Subject to closing the four-year manufacturing agreement, Flextronics will assume most of Nortel Networks' systems integration activities, final assembly, testing and repair operations, along with the management of the related supply chain and suppliers. Over time, Flextronics expects to consolidate and internally source its vertically integrated supply chain solutions, which include the fabrication and assembly of printed circuit boards and enclosures, as well as logistics and repair services. Through an optical design services agreement, Flextronics will acquire a world-class group of engineers with expertise in end-to-end, carrier grade optical network products that include Edge, Core Switching, and Transport Line products.

The design and engineering skills to be transferred to Flextronics include hardware development, software development and project management. "Flextronics will be acquiring a design group with broad experience in telecommunications and optical networks, with extensive knowledge of optical products and processes. There are no independent design companies in the world that have this degree of design expertise, so we are thrilled to have expanded the scope of our engagement with Nortel Networks to include these services," said Michael Marks, Chief Executive Officer of Flextronics. "Coupled with our recently announced acquisition of a majority share of Hughes Software Systems in India, Flextronics will now have the most robust hardware and software telecom and datacom design capabilities of any EMS company in the world. We believe hardware design, software design, and manufacturing are converging, which makes the addition of the Nortel Networks design group an excellent fit with our long-term strategy of providing the lowest total cost solutions to customers in each of the market segments that we serve." "This new customer program solidifies Flextronics as the leader in the communications infrastructure market," said Mike McNamara, Chief Operating Officer of Flextronics.

"The significant increase in complex, multi-technology telecom and network solutions, including carrier grade products further diversifies our product mix and reduces seasonality. The expertise acquired from the Nortel Networks' operations will enhance the capabilities in our Industrial Parks in China, Poland, Mexico, and Brazil and will create a sustainable competitive advantage for large-scale, low-cost manufacturing of very complex products." "Today's announcement is an important part of Nortel Networks' strategy. By leveraging the vertically integrated supply chain capabilities of Flextronics, we can focus our resources and efforts on those areas that offer us greater competitive differentiation," said Chahram Bolouri, President, Global Operations, Nortel Networks.

"Flextronics has industry leading vertical supply chain expertise, resources and the global presence to meet our time-to-market, quality, and product cost-reduction objectives and take Nortel Networks' supply chain to new levels of performance and competitive differentiation." As part of the transaction, which is subject to customary closing conditions, including the completion of the required information and consultation process with employee representatives in Europe, approximately 2,500 employees would transfer to Flextronics. The business transfer to Flextronics is expected to begin in November 2004 and will take approximately six months to complete. During this time period, Flextronics' revenues from Nortel Networks will increase each quarter and should reach an annual revenue rate of approximately $2.5 billion.

Flextronics expects that the Nortel Networks program will be neutral to earnings in the last two quarters of its fiscal year ending March 31, 2005, accretive by approximately $0.10 per diluted share in its fiscal year ending March 31, 2006 and accretive by approximately $0.15 per diluted share in its fiscal year ending March 31, 2007. Cash payments of approximately $75 million will be made to Nortel Networks in the fourth quarter of calendar 2004, and installment payments of approximately $600 million to $650 million will be made over a four quarter period in calendar 2005. Of the estimated aggregate payment amount, approximately $60 million is for fixed assets, $200 million is for intangible assets relating to, among other things, the design and engineering transfer, and the balance is related to inventory. Bob Dykes, Chief Financial Officer of Flextronics commented, "The estimated cash requirements do not consider the expected cash inflows generated by the Nortel Networks program. We expect to generate positive cash flow on this program not only from the profits, but also from an expected reduction in excess of $100 million in the initial inventory level acquired."