in) investing activities:
Purchases of short-term investments	(14,160		)	—			—			—		(14,160		)
Proceeds from maturities and sales of short-term investments	7,034			—			—			—		7,034
Purchases of long term investments	(314		)	—			—			—		(314		)
Purchases of property, plant and equipment	(1,593		)	(1,919		)	(11,230		)	—		(14,742		)
Proceeds from sale of property, plant and equipment	21			2,928			4,766			—		7,715
Cash paid for businesses acquired, net	(2,526		)	—			(74,567		)	—		(77,093		)
Cash provided by (used in) investing activities	(11,538		)	1,009			(81,031		)	—		(91,560		)
Cash flows provided by (used in) financing activities:
Payments of notes and credit facilities	—			(197		)	(339		)	—		(536		)
Payments of long-term debt	—			—			(12,119		)	—		(12,119		)
Payment of long-term liabilities	(344		)	(371		)	—			—		(715		)
Proceeds from sale of common stock	2,244			—			—			—		2,244
Proceeds from (repayment of) intercompany debt	(51,725		)	17,190			34,535			—		—
Cash provided by (used in) financing activities	(49,825		)	16,622			22,077			—		(11,126		)
Effect of exchange rate changes	—			—			(2,129		)	—		(2,129		)
Increase (decrease) in cash and cash equivalents	63,012			(10,426		)	(105,261		)	—		(52,675		)
Cash and cash equivalents at beginning of period	448,464			68,963			552,020			—		1,069,447
Cash and cash equivalents at end of period	$	511,476		$	58,537		$	446,759		$	—	$	1,016,772

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including any statements regarding trends in future revenues or results of operations, gross margin or operating margin, expenses, earnings or losses from operations, synergies or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning developments, performance or industry ranking; any statements regarding future economic conditions or performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Generally, the words “anticipate,” “believe,” “plan,” “expect,” “future,” “intend,” “may,” “will,” “should,” “estimate,” “predict,” “potential,” “continue” and similar expressions identify forward-looking statements. Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to risks, uncertainties and changes in condition, significance, value and effect. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this report with the Securities and Exchange Commission.

Overview

We are a leading independent global provider of customized, integrated electronics manufacturing services, or EMS. Our revenue is generated from sales of our services primarily to original equipment manufacturers, or OEMs, in the communications, enterprise computing and storage, personal and business computing, multimedia, medical, industrial and semiconductor capital equipment, defense and aerospace and automotive industries. We also generate sales from our original design manufacturing, or ODM, products where we design and develop servers and storage systems targeted to major OEMs. Our engineering services mainly focus on high-end products and we provide end-to-end design capacities for printed circuit board design, backplane design, enclosure design, full system and final system design.

A relatively small number of customers historically have been responsible for a significant portion of our net sales. Sales to our ten largest customers accounted for 64.3% and 69.3% of our net sales for the three months ended December 31, 2005 and January 1, 2005, respectively, and our two largest customers each accounted for 10% or more of our net sales during those periods.

During the three month periods ended December 31, 2005 and January 1, 2005, 74.7% and 77.4% respectively, of our consolidated net sales were derived from non-U.S. operations. We expect that a significant majority of the Company’s revenue will continue to be derived from our non-U.S. Operations.

Historically, we have had substantial recurring sales from existing customers. We have also expanded our customer base through acquisitions. We typically enter into supply agreements with our major OEM customers. These agreements generally have terms ranging from three to five years and cover the manufacturing of a range of products. Under these agreements, a customer typically agrees to purchase its requirements for particular products in particular geographic areas from us. These agreements generally do not obligate the customer to purchase minimum quantities of products. In some circumstances our supply agreements with customers provide for cost reduction objectives during the term of the agreement.

We have experienced fluctuations in gross margins in the past and may continue to in the future. Fluctuations in our gross margins may be caused by a number of factors, including pricing, changes in product mix, competitive pressures and transition of manufacturing to lower cost locations.

Recent Accounting Pronouncements

In March 2005, the FASB issued FIN 47 as an interpretation of SFAS No. 143, “Accounting for Asset Retirement Obligations”. This interpretation clarifies that the term conditional asset retirement obligation as used in SFAS No. 143, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN

28

47 is effective no later than the end of fiscal years ending after December 15, 2005. We do not anticipate that the adoption of this standard will have a material impact on our financial position or results of operations.

Summary Results of Operations

Approximately $324 million of this decline in sales was due to decreased demand from existing customers in our personal computing sector. The remainder of the decrease was due primarily to declines in revenue from our communications and industrial sectors.

The following table sets forth, for the periods indicated, key operating results (in thousands):

	Three Months Ended
	December 31, 2005		January 1, 2005
	(In thousands)
Net sales	$	2,861,797	$	3,252,706
Gross profit	169,680		176,967

Key performance measures

The following table sets forth, for the periods indicated, certain key performance measures that management utilizes to assess operating results:

	Three Months Ended
	December 31, 2005	October 1, 2005	January 1, 2005
Days sales outstanding(1)	51	48	50
Inventory turns(2)	9.6	10.3	12.3
Accounts payable days(3)	55	54	48
Cash cycle days(4)	33	29	31

(1)Days sales outstanding is calculated as the ratio of ending accounts receivable, net, for the quarter divided by average daily net sales for the quarter.

(2)Inventory turns are calculated as the ratio of four times our cost of sales for the quarter divided by inventory at period end.

(3)Accounts payable days is calculated as the ratio of 365 days divided by accounts payable turns, in which accounts payable turns is calculated as the ratio of four times our cost of sales for the quarter divided by accounts payable at period end.

(4)Cash cycle days is calculated as the ratio of 365 days divided by inventory turns plus days sales outstanding minus accounts payable days.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate the process used to develop estimates for certain reserves and contingent liabilities, including those related to product returns, accounts receivable, inventories, investments, intangible assets, income taxes, warranty obligations, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates.

29

For a complete description of our key critical accounting policies and estimates, refer to our 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 29, 2005.

Results of Operations

The following table sets forth, for the three months ended December 31, 2005 and January 1, 2005, certain items in the Condensed Consolidated Statement of Operations expressed as a percentage of net sales. The table and the discussion below should be read in conjunction with the condensed consolidated financial statements and the notes thereto, which appear elsewhere in this report.

	Three Months Ended
	December 31, 2005		January 1, 2005
Net sales	100.0	%	100.0	%
Cost of sales	94.1		94.6
Gross margin	5.9		5.4
Operating expenses:
Selling, general and administrative	3.1		2.7
Research and development	0.3		0.2
Amortization of intangible assets	0.1		0.1
Integration costs	—		—
Restructuring costs	1.2		0.6
Total operating expenses	4.7		3.6
Operating income	1.2		1.8
Interest income	0.2		0.1
Interest expense	(1.2	)	(0.9	)
Other expense, net	—		—
Interest and other expense, net	(1.0	)	(0.8	)
Income before income taxes and cumulative effect of accounting changes	0.2		1.0
Provision for (benefit from) income taxes	(0.5	)	0.3
Income before cumulative effect of accounting change	0.7		0.7
Cumulative effect of accounting change, net of tax	0.2		—
Net income	0.9	%	0.7	%

Net Sales

Approximately $324 million of this decline in sales was due to decreased demand from existing customers in our personal computing sector. The remainder of the decrease was due primarily to declines in revenue from our communications and industrial sectors.

Gross Margin

Gross margin increased from 5.4% in the first quarter of fiscal 2005 to 5.9% in the first quarter of fiscal 2006. The increase in gross margin for the three months ended December 31, 2005 as compared to the three months ended January 1, 2005 were primarily attributable to changes in product mix as sales to customers in the personal business computing sector, which typically have lower gross margins, represented a smaller percentage of total revenue. We expect gross margins to continue to fluctuate based on overall production and shipment volumes as well as changes in the mix of products demanded by our major customers.

Fluctuations in our gross margins may be caused by a number of factors, including:

•Changes in customer demand and sales volumes, including demand for our vertically integrated key system components and subassemblies;

•Changes in the mix of high and low margin products demanded by our customers;

•Greater competition in the EMS industry requiring us to reduce prices for our services;

•Pricing pressures from OEMs due to the greater cost reduction focus of global OEMs;

•Charges or write offs of excess and obsolete inventory that we are not able to charge back to a customer or sales of

30

inventories previously written down;

•Pricing pressure on electronic components resulting from economic conditions in the electronics industry, with EMS companies competing more aggressively on cost to obtain new or maintain existing business; and

•Our ability to transition manufacturing and assembly operations to lower cost regions in an efficient manner.

We have experienced fluctuations in gross margin in the past and may continue to do so in the future.

Operating Expenses

Selling, general and administrative expenses

Selling, general and administrative expenses increased $1.2 million to $88.5 million in the first quarter of fiscal 2006 from $87.3 million in the first quarter of fiscal 2005. Selling, general and administrative expenses increased as a percentage of net sales, to 3.1% in the first quarter of fiscal 2006 from 2.7% in the first quarter of fiscal 2005. The dollar increase in selling, general, and administrative expenses in the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005 was primarily attributable to expenses we incurred in connection with the implementation of new internal controls and completion of our evaluation of our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. The increase in selling, general, and administrative expenses in the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005 in terms of percentage of sales was primarily attributable to the decrease in sales in the first quarter of fiscal 2006.

Research and Development

Research and development expenses increased from $7.5 million in the first quarter of fiscal 2005 to $8.9 million in the first quarter of fiscal 2006. Research and development increased as a percentage of net sales, from 0.2% in the first quarter of fiscal 2005 to 0.3% in the first quarter of fiscal 2006. The increase in spending is primarily related to the new research and development project started in the first quarter of fiscal 2006.

Restructuring costs

Costs associated with restructuring activities initiated on or after January 1, 2003, other than those activities related to purchase business combinations, are accounted for in accordance with SFAS No. 146 and SFAS No. 112 where applicable. Accordingly, costs associated with such plans are recorded as restructuring costs in the consolidated statements of operations when a liability is incurred, pursuant to SFAS No. 146 and pursuant to SFAS No. 112, restructuring costs are recorded when probable and estimatable. Accrued restructuring costs are included in “accrued liabilities” in the Condensed Consolidated Balance Sheets. Below is a summary of the activity related to restructuring costs recorded pursuant to SFAS No. 146 and SFAS No. 112 through the first quarter of fiscal year 2006:

31

	Employee Termination Benefits			Lease and Contract Termination Costs			Other Restructuring Costs			Impairment of Fixed Assets			Total
	(In thousands)
	Cash			Cash			Cash			Non-Cash
Balance at September 27, 2003	$	3,870		$	1,462		$	—		$	—		$	5,332
Charges to operations	59,076			11,186			18,890			18,079			107,231
Charges utilized	(45,618		)	(9,677		)	(18,848		)	(18,079		)	(92,222		)
Reversal of accrual	(1,832		)	(1,384		)	—			—			(3,216		)
Balance at October 2, 2004	15,496			1,587			42			—			17,125
Charges to operations	84,651			14,070			6,404			6,932			112,057
Charges utilized	(64,823		)	(12,533		)	(6,446		)	(6,932		)	(90,734		)
Reversal of accrual	(2,508		)	—			—			—			(2,508		)
Balance at October 1, 2005	32,816			3,124			—			—			35,940
Charges to operations	16,364			792			2,704			15,324			35,184
Charges utilized	(12,233		)	(108		)	(2,704		)	(15,324		)	(30,369		)
Reversal of accrual	(331		)	—			—			—			(331		)
Balance at December 31, 2005	$	36,616		$	3,808		$	—		$	—		$	40,424

During the three month period ended December 31, 2005, we recorded restructuring charges of approximately $34.9 million (net of $331,000 reversal of accrual) related to our phase three restructuring plan. These charges included employee termination benefits of approximately $16.4 million, lease and contract termination costs of approximately $792,000, other restructuring costs of approximately $2.7 million, incurred primarily to prepare facilities for closure, and impairment of fixed assets of approximately $15.3 million pursuant to SFAS No. 144, mainly consisting of a building complex. These facilities have been reclassified as assets held for sale and included in Prepaid Expenses and Other Current Assets in our Condensed Consolidated Balance Sheets. The employee termination benefits were related to involuntary termination of employees, the majority of which were involved in manufacturing activities.  Approximately $12.2 million of employee termination benefits were utilized and 1,763 employees were terminated during the three months ended December 31, 2005 pursuant to this restructuring plan. We also utilized $108,000 of lease and contract termination costs and $2.7 million of the other restructuring costs during the three months ended December 31, 2005.  In addition, we reversed $331,000 of employee termination benefits due to completion of our restructuring plan in one of the plants.

In fiscal 2005, we recorded charges of approximately $109.5 million (net of $2.5 million reversal of accrual) related to restructuring activities pursuant to SFAS No. 146 and SFAS No. 112, of which $106.5 million related to our phase three restructuring plan and $3.0 million related to our phase two restructuring plan. These charges included employee termination benefits of approximately $84.7 million, lease and contract termination costs of approximately $14.1 million, other restructuring costs of approximately $6.4 million, incurred primarily to prepare facilities for closure, and impairment of fixed assets of approximately $6.9 million consisting of excess facilities and equipment to be disposed of. The employee termination benefits were related to the involuntary termination of employees, the majority of which were involved in manufacturing activities. Approximately $64.8 million of employee termination benefits were utilized and total of approximately 11,800 employees were terminated in fiscal 2005. We also utilized $12.5 million of lease and contract termination costs and $6.4 million of the other restructuring costs in fiscal 2005. We incurred charges to operations of $6.9 million in fiscal 2005 for the impairment of excess fixed assets at the vacated facilities, all of which were utilized as of October 1, 2005.  We reversed approximately $2.5 million of accrued employee termination benefits. The reversal of the accrual was a result of the changes in estimates and economic circumstances.

In fiscal 2004, we recorded restructuring charges of approximately $107.2 million related to restructuring activities initiated after January 1, 2003. With the exception of $7.8 million of restructuring charges associated with our phase three restructuring plan announced in July 2004, these restructuring charges were incurred in connection with our phase two restructuring plan announced in October 2002. These charges included employee termination benefits of approximately $59.0 million, lease and contract termination costs of approximately $11.2 million, other restructuring costs of approximately $18.9 million, primarily costs incurred to prepare facilities for closure, and impairment of fixed assets of $18.1 million consisting of excess facilities and equipment to be disposed of. The employee termination benefits were related to the involuntarily termination of approximately 2,000 employees, the majority of which were involved in manufacturing activities. Approximately $45.6 million of employee termination benefits were utilized during fiscal 2004 for the termination of approximately 1,900 employees. We also utilized $9.7 million of lease and contract termination

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costs and $18.8 million of the other restructuring costs during fiscal 2004. In fiscal 2004, we reversed approximately $1.8 million of accrued employee termination benefits and approximately $1.4 million of accrued lease costs due to revisions of estimates.

Costs associated with restructuring activities initiated prior to January 1, 2003, other than those activities related to purchase business combinations, are accounted for in accordance with EITF 94-3 and SFAS No. 112 where applicable. Accordingly, costs associated with such plans are recorded as restructuring costs in the Condensed Consolidated Statements of Operations generally at the commitment date. The accrued restructuring costs are included in “accrued liabilities” in the Condensed Consolidated Balance Sheets.  Below is a summary of the activity related to restructuring costs recorded pursuant to EITF 94-3 and SFAS No. 112 through the first quarter of fiscal year 2006:

	Employee Severance and Related Expenses			Facilities Shutdown and Consolidation Costs			Write-off Impaired or Redundant Fixed Assets			Total
	(In thousands)
	Cash			Cash			Non-Cash
Balance at September 27, 2003	$	9,739		$	14,490		$	—		$	24,229
Charges to operations	4,071			35,730			3,500			43,301
Charges utilized	(5,533		)	(28,279		)	(3,500		)	(37,312		)
Reversal of accrual	(7,050		)	(7,016		)	—			(14,066		)
Balance at October 2, 2004	1,227			14,925			—			16,152
Charges to operations	2,285			2,522			4,107			8,914
Charges utilized	(3,010		)	(7,890		)	(4,107		)	(15,007		)
Balance at October 1, 2005	502			9,557			—			10,059
Charges to operations	—			514			261			775
Charges utilized	—			(1,261		)	(261		)	(1,522		)
Balance at December 31, 2005	$	502		$	8,810		$	—		$	9,312

The following sections separately present the charges to the restructuring liability and charges utilized that are set forth in the above table on an aggregate basis.

Fiscal 2002 Plans

September 2002 Restructuring. During the three month period ended December 31, 2005, we utilized approximately $475,000 of accrued costs related to the shutdown of facilities.  Approximately $27,000 was charged to operations and utilized due to the write-off of impaired fixed assets.  There were no employees terminated during the three month period ended December 31, 2005 pursuant to this restructuring plan.

In fiscal 2005, we recorded charges to operations of approximately $203,000 and utilized $216,000 for employee severance expenses. There was no reduction of work force during fiscal 2005 pursuant to this restructuring plan.  In fiscal 2005, we also recorded charges to operations of approximately $544,000 and utilized approximately $2.7 million for non-cancelable lease payments, lease termination costs and related costs for the shutdown of facilities.  In addition, $800,000 was charged to operations and utilized due to the impairment of fixed assets to be disposed of. The closing of the plants discussed above as well as employee terminations and other related activities have been completed, however, the leases of the related facilities expire in 2009; therefore, the remaining accrual will be reduced over time as the lease payments, net of sublease income, are incurred.

In fiscal 2004, we recorded charges to operations of approximately $1.9 million and utilized $2.6 million for employee severance expenses. Approximately 10 employees were terminated during fiscal 2004. In fiscal 2004, we also recorded charges to operations of approximately $26.7 million and utilized approximately $16.1 million for non-cancelable lease payments, lease termination costs and related costs for the shutdown of facilities. In addition, in fiscal 2004 we reversed approximately $3.6 million of accrued employee severance due to lower than anticipated payments at various plants and approximately $5.8 million of accrued facilities shutdown costs due to a change in use of the facilities or greater sublease income than anticipated. We also incurred and utilized charges to operations of $3.7 million related to the impairment of buildings and leasehold improvements at permanently vacated facilities in fiscal 2004.

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October 2001 Restructuring. There were no significant activities incurred during the first quarter of fiscal year 2006.

In fiscal 2005, we recorded charges to operations of approximately $2.0 million for employee severance costs, of which $1.9 million was related to the settlement of a pension plan. We also recorded approximately $82,000 for non-cancelable lease payments and other costs related to the shutdown of facilities. We utilized accrued severance charges of approximately $2.7 million and accrued facilities shutdown related charges of $811,000 in fiscal 2005. In addition, we incurred and utilized charges of $633,000 in fiscal 2005 related to write-offs of fixed assets consisting of excess equipment and leasehold improvements to facilities that were permanently vacated. Manufacturing activities at the facilities affected by this plan ceased in fiscal year 2003 or prior; however, final payments of accrued costs may not occur until later periods.

In fiscal 2004, we recorded charges to operations of approximately $1.1 million for employee severance costs and approximately $4.8 million for non-cancelable lease payments and other costs related to the shutdown of facilities. We utilized accrued severance charges of approximately $2.5 million and accrued facilities shutdown related charges of $3.7 million during fiscal 2004. In fiscal 2004, we reversed approximately $1.3 million of accrued severance and approximately $530,000 of accrued lease costs due to lower than expected payments at various sites. Approximately 5,400 employees were associated with these plant closures and we had terminated all employees affected under this plan.

Fiscal 2001 Plans

July 2001 Restructuring. During the three month period ended December 31, 2005, we recorded approximately $662,000 and utilized approximately $804,000 of accrued costs related to the shutdown of facilities. We also recorded charges to operations and fully utilized $234,000 for write-off of impaired fixed assets.

In fiscal 2005, we recorded approximately $43,000 and utilized approximately $100,000 of accrued severance. In addition, we recorded approximately $1.9 million and utilized approximately $3.5 million of accrued costs related to the shutdown of facilities. We also incurred and utilized $2.7 million for the impairment of fixed assets to be disposed of. Manufacturing activities at the plants affected by this plan had ceased by the fourth quarter of fiscal 2002; however, the leases of the related facilities expire between 2005 and 2010, therefore, the remaining accrual will be reduced over time as the lease payments, net of sublease income, are made.

In fiscal 2004, we recorded approximately $4.1 million and utilized approximately $7.7 million of accrued costs related to the shutdown of facilities. In addition, we recorded charges to operations of approximately $1.1 million, utilized $164,000 and reversed approximately $2.1 million of accrued severance due to lower than anticipated payments in fiscal 2004.

Cost associated with restructuring activities related to purchase business combinations are accounted for in accordance with EITF 95-3. Below is a summary of the activity related to restructuring costs recorded pursuant to EITF 95-3 through the first quarter of fiscal year 2006:

	Employee Severance and Related Expenses			Facilities Shutdown and Consolidation Costs			Write-off Impaired or Redundant Fixed Assets			Total
	(In thousands)
	Cash			Cash			Non-Cash
Balance at September 27, 2003	$	12,052		$	13,612		$	—		$	25,664
Additions to restructuring accrual	10,858			—			6,024			16,882
Accrual utilized	(20,826		)	(11,434		)	(6,024		)	(38,284		)
Balance at October 2, 2004	2,084			2,178			—			4,262
Accrued utilized	(773		)	(393		)	—			(1,166		)
Balance at October 1, 2005	1,311			1,785			—			3,096
Accrued utilized	(25		)	(1,623		)	—			(1,648		)
Balance at December 31, 2005	$	1,286		$	162		$	—		$	1,448

The following sections separately present the charges to the restructuring liability and charges utilized that are set forth in the above table on an aggregate basis.

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Other Acquisition-Related Restructuring Actions. In fiscal 2004, we utilized $6.6 million of accrued severance to terminate 60 employees. In addition, we recorded charges to the restructuring liability of $10.9 million, and utilized $10.8 million, related to employee terminations. The charges were related to the elimination of approximately 340 employees. We also recorded and utilized charges to the restructuring liability of approximately $6.0 million related to excess machinery and equipment to be disposed of.

SCI Acquisition Restructuring. During the three month period ended December 31, 2005, we utilized $25,000 related to employee severance and utilized $1.6 million of accrued facility costs due to expiration of leases.

In fiscal 2005, we utilized $731,000 related to employee severance and utilized $393,000 due to facilities shutdown. In fiscal 2004, we utilized a total of approximately $11.4 million of facilities related accruals and $3.4 million of accrued severance.

Ongoing Restructuring Activities. As of December 31, 2005, we had incurred approximately $149.5 million of restructuring cost under our phase three restructuring plan. As initially planned, we incurred approximately 84% of the charges as cash charges and approximately 16% as non-cash charges. As a result of our phase three restructuring plan, we expect to achieve reductions in non-cash and cash costs, including depreciation, payroll and related benefits, and rent expense.

We continue to rationalize manufacturing facilities and headcount to more efficiently scale capacity to current market and operating conditions. The closing of plants as well as employee terminations and other related activities under our phase three restructuring plan will be substantially completed at the end of fiscal year 2006. However, the leases of the related facilities are unexpired; therefore, the remaining accrual will be reduced over time as the lease payments, net of sublease income, are made.

At the end of fiscal 2005, we realigned our reporting structure based on different types of manufacturing services offered to our customers. As a result, our operating segments have changed resulting in the identification of two new reportable segments (Standard Electronic Manufacturing Services and Personal Computing). The following table summarizes the total restructuring costs incurred with respect to our reported segments through the first quarter of fiscal year 2006:

	December 31, 2005		January 1, 2005
	(In Thousands)
Personal Computing	$	20,701	$	1,361
Standard Electronic Manufacturing Services	14,927		19,064
Total	$	35,628	20,425
Cash	$	20,042	$	18,442
Non-cash	15,586		1,983
Total	$	35,628	$	20,425

We plan to fund cash restructuring costs with cash flows generated by operating activities.

Interest Expense

Interest expense increased $4.2 million to $34.2 million in the first quarter of fiscal 2006 from $30.1 million in the first quarter of fiscal 2005. Although, average debt balances were down, interest expense increased in the first quarter of fiscal 2006 from the first quarter of fiscal 2005, primarily due to higher interest rates from our interest rate swap on our 10.375% Notes.

We entered into an interest rate swap transaction with an independent third party to effectively convert the fixed interest rate on our 10.375% Notes to a variable rate. Under the terms of this swap agreement, we pay the independent third party an interest rate equal to the six-month LIBOR rate plus 6.2162%. In exchange, we receive a fixed rate of 10.375%. We have also entered into interest rate swap transactions with independent third parties to effectively convert the fixed interest rate on our 6.75% Notes to a variable rate. Under the terms of these swap agreements, we pay the independent third parties an interest rate equal to the six-month LIBOR rate plus a spread ranging from 2.214% to 2.250%. In exchange, we receive a fixed rate of 6.75%.

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Other Income, net

Other income, net was $1.1 million for the three month period ended December 31, 2005 and $270,000 for the three month ended January 1, 2005.  The following table summarizes the major component of other income, net:

	Three Months Ended
	December 31, 2005			January 1, 2005
	(In Thousands)
Foreign exchange losses	$	(389	)	$	(515	)
Other, net	1,443			785
Total other income, net	$	1,054		$	270

Provision for Income Taxes

For the three months ended December 31, 2005, the Company recorded an income tax benefit of $13.0 million.  The income tax benefit for the three months ended December 31, 2005 included a one-time favorable income tax adjustment of $27.9 million relating to previously accrued income taxes that were reversed as a result of a settlement reached with the U.S. Internal Revenue Service.  The settlement was in relation to certain U.S. tax audits.  Notification of approval of the settlement by the Congressional Joint Committee on Taxation was received following the filing of the Company’s Annual Report on Form 10-K for fiscal 2005.  The total adjustment to previously accrued income taxes was $64.0 million of which $27.9 million was recorded as an income tax benefit to earnings.  The remaining $36.1 million was recorded as an adjustment to goodwill for pre-merger tax items associated with SCI Systems, a subsidiary of the Company.

Cumulative Effect of Accounting Change, Net of Tax

Cumulative effect of accounting change, net of tax, is a benefit of $4.8 million which resulted from adoption of SFAS No. 123R.

Liquidity and Capital Resources

Cash, cash equivalents, and short-term investments were $1.1 billion at December 31, 2005 and $1.2 billion at October 1, 2005.  Both periods included restricted cash of $25.5 million.

Net cash used in operating activities was $66.2 million for the three months ended December 31, 2005. Net cash provided by operating activities was $52.1 million for the three months ended January 1, 2005. Net cash used for operating activities in the first quarter of 2006 was primarily due to an increase in accounts receivables and inventory from fiscal 2005 offset partially by an increase in accounts payable. Working capital was $1.8 billion and $1.7 billion as of December 31, 2005 and October 1, 2005, respectively.

Net cash provided by investing activities was $10.3 million for the three months ended December 31, 2005. Net cash used in investing activities was $91.6 million for the three months ended January 1, 2005. Net cash provided by investing activities in the first quarter of 2006 was primarily due to the maturity of our short-term investments offset by the purchase of additional property, plant and equipment and short-term investments.

Net cash provided by financing activities was $5.3 million for the three months ended December 31, 2005. Net cash used in financing activities was $11.1 million for the three months ended January 1, 2005. Net cash provided by financing activities for the first quarter of fiscal 2006 primarily related to proceeds of $5.6 million from the exercise of common stock options by our employees.

We have up to $500 million available for borrowings under our senior secured credit facility, with a $150 million letter of credit sub-limit. On December 16, 2005, we entered into an Amended and Restated Credit and Guaranty Agreement which amended and restated our Credit and Guaranty Agreement, dated as of October 26, 2004 (the “Original Credit Agreement”) among other things, to:

•Extend the maturity date from October 26, 2007 to December 16, 2008;

•Amend the leverage ratio;

•Permit us and the guarantors to sell domestic receivables pursuant to factoring or similar arrangements if certain conditions are met; and

•Revise the collateral release provisions.

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Certain of the Company’s subsidiaries have entered into agreements that permit them to sell specified accounts receivables. The purchase price for receivable sold under these Agreements is equal to 100% of its face amount less a discount charge (based on LIBOR plus a spread) for the period from the date the receivable is sold to its collection date. These agreements provide for a commitment fee based on the unused portion of the facility. Accounts receivable sales under these Agreements was $348.2 million for the three month period ended December 31, 2005. The sold receivables are subject to certain limited recourse provisions. As of December 31, 2005, $193.0 million of sold accounts receivable remain subject to certain recourse provisions. We have not experienced any credit losses under these recourse provisions.

On January 30, 2006, the Company priced an offering of $600 million aggregate principal amount of 8.125% Senior Subordinated Notes due 2016.  The issue price of the notes is 100% and the offering is expected to close on February 15, 2006. The Company has commenced a cash tender offer and consent solicitation for any and all $750 million aggregate principal amount of its outstanding 10.375% Senior Secured Notes due 2010 (the “10.375% Notes”). The tender offer will be financed with the proceeds of the offering of senior subordinated notes together with up to approximately $250 million of cash on hand. The Company estimates that these transactions will result in an annual interest expense reduction of approximately $35 million.

As a result of the extinguishment of the 10.375% Notes, assuming the entire $750 million of 10.375% Notes are tendered, the Company will record a charge for loss on debt extinguishment and conversion totaling approximately $115 million during the quarter ending April 1, 2006, comprised of the non-cash charges for the write-off of debt issuance costs totaling approximately $15 million and approximately $100 million for cash redemption, interest rate swap unwind cost and transaction costs.

Our future needs for financial resources include increases in working capital to support anticipated sales growth, investments in manufacturing facilities and equipment, and repayments of outstanding indebtedness. We have evaluated and will continue to evaluate possible business acquisitions within the parameters of the restrictions set forth in the agreements governing certain of our debt obligations. These possible business acquisitions could require substantial cash payments. Additionally, we anticipate incurring additional expenditures in connection with the integration of our recently acquired businesses and our restructuring activities.

We believe that our existing cash resources, together with cash generated from operations, will be sufficient to meet our working capital requirements for the remainder of fiscal 2006. Should demand for our products decrease over the remainder of fiscal 2006, the available cash provided by operations could be negatively impacted. We may seek to raise additional capital through the issuance of either debt or equity securities. Our senior secured credit facility and the indentures governing our 10.375% Notes and our 6.75% Notes include covenants that, among other things, limit in certain respects us and our restricted subsidiaries from incurring debt, making investments and other restricted payments, paying dividends on capital stock, redeeming capital stock or subordinated obligations and creating liens. In addition to existing collateral and covenant requirements, future debt financing may require us to pledge assets as collateral and comply with financial ratios and covenants. Equity financing may result in dilution to stockholders.

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Risk Factors Affecting Operating Results

We are exposed to general market conditions in the electronics industry which could have a material adverse impact on our business, operating results and financial condition.

As a result of the downturn in the electronics industry, demand for our manufacturing services declined significantly during our 2001, 2002, and 2003 fiscal years. The decrease in demand for manufacturing services by OEMs resulted primarily from reduced capital spending by communications service providers. Consequently, our operating results were adversely affected as a result of the deterioration in the communications market and the other markets that we serve. Although we have begun to see evidence of a recovery in several markets that we serve, if capital spending in these markets does not continue to improve, or improves at a slower pace than we anticipate, our revenue and profitability will be adversely affected. In addition, even as many of these markets begin to recover, OEMs are likely to continue to be highly sensitive to costs and will likely continue to place pressure on EMS companies to minimize costs. This will likely result in continued significant price competition among EMS companies, and this competition will likely continue to affect our results of operations. In addition, OEM customers are increasingly requiring us and other EMS companies to move production of their products to lower-cost locations and away from high cost locations such as the United States and Western Europe. As a result, we have had to close facilities in the U.S. and Europe and incur costs for facilities closure, employee severance and related items. These trends are likely to continue, and we may therefore need to close additional facilities and incur related closure costs in future fiscal periods.

We cannot accurately predict future levels of demand for our customers’ electronics products. As a result of this uncertainty, we cannot accurately predict if the improvement in the electronics industry will continue. Consequently, our past operating results, earnings and cash flows may not be indicative of our future operating results, earnings and cash flows. In particular, if the economic recovery in the electronics industry does not demonstrate sustained momentum, and if price competition for EMS services continues to be intense, our operating results may be adversely affected.

If demand for our higher-end, higher margin manufacturing services does not improve, our future gross margins and operating results may be lower than expected.

Before the economic downturn in the communications sector and before our merger with SCI Systems, Inc., sales of our services to OEMs in the communications sector accounted for a substantially greater portion of our net sales and earnings than in recent periods. As a result of reduced sales to OEMs in the communications sector, our gross margins have declined because the services that we provided to these OEMs often were more complex, thereby generating higher margins than those that we provided to OEMs in other sectors of the electronics industry. For example, a substantial portion of our net sales are currently derived from sales of personal computers. Margins on personal computers are typically lower than margins that we have historically realized on communication products. OEMs are continuing to seek price decreases from us and other EMS companies and competition for this business remains intense. Although the electronics industry has begun to show indications of a recovery, pricing pressure on EMS companies continues to be strong and there continues to be intense price competition for EMS services. This price competition has affected, and could continue to adversely affect, our gross margins. If demand for our higher-end, higher margin manufacturing services does not improve in the future, our gross margins and operating results in future periods may be adversely affected.

Our operating results are subject to significant uncertainties.

Our operating results are subject to significant uncertainties, including the following:

•      economic conditions in the electronics industry;

•      the timing of orders from major customers and the accuracy of their forecasts;

•the timing of expenditures in anticipation of increased sales, customer product delivery requirements and shortages of components or labor;

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•the mix of products ordered by and shipped to major customers, as high volume and low complexity manufacturing services typically have lower gross margins than more complex and lower volume services;

•      the degree to which we are able to utilize our available manufacturing capacity;

•      our ability to effectively plan production and manage our inventory and fixed assets;

•customer insolvencies resulting in bad debt exposures that are in excess of our accounts receivable reserves;

•our ability to efficiently move manufacturing activities to lower cost regions without adversely affecting customer relationships and while controlling facilities closure and employee severance costs;

•      pricing and other competitive pressures;

•      seasonality in customers’ product requirements;

•      fluctuations in component prices;

•      political and economic developments in countries in which we have operations;

•      component shortages, which could cause us to be unable to meet customer delivery schedules; and

•      new product development by our customers.

A portion of our operating expenses is relatively fixed in nature, and planned expenditures are based, in part, on anticipated orders, which are difficult to estimate. If we do not receive anticipated orders as expected, our operating results will be adversely impacted. Moreover, our ability to reduce our costs as a result of current or future restructuring efforts may be limited because consolidation of operations can be costly and a lengthy process to complete.

If in a future fiscal period, we were to identify a material weakness in our internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities; we will also likely continue to incur substantial expenditures in connection with the Sarbanes-Oxley Section 404 process.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company’s internal control over financial reporting in their annual reports on Form 10-K that contains an assessment by management of the effectiveness of the company’s internal control over financial reporting. In addition, the independent registered public accounting firm auditing the company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting. We are subject to these requirements beginning in our 2005 fiscal year. Although this process did not identify any material weaknesses in our internal controls over financial reporting at October 1, 2005, in the future, we will need to continue to evaluate, and upgrade and enhance, our internal controls. For a discussion of changes undertaken to remediate a previously identified material weakness and adjustments recorded to our financial statements as a result of this remediation, see “Item 9A. Controls and Procedures” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quarterly Results (Unaudited)” contained in the Annual Report on Form 10-K incorporated by reference herein. In addition, because of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements, errors or omissions, and any projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate. If we fail to maintain the adequacy of our internal controls, including any failure

39

to implement or difficulty in implementing required new or improved controls, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, we could fail to be able to provide reasonable assurance as to our financial results or the effectiveness of our internal controls or meet our reporting obligations and there could be a material adverse effect on the price of our securities.

In addition, during fiscal 2005, we expended significant resources in connection with the Section 404 process. In future periods, we will likely continue to expend substantial amounts in connection with the Section 404 process and with ongoing evaluation of, and improvements and enhancements to, our internal control over financial reporting. These expenditures may make it difficult for us to control or reduce the growth of our selling, general and administrative expenses, which could adversely affect our results of operations and the price of our securities.

Adverse changes in the key end markets we target could harm our business.

We are dependent on the communications, computing and storage, multimedia, industrial and semiconductor systems, defense and aerospace, medical and automotive sectors of the electronics industry. Adverse changes in the end markets that we serve can reduce demand from our customers in those end markets and make customers in these end markets more price sensitive, either of which could adversely affect our business and results of operations. For example, in calendar year 2001, the communications equipment industry was afflicted by a significant downturn, which caused a substantial reduction in demand for our services from these customers. In addition, the declining financial performance of these customers made them more price sensitive which resulted in increased competition and pricing pressures on us. Future developments of this nature in end markets we serve, particularly in those markets which account for more significant portions of our revenues, could harm our business and our results of operations.

An adverse change in the interest rates for our borrowings could adversely affect our financial condition.

Interest to be paid by us on any borrowings under any of our credit facilities and other long-term debt obligations may be at interest rates that fluctuate based upon changes in various base interest rates. Recently, interest rates have trended upwards in major global financial markets. These interest rate trends have resulted in increases in the base rates upon which our interest rates are determined. Continued increases in interest rates could have a material adverse effect on our financial position, results of operations and cash flows, particularly if such increases are substantial. In addition, interest rate trends could affect global economic conditions.

We generally do not obtain long-term volume purchase commitments from customers, and, therefore, cancellations, reductions in production quantities and delays in production by our customers could adversely affect our operating results.

We generally do not obtain firm, long-term purchase commitments from our customers. Customers may cancel their orders, reduce production quantities or delay production for a number of reasons. In the event our customers experience significant decreases in demand for their products and services, our customers may cancel orders, delay the delivery of some of the products that we manufacture or place purchase orders for fewer products than we previously anticipated. Even when our customers are contractually obligated to purchase products from us, we may be unable or, for other business reasons, choose not to enforce our contractual rights. Cancellations, reductions or delays of orders by customers would:

•adversely affect our operating results by reducing the volumes of products that we manufacture for our customers;

•delay or eliminate recoupment of our expenditures for inventory purchased in preparation for customer orders; and

•lower our asset utilization, which would result in lower gross margins.

In addition, customers may require that we transfer the manufacture of their products from one facility to another to achieve cost reductions and other objectives. These transfers may result in increased costs to us due to resulting facility downtime or less than optimal utilization of our manufacturing capacity. These transfers may also

40

require us to close or reduce operations at certain facilities, particularly those in high cost locations, and as a result we could incur increased costs for facilities closure, employee severance and related matters.

We rely on a small number of customers for a substantial portion of our net sales, and declines in sales to these customers could adversely affect our operating results.

Sales to our ten largest customers accounted for 63.9% of our net sales in fiscal 2005 and sales to our largest customer, IBM, accounted for more than 10% of our net sales for that period. We depend on the continued growth, viability and financial stability of our customers, substantially all of which operate in an environment characterized by rapid technological change, short product life cycles, consolidation, and pricing and margin pressures. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our revenue. Consolidation among our customers may further concentrate our business in a limited number of customers and expose us to increased risks relating to dependence on a small number of customers. In addition, a significant reduction in sales to any of our large customers or significant pricing and margin pressures exerted by a key customer would adversely affect our operating results. In December 2004, IBM announced that it was selling its personal computer business to Lenovo Group, Ltd., or Lenovo, a China-based manufacturer of personal computers. The Lenovo transaction was completed in May 2005. A substantial portion of our sales to IBM relate to personal computer products. In May 2005, we entered into a new supply agreement with Lenovo and IBM for personal computer manufacturing, which expires in the first half of fiscal 2006. In the event that we are unable to enter into new supply agreements with Lenovo for the former IBM personal computer business that was sold to Lenovo, our net sales and operating results could be adversely affected. In the past, some of our large customers have significantly reduced or delayed the volume of manufacturing services ordered from us as a result of changes in their business, consolidations or divestitures or for other reasons. In particular, certain of our customers have from time to time entered into manufacturing divestiture transactions with other EMS companies, and such transactions could adversely affect our revenues with these customers. We cannot assure you that present or future large customers will not terminate their manufacturing arrangements with us or significantly change, reduce or delay the amount of manufacturing services ordered from us, any of which would adversely affect our operating results.

If our business declines or improves at a slower pace than we anticipate, we may further restructure our operations, which may adversely affect our financial condition and operating results.

In January 2005, we revised our projected costs for our phase three restructuring plan to approximately $175.0 million. During the fourth quarter of fiscal 2004 and fiscal 2005, we incurred approximately $114.3 million of restructuring cost associated with this plan. As initially planned, we incurred approximately 92% of the charges as cash charges and approximately 8% as non-cash charges. We anticipate incurring additional restructuring charges in the first half of fiscal 2006 under our phase three restructuring plan which was approved by management in the fourth quarter of fiscal 2005. On October 12, 2005, we announced the restructuring of several European entities. We cannot be certain as to the actual amount of these restructuring charges or the timing of their recognition for financial reporting purposes. We may need to take additional restructuring charges in the future if our business declines or improves at a slower pace than we anticipate or if the expected benefits of recently completed and currently planned restructuring activities do not materialize. These benefits may not materialize if we incur unanticipated costs in closing facilities or transitioning operations from closed facilities to other facilities or if customers cancel orders as a result of facility closures. If we are unsuccessful in implementing our restructuring plans, we may experience disruptions in our operations and higher ongoing costs, which may adversely affect our operating results.

We are implementing our original design manufacturer, or ODM, strategy, which we expect will be a critical element of our future growth and profitability, and we may encounter difficulties in growing this business.

We are implementing a strategy of offering original design manufacturer, or ODM, products and product platforms. ODM products and product platforms are either substantially finished products or product platforms that contain the electronics critical to the functionality of a finished product, such as a personal computer motherboard and chassis. By developing ODM products, we can increase the level of proprietary technology content we provide to our customers and our technologies can be designed into our customers’ products. We began our ODM efforts in the area of server technology with our acquisition of Newisys and are now moving into other end markets. We may encounter unforeseen difficulties in connection with our ODM strategy including difficulties in identifying and targeting ODM

41

opportunities, difficulties in achieving development timelines and difficulties in hiring and retaining qualified engineering and technical personnel. These or other factors could slow or impair our ODM initiatives, which would adversely affect our growth and profitability.

We are subject to intense competition in the EMS industry, and our business may be adversely affected by these competitive pressures.

The EMS industry is highly competitive. We compete on a worldwide basis to provide electronics manufacturing services to OEMs in the communications, personal and business computing, enterprise computing and storage, multimedia, industrial and semiconductor capital equipment, defense and aerospace, medical and automotive industries. Our competitors include major global EMS providers such as Celestica, Inc., Flextronics International Ltd., Hon Hai (FoxConn), Jabil Circuit, Inc., and Solectron Corporation, as well as other EMS companies that often have a regional or product, service or industry specific focus. Some of these companies have greater manufacturing and financial resources than we do. We also face competition from current and potential OEM customers, who may elect to manufacture their own products internally rather than outsource the manufacturing to EMS providers.

In addition to EMS companies, we also compete, with respect to certain of the EMS services we provide, with original design manufacturers, or ODMs. These companies, many of which are based in Asia, design products and product platforms that are then sold to OEMs, system integrators and others who configure and resell them to end users. To date, ODM penetration has been greatest in the personal computer, including both desktop and notebook computers, and server markets. However, the trend towards the use of ODM product platforms is moving into other segments of the electronics industry, including multimedia and other products. As we implement our ODM strategies, the extent to which we compete with both established and emerging ODMs in multiple end-customer markets is likely to increase.

We expect competition to intensify further as more companies enter markets in which we operate and the OEMs we serve continue to consolidate. To remain competitive, we must continue to provide technologically advanced manufacturing services, high quality service, flexible and reliable delivery schedules, and competitive prices. Our failure to compete effectively could adversely affect our business and results of operations.

Consolidation in the electronics industry may adversely affect our business.

In the current economic climate, consolidation in the electronics industry may increase as companies combine to achieve further economies of scale and other synergies. Consolidation in the electronics industry could result in an increase in excess manufacturing capacity as companies seek to divest manufacturing operations or eliminate duplicative product lines. Excess manufacturing capacity has increased, and may continue to increase, pricing and competitive pressures for the EMS industry as a whole and for us in particular. Consolidation could also result in an increasing number of very large electronics companies offering products in multiple sectors of the electronics industry. The significant purchasing power and market power of these large companies could increase pricing and competitive pressures for us. If one of our customers is acquired by another company that does not rely on us to provide services and has its own production facilities or relies on another provider of similar services, we may lose that customer’s business. Any of the foregoing results of industry consolidation could adversely affect our business.

Our failure to comply with applicable environmental laws could adversely affect our business.

We are subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous substances and wastes in the ordinary course of our manufacturing operations. We also are subject to laws and regulations governing the recyclability of products, the materials that may be included in products, and the obligations of a manufacturer to dispose of these products after end users have finished using them. If we violate environmental laws, we may be held liable for damages and the costs of remedial actions and may be subject to revocation of permits necessary to conduct our businesses. We cannot assure you that we will not violate environmental laws and regulations in the future as a result of our inability to obtain permits, human error, equipment failure or other causes. Any permit revocations could require us to cease or limit production at one or more of our facilities, which could adversely affect our business, financial condition and operating results. Although we estimate our potential liability with respect to violations or alleged violations and reserve for such liability, we cannot assure you that any accruals will be sufficient to cover the actual costs that we incur as a result of these violations or alleged violations. Our failure to comply with applicable environmental laws and regulations could limit

42

our ability to expand facilities or could require us to acquire costly equipment or to incur other significant expenses to comply with these laws and regulations.

Over the years, environmental laws have become, and in the future may become, more stringent, imposing greater compliance costs and increasing risks and penalties associated with violations. We operate in several environmentally sensitive locations and are subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes in or restrictions on discharge limits, emissions levels, permitting requirements and material storage or handling could require a higher than anticipated level of operating expenses and capital investment or, depending on the severity of the impact of the foregoing factors, costly plant relocation.

In addition, the electronics industry will become subject to the European Union’s Restrictions of Hazardous Substances, or RoHS, and Waste Electrical and Electronic Equipment, or WEEE, directives which take effect during 2005 and 2006. Parallel initiatives are being proposed in other jurisdictions, including several states in the United States and the Peoples’ Republic of China. RoHS prohibits the use of lead, mercury and certain other specified substances in electronics products and WEEE requires industry OEMs to assume responsibility for the collection, recycling and management of waste electronic products and components. We are in the process of making our manufacturing process RoHs compliant. In the case of WEEE, the compliance responsibility rests primarily with OEMs rather than with EMS companies. However, OEMs may turn to EMS companies for assistance in meeting their WEEE obligations. In the event we are not able to make our manufacturing obligations fully RoHS compliant by the applicable deadlines, we could be unable to certify compliance to our customers and could incur substantial costs, including fines and penalties, as well as liability to our customers. In addition, we may incur costs related to inventories containing restricted substances that are not consumed by the RoHS effective dates.

We are potentially liable for contamination of our current and former facilities, including those of the companies we have acquired, which could adversely affect our business and operating results in the future.

We are potentially liable for contamination at our current and former facilities, including those of the companies we have acquired. These liabilities include ongoing investigation and remediation activities at a number of sites, including our facilities located in Irvine, California, (a non-operating facility acquired as part of our acquisition of Elexsys); Owego, New York (a current facility of our Hadco subsidiary); Derry, New Hampshire (a non-operating facility of our Hadco subsidiary); and Fort Lauderdale, Florida (a former facility of our Hadco subsidiary). Currently, we are unable to anticipate whether any third-party claims will be brought against us for this contamination. We cannot assure you that third-party claims will not arise and will not result in material liability to us. In addition, there are several sites, including our facilities in Wilmington, Massachusetts; Clinton, North Carolina; and Gunzenhausen, Germany that are known to have groundwater contamination caused by a third party, and that third party has provided indemnity to us for the liability. Although we do not currently expect to incur liability for clean-up costs or expenses at any of these sites, we cannot assure you that we will not incur such liability or that any such liability would not be material to our business and operating results in the future.

Our key personnel are critical to our business, and we cannot assure you that they will remain with us.

Our success depends upon the continued service of our executive officers and other key personnel. Generally, these employees are not bound by employment or non-competition agreements. We cannot assure you that we will retain our officers and key employees, particularly our highly skilled design, process and test engineers involved in the manufacture of existing products and development of new products and processes. The competition for these employees is intense. In addition, if Jure Sola, our chairman and chief executive officer, or one or more of our other executive officers or key employees, were to join a competitor or otherwise compete directly or indirectly with us or otherwise be unavailable to us, our business, operating results and financial condition could be adversely affected.

Unanticipated changes in our tax rates or in our assessment of the realizability of our deferred tax assets or exposure to additional income tax liabilities could affect our operating results and financial condition.

We are subject to income taxes in both the United States and various foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and, in the ordinary course of business, there are many transactions and calculations where the ultimate tax

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determination is uncertain. Our effective tax rates could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws as well as other factors. For example, as a result of our continuous migration of certain operating activities from high-cost to low-cost regions, we determined during the second fiscal quarter of 2005 that it was more likely than not that certain of our deferred tax assets primarily relating to our U.S. operations would not be realized. As a result of this analysis, during the second quarter of fiscal 2005, we recorded an increase in our deferred tax asset valuation allowance of $379.2 million in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109). Our tax determinations are regularly subject to audit by tax authorities and developments in those audits could adversely affect our income tax provision. Although we believe that our tax estimates are reasonable, the final determination of tax audits or tax disputes may be different from what is reflected in our historical income tax provisions which could affect our operating results.

During the second quarter of fiscal 2005, we recorded a goodwill impairment loss of $600 million, and there can be no assurance that it will not be necessary to record additional goodwill impairment or long-lived asset impairment charges in the future.

During the quarter ended April 2, 2005, we recorded a goodwill impairment loss of $600 million. The factors that led us to record a write-off of our deferred tax assets, which primarily related to U.S. operations, coupled with the recent decline in the market price of our common stock, led us to record this goodwill impairment loss. In particular, the shift of operations from U.S. facilities and other facilities in high cost locations to facilities in lower-cost locations has resulted in restructuring charges and a decline in sales with respect to our U.S. operations. In the event that the results of operations do not stabilize or improve, or the market price of our common stock declines further or does not rise, we could be required to record additional goodwill impairment or other long-lived asset impairment charges during fiscal 2006 or in future fiscal periods. Although these goodwill impairment charges are of a non-cash nature, they do adversely affect our results of operations in the periods in which such charges are recorded.

We are subject to risks arising from our international operations.

We conduct our international operations primarily in Asia, Latin America, Canada and Europe and we continue to consider additional opportunities to make foreign acquisitions and construct new foreign facilities. We generated 76.2% of our net sales from non-U.S. operations during the fiscal year ended October 1, 2005, and a significant portion of our manufacturing material was provided by international suppliers during this period. During fiscal 2004, we generated 72.7% of our net sales from non-U.S. operations. As a result of our international operations, we are affected by economic and political conditions in foreign countries, including:

•the imposition of government controls;

•export license requirements;

•political and economic instability;

•trade restrictions;

•changes in tariffs;

•labor unrest and difficulties in staffing;

•coordinating communications among and managing international operations;

•fluctuations in currency exchange rates;

•increases in duty and/or income tax rates;

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•earnings repatriation restrictions;

•difficulties in obtaining export licenses;

•misappropriation of intellectual property; and

•constraints on our ability to maintain or increase prices.

To respond to competitive pressures and customer requirements, we may further expand internationally in lower cost locations, particularly in Asia, Eastern Europe and Latin America. As we pursue continued expansion in these locations, we may incur additional capital expenditures. In addition, the cost structure in certain countries that are now viewed as low-cost may increase as economies develop or as such countries join multinational economic communities or organizations. For example, Hungary, in which we have operations, is in the process of joining the European Union, and it is possible that costs in Hungary could therefore increase. As a result, we may need to continue to seek out new locations with lower costs and the employee and infrastructure base to support electronics manufacturing. We cannot assure you that we will realize the anticipated strategic benefits of our international operations or that our international operations will contribute positively to, and not adversely affect, our business and operating results.

In addition, during fiscal 2004 and fiscal 2005, the decline in the value of the U.S. dollar as compared to the Euro and many other currencies has resulted in foreign exchange losses. To date, these losses have not been material to our results of operations. However, continued fluctuations in the value of the U.S. dollar as compared to the Euro and other currencies in which we transact business could adversely affect our operating results.

We are subject to risks of currency fluctuations and related hedging operations.

A portion of our business is conducted in currencies other than the U.S. dollar. Changes in exchange rates among other currencies and the U.S. dollar will affect our cost of sales, operating margins and revenues. We cannot predict the impact of future exchange rate fluctuations. In addition, certain of our subsidiaries that have non-U.S. dollar functional currencies transact business in U.S. dollars. We use financial instruments, primarily short-term foreign currency forward contracts, to hedge U.S. dollar and other currency commitments arising from trade accounts receivable, trade accounts payable and fixed purchase obligations. If these hedging activities are not successful or we change or reduce these hedging activities in the future, we may experience significant unexpected expenses from fluctuations in exchange rates.

We may not be successful in implementing strategic transactions, including business acquisitions, and we may encounter difficulties in completing and integrating acquired businesses or in realizing anticipated benefits of strategic transactions, which could adversely affect our operating results.

We seek to undertake strategic transactions that give us the opportunity to access new customers and new end-customer markets, to obtain new manufacturing and service capabilities and technologies, to enter new geographic manufacturing locations markets, to lower our manufacturing costs and improve the margins on our product mix, and to further develop existing customer relationships. For example, early in fiscal 2005, we completed the acquisition of Pentex-Schweizer Circuits in order to provide lower cost printed circuit board manufacturing capacity in China. In addition, we will continue to pursue OEM divestiture transactions. Strategic transactions may involve difficulties, including the following:

•integrating acquired operations and businesses;

•allocating management resources;

•scaling up production and coordinating management of operations at new sites;

•managing and integrating operations in geographically dispersed locations;

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•      maintaining customer, supplier or other favorable business relationships of acquired operations and terminating unfavorable relationships;

•integrating the acquired company’s systems into our management information systems;

•addressing unforeseen liabilities of acquired businesses;

•lack of experience operating in the geographic market or industry sector of the business acquired;

•improving and expanding our management information systems to accommodate expanded operations; and

•losing key employees of acquired operations.

Any of these factors could prevent us from realizing the anticipated benefits of a strategic transaction, and our failure to realize these benefits could adversely affect our business and operating results. In addition, we may not be successful in identifying future strategic opportunities or in consummating any strategic transactions that we pursue on favorable terms, if at all. Although our goal is to improve our business and maximize stockholder value, any transactions that we complete may impair stockholder or debtholder value or otherwise adversely affect our business and the market price of our stock. Moreover, any such transaction may require us to incur related charges, and may pose significant integration challenges and/or management and business disruptions, any of which could harm our operating results and business.

If we are unable to protect our intellectual property or infringe or are alleged to infringe upon intellectual property of others, our operating results may be adversely affected.

We rely on a combination of copyright, patent, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. As ODM services assume a greater degree of importance to our business, the extent to which we rely on intellectual property rights will increase. We cannot be certain that the steps we have taken will prevent unauthorized use of our technology. Our inability to protect our intellectual property rights could diminish or eliminate the competitive advantages that we derive from our proprietary technology.

We may become involved in litigation in the future to protect our intellectual property or because others may allege that we infringe on their intellectual property. The likelihood of any such claims may increase as we increase the ODM aspects of our business. These claims and any resulting lawsuits could subject us to significant liability for damages and invalidate our proprietary rights. In addition, these lawsuits, regardless of their merits, likely would be time consuming and expensive to resolve and would divert management’s time and attention. Any potential intellectual property litigation alleging our infringement of a third-party’s intellectual property also could force us or our customers to:

•stop producing products that use the challenged intellectual property;

•obtain from the owner of the infringed intellectual property a license to sell the relevant technology at an additional cost, which license may not be available on reasonable terms, or at all; and

•redesign those products or services that use the infringed technology.

Any costs we incur from having to take any of these actions could be substantial.

We and the customers we serve are vulnerable to technological changes in the electronics industry.

Our customers are primarily OEMs in the communications, high-end computing, personal computing, aerospace and defense, medical, industrial controls and multimedia sectors. These industry sectors, and the electronics industry as a whole, are subject to rapid technological change and product obsolescence. If our customers are unable to develop products that keep pace with the changing technological environment, our customers’ products could become obsolete,

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and the demand for our services could decline significantly. In addition, our customers may discontinue or modify products containing components that we manufacture, or develop products requiring new manufacturing processes. If we are unable to offer technologically advanced, easily adaptable and cost effective manufacturing services in response to changing customer requirements, demand for our services will decline. If our customers terminate their purchase orders with us or do not select us to manufacture their new products, our operating results could be adversely affected.

We may experience component shortages, which could cause us to delay shipments to customers and reduce our revenue and operating results.

In the past from time to time, a number of components purchased by us and incorporated into assemblies and subassemblies produced by us have been subject to shortages. These components include application-specific integrated circuits, capacitors and connectors. As our business begins to improve following the economic downturn, we may experience component shortages from time to time. Unanticipated component shortages have prevented us from making scheduled shipments to customers in the past and may do so in the future. Our inability to make scheduled shipments could cause us to experience a shortfall in revenue, increase our costs and adversely affect our relationship with the affected customer and our reputation generally as a reliable service provider. Component shortages may also increase our cost of goods sold because we may be required to pay higher prices for components in short supply and redesign or reconfigure products to accommodate substitute components. In addition, we may purchase components in advance of our requirements for those components as a result of a threatened or anticipated shortage. In this event, we will incur additional inventory carrying costs, for which we may not be compensated, and have a heightened risk of exposure to inventory obsolescence. As a result, component shortages could adversely affect our operating results for a particular period due to the resulting revenue shortfall and increased manufacturing or component costs.

If we manufacture or design defective products, or if our manufacturing processes do not comply with applicable statutory and regulatory requirements, demand for our services may decline and we may be subject to liability claims.

We manufacture products to our customers’ specifications, and, in some cases, our manufacturing processes and facilities may need to comply with applicable statutory and regulatory requirements. For example, medical devices that we manufacture, as well as the facilities and manufacturing processes that we use to produce them, are regulated by the Food and Drug Administration. In addition, our customers’ products and the manufacturing processes that we use to produce them often are highly complex. As a result, products that we manufacture or design may at times contain design or manufacturing defects, and our manufacturing processes may be subject to errors or not in compliance with applicable statutory and regulatory requirements. In addition, we are also involved in product and component design, and as we seek to grow our original design manufacturer business, this activity as well as the risk of design defects will increase. Defects in the products we manufacture or design may result in delayed shipments to customers or reduced or cancelled customer orders. If these defects or deficiencies are significant, our business reputation may also be damaged. The failure of the products that we manufacture or design or of our manufacturing processes and facilities to comply with applicable statutory and regulatory requirements may subject us to legal fines or penalties and, in some cases, require us to shut down or incur considerable expense to correct a manufacturing program or facility. In addition, these defects may result in liability claims against us. The magnitude of such claims may increase as we expand our medical, automotive, and aerospace and defense manufacturing services because defects in medical devices, automotive components, and aerospace and defense systems could seriously harm users of these products. Even if our customers are responsible for the defects, they may not, or may not have the resources to, assume responsibility for any costs or liabilities arising from these defects.

Recently enacted changes in the securities laws and regulations have increased, and are likely to continue to increase, our costs.

The Sarbanes-Oxley Act of 2002 that became law in July 2002 has required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of that Act, the Securities and Exchange Commission and the NASDAQ National Market have promulgated new rules on a variety of subjects. Compliance with these new rules, particularly Section 404 of The Sarbanes-Oxley Act of 2002 regarding management’s assessment of our internal control over financial reporting, has increased our legal and financial and accounting costs, and we expect these increased costs to continue indefinitely. We also expect these developments to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be forced to accept

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reduced coverage or incur substantially higher costs to obtain coverage. Likewise, these developments may make it more difficult for us to attract and retain qualified members of our board of directors or qualified executive officers.

We are subject to risks associated with natural disasters and global events.

We conduct a significant portion of our activities including manufacturing, administration and data processing at facilities located in the State of California and other seismically active areas that have experienced major earthquakes in the past, as well as other natural disasters. Our insurance coverage with respect to natural disasters is limited and is subject to deductibles and coverage limits. Such coverage may not be adequate or continue to be available at commercially reasonable rates and terms. In the event of a major earthquake or other disaster affecting one or more of our facilities, it could significantly disrupt our operations, delay or prevent product manufacture and shipment for the time required to transfer production, repair, rebuild or replace the affected manufacturing facilities. This time frame could be lengthy, and result in significant expenses for repair and related costs. In addition, concerns about terrorism or an outbreak of epidemic diseases such as avian influenza or severe acute respiratory syndrome, or SARS, could have a negative effect on travel and our business operations, and result in adverse consequences on our business and results of operations.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposures to market risk for changes in interest rates relate primarily to our investment portfolio and certain debt obligations. Currently, we do not use derivative financial instruments in our investment portfolio. We invest in high quality credit issuers and, by policy, limit the amount of principal exposure to any one issuer. As stated in our policy, we seek to ensure the safety and preservation of our invested principal funds by limiting default and market risk.

We seek to mitigate default risk by investing in high quality credit securities and by positioning our investment portfolio to respond to a significant reduction in credit rating of any investment issuer, guarantor or depository. We seek to mitigate market risk by limiting the principal and investment term of funds held with any one issuer and by investing funds in marketable securities with active secondary or resale markets.

The table below presents carrying amounts and related average interest rates by year of maturity for our investment portfolio as of December 31, 2005:

	2006		2007	Total
	(In thousands, except percentages)
Cash equivalents and short-term investments	$	435,784	—	$	435,784
Average interest rate	4.11%		—	4.11%

We have issued the 10.375% Notes with a principal balance of $750.0 million due in 2010. We entered into an interest rate swap transaction with an independent third party to effectively convert the fixed interest rate to a variable rate. The swap agreement, which expires in 2010, is accounted for as a fair value hedge under SFAS No. 133. The aggregate notional amount of the swap transaction is $750.0 million. Under the terms of the swap agreement, we pay the independent third party an interest rate equal to the six-month LIBOR rate plus 6.2162%. In exchange, we receive a fixed rate of 10.375%. At December 31, 2005 and October 1, 2005, respectively, $27.6 million and $22.1 million have been recorded in other long-term liabilities to record the fair value of the interest rate swap transactions, with a corresponding decrease to the carrying value of the 10.375% Notes on the Condensed Consolidated Balance Sheets.

We have issued the 6.75% Notes with a principal balance of $400.0 million due in 2013. We entered into interest rate swap transactions with independent third parties to effectively convert the fixed interest rate to a variable rate. The swap agreements, which expire in 2013, are accounted for as fair value hedges under SFAS No. 133. The aggregate notional amount of the combined swap transactions is $400.0 million. Under the terms of the swap agreements, we pay the independent third parties an interest rate equal to the six-month LIBOR rate plus a spread ranging from 2.214% to 2.250%. In exchange, we receive a fixed rate of 6.75%. At December 31, 2005 and October 1, 2005, respectively, $14.0 million and $10.6 million has been recorded in other long-term liabilities to record the fair value of the interest rate swap transactions, with a corresponding decrease to the carrying value of the 6.75% Notes on the Condensed Consolidated Balance Sheets.

As of December 31, 2005, we have $1.3 million of other term loans at interest rates that fluctuate. The average interest rates for the year ended December 31, 2005 was 5.25%.

Foreign Currency Exchange Risk

We transact business in foreign countries. Our primary foreign currency cash flows are in certain Asian and European countries, Australia, Brazil, Canada, and Mexico. We enter into short-term foreign currency forward contracts to hedge those currency exposures associated with certain assets and liabilities denominated in foreign currencies. At December 31, 2005, we had forward contracts to exchange various foreign currencies for U.S. dollars in the aggregate notional amount of $421.8 million. The net unrealized loss on the contracts at December 31, 2005 is not material and is recorded in current liabilities on the Condensed Consolidated Balance Sheets.

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Market value gains and losses on forward exchange contracts are recognized in the consolidated statement of operations as offsets to the exchange gains and losses on the hedged transactions. The impact of these foreign exchange contracts was not material to the results of operations for the three months ended December 31, 2005 and January 1, 2005. We also utilize foreign currency forward and option contracts to hedge certain forecasted foreign currency sales and cost of sales (“cash flow hedges”). Gains and losses on these contracts related to the effective portion of the hedges are recorded in other comprehensive income until the forecasted transactions occur. Gains and losses related to the ineffective portion of the hedges are immediately recognized in the Consolidated Statements of Operations. At December 31, 2005, we had forward and option contracts related to cash flow hedges in various foreign currencies in the aggregate notional amount of $69.6 million. The net unrealized gain on the contracts at December 31, 2005 is not material and is recorded in prepaid expenses and other on the Condensed Consolidated Balance Sheets. The impact of these foreign exchange contracts was not material to the results of operations for the three months ended December 31, 2005 and January 1, 2005.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005, the end of the quarterly fiscal period covered by this quarterly report. The evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2005, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

We are a party to certain legal proceedings that have arisen in the ordinary course of our business. We believe that the resolution of these proceedings will not have a material adverse effect on our business, financial condition or results of operations.

Item 4.  Submission of Matters to a Vote of Security Holders

None.

Item 6.  Exhibits

(a)Exhibits

Refer to item (c) below.

(c)Exhibits

Exhibit Number	Description
31.1	Certification of the Principal Executive Officer pursuant to
	Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Principal Financial Officer pursuant to
	Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to 18
	U.S.C. Section 1350, as adopted pursuant to Section 906 of
	the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18
	U.S.C. Section 1350, as adopted pursuant to Section 906 of
	the Sarbanes-Oxley Act of 2002.

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SANMINA-SCI CORPORATION

SIGNATURES

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

	SANMINA-SCI CORPORATION
	(Registrant)
	By:	/s/ JURE SOLA
		Jure Sola
		Chief Executive Officer
Date: February 9, 2006
	By:	/s/ DAVID L. WHITE
		David L. White
		Executive Vice President and Chief Financial Officer
Date: February 9, 2006

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EXHIBIT INDEX

Exhibit Number	Description
31.1	Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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