SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2004

Commission file number 1- 4373

THREE-FIVE SYSTEMS, INC.

Securities registered pursuant to Section 12(b) of the Exchange Act:

     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 þ No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

     The aggregate market value of Common Stock held by nonaffiliates of the registrant (17,362,905 shares) based on the closing price of the registrant’s Common Stock as reported on the New York Stock Exchange on June 30, 2004, which was the last business day of the registrant’s most recently completed second fiscal quarter, was $88,550,816. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.

     As of March 28, 2005, there were outstanding 21,767,653 shares of the registrant’s Common Stock, par value $.01 per share.

Documents Incorporated by Reference

     Portions of the registrant’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. If for any reason such statement is not filed within 120 days after the close of the fiscal year ended December 31, 2004, this annual report will be appropriately amended.

THREE-FIVE SYSTEMS, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2004

TABLE OF CONTENTS

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Statement Regarding Forward-Looking Statements

The statements contained in this report on Form 10-K that are not purely historical are forward-looking statements within the meaning of applicable securities laws. Forward-looking statements include statements regarding our “expectations,” “anticipation,” “intentions,” “beliefs,” or “strategies” regarding the future. Forward-looking statements also include statements regarding revenue, margins, expenses, and earnings analysis for fiscal 2005 and thereafter; technological innovations; future products or product development; our product development strategies; potential acquisitions or strategic alliances; the success of particular product or marketing programs; the amounts of revenue generated as a result of sales to significant customers; and liquidity and anticipated cash needs and availability. All forward-looking statements included in this report are based on information available to us as of the filing date of this report, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from the forward-looking statements. Among the factors that could cause actual results to differ materially are the factors discussed in Item 1, “Business – Risk Factors.”

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PART I

ITEM 1. BUSINESS

Overview

     We are a global provider of electronics manufacturing services, or EMS. We design and/or manufacture electronic printed circuit board assemblies, radio frequency, or RF, modules, display modules and systems, and complete systems for customers in the computing, consumer, industrial, medical, telecommunications and transportation industries. Our services include advanced engineering support, “designed for” services, automated printed circuit board assembly, in-circuit and functional testing, systems level integration and box build, and turn-key supply chain management services, all of which enable our customers the ability to outsource all stages of product engineering, design, development, materials procurement and management, manufacturing, and testing. Our design and manufacturing services include a distinctive competence in display modules and systems and the integration of display modules and systems into other products. The display modules and systems we design and manufacture primarily utilize liquid crystal displays, or LCDs. Those LCDs include small form factor monochrome and color LCDs, including thin film transistor LCDs, or TFTs, as well as large format flat panel monitors, all of which are TFTs. We refer to the business involving displays as our Display business. All other business, other than the Display business, is referred to herein as the EMS business.

     The products we manufacture for customers are of varying sizes and have varying levels of integration. The typical design program life cycle of a custom-designed product is three to fifteen months and includes technical design, prototyping, pilot manufacturing, and high-volume manufacturing. The cycle is shorter for products in which no display is involved or when the customer has already completed the design.

     Our website is located at www.tfsc.com. Through our website, we make available free of charge our annual report on Form 10-K, our proxy statement, our quarterly reports on Form 10-Q, our current reports on Form 8-K, any amendments to those reports filed or furnished under the Securities Exchange Act, and our earnings press releases. These reports and press releases are available as soon as reasonably practical after we electronically file them with the Securities and Exchange Commission. We also post on our website the charters of our Audit, Compensation, and Nominating/Corporate Governance Committees; our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and Code of Ethics for the CEO and Senior Financial Officers, and any amendments of or waiver thereto; and any other corporate governance materials contemplated by SEC and NYSE regulations. These documents are also available in print to any stockholder requesting a copy from our corporate secretary at our principal executive offices.

Industry Overview

     Historically, original equipment manufacturers, or OEMs, have been fully integrated, performing the engineering and design, new product introduction, assembly and manufacturing, testing, procurement, distribution and logistics, and aftermarket support functions for their products. In recent years, however, OEMs have been under intense pressure to reduce costs, focus on core competencies, and reduce supply chain investment. In response, OEMs have increasingly outsourced these functions to EMS companies. By focusing on these functions, we believe that EMS companies provide OEMs with cost savings, superior technological know-how, and access to more advanced manufacturing processes. These services enable OEMs to concentrate on their core competencies, such as product development, marketing, and sales. As a result of this outsourcing strategy, many OEMs are divesting a significant portion of their manufacturing facilities, and many newer OEMs are choosing to outsource rather than add additional capital equipment and build internal manufacturing infrastructures.

     Today, the EMS industry consists of companies that provide a broad range of services, including engineering and design, new product introduction, printed circuit board assembly, or PCBA, box build, testing, distribution and logistics, and aftermarket support services for OEMs in the electronics industry. The trend toward outsourcing by OEMs has continued in recent years, as OEMs have been under increased pressure to pursue aggressive cost savings. In addition, OEMs have continued to move manufacturing programs to lower cost regions and sought EMS providers with global footprints.

     Although EMS industry revenue declined in recent years as a result of significant cutbacks in customer production requirements, industry revenue has slowly begun to increase again over the last year as inventories have declined and customer production requirements generally have begun to stabilize. We believe further growth opportunities exist for EMS providers to penetrate the worldwide electronics markets. We also believe that an EMS

provider with a global presence will grow faster than the industry average because of the ability to offer multinational OEMs a comprehensive set of outsourced services through a single global manufacturing platform.

     The factors driving OEMs to favor an outsourcing strategy include the following:

	•	Reduce Operating Costs and Capital Investment. In the current economic environment, OEMs are under significant pressure to reduce manufacturing costs and capital expenditures. EMS companies can provide OEMs with flexible, cost-efficient manufacturing services. In addition, as OEM products have become more technologically advanced, the manufacturing and system test processes have become increasingly automated and complex, requiring significant capital investments. EMS companies enable OEMs to access technologically advanced manufacturing and test equipment and facilities without additional capital expenditures.
	•	Access Global Manufacturing Services. OEMs seek to reduce their manufacturing costs by having EMS companies manufacture their products in the lowest cost locations that are appropriate for their products and end customers. OEMs also are increasingly requiring particular products to be manufactured simultaneously in multiple locations, often near end users, to bring products to market more quickly, reduce shipping and logistics costs, and meet local product content requirements. Global EMS companies are able to satisfy these requirements by capitalizing on their geographically dispersed manufacturing facilities, including those in lower cost regions.
	•	Accelerate Time to Market. OEMs face increasingly short product life cycles resulting from increased competition and rapid technological changes. As a result, OEMs must reduce the time required to bring their products to market. OEMs can bring a product to market faster by using EMS companies’ expertise in new product introduction, including manufacturing design, engineering support, and prototype production. OEMs can more quickly achieve volume production of their products by capitalizing on EMS companies’ manufacturing expertise and global presence and infrastructure.
	•	Ability to Focus on Core Competencies. By shifting design, manufacturing, testing, logistics and distribution, and aftermarket support functions to EMS companies, OEMs can focus their resources on their core competencies, including product development, marketing, and sales.
	•	Access to Engineering and Manufacturing Technologies. OEMs continually seek access to engineering expertise and manufacturing technologies necessary to build their increasingly complex products, such as displays, as described below. OEMs are motivated to work with EMS companies to gain access to their expertise in product design, assembly, manufacturing, and testing technologies.
	•	Reduced Supply Chain Investment. Outsourcing to EMS companies allows OEMs to enter into short-term manufacturing contracts and lower their investment in inventory and long-term manufacturing assets, enabling them to increase their return on assets. As a result, OEMs can react more quickly to changing market conditions and allocate capital to other core activities.

     As part of our suite of electronics manufacturing services, our expertise in display systems differentiates us from competitors. Displays are a prevalent feature in many OEM products. OEMs increasingly believe that a display interface is important because it makes products more useful and easier to operate. Custom LCDs, including both monochrome and color displays, address requirements for high performance, increased information content, low power, and low cost.

     Custom-designed display modules provide OEMs a cost-effective means to differentiate their products from the products of their competitors. In designing a product, an OEM must determine whether to use standard “off-the-shelf” display modules or a custom display module. OEMs recognize that standard “off-the-shelf” displays may be more cost-effective, but make it more difficult to differentiate their products from those of their competitors.

     Our EMS services include custom display solutions and standard display products. Our focus is on LCD display technologies. Historically, our emphasis was on small form factor displays, but since 2002 we have also offered our customers monitors with large-format displays for use in industrial and governmental applications.

Products and Services

     We provide integrated design, manufacturing, and supply chain solutions that address all stages of our customers’ product life cycles, including advanced engineering and design, new product introduction and prototyping, global supply chain management, printed circuit board assembly, display module assembly, RF module

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assembly, box build, testing, logistics and distribution, and aftermarket services. We also provide a wide range of aftermarket support, such as repairs, refurbishment, systems upgrades, and spare part manufacturing. By providing these design, engineering, manufacturing, and logistics services, we enable our customers to focus on their core competencies and to enhance their competitiveness by reducing the cost of their products, increasing product performance and functionality, and shortening the time from product conception to product introduction in the marketplace.

     Engineering and Design. We offer engineering, design, and related services for new products and assist our customers in designing products for optimal manufacturing and testing. Our design for manufacturability service seeks to achieve defect-free and cost-effective product designs, reduce product development cycles, create high production yields, and establish superior product quality. Our design for testability service focuses on achieving the highest level of in-circuit and functional test coverage prior to product shipment. Our engineering and development activities also focus on display products intended to meet the requirements of our target markets. We add value for our customers through our ability to integrate the design and production process, which reduces the time between product conception and market introduction. Our emphasis on engineering and manufacturing services has positioned us to develop unique product solutions for our customers as they seek displays with more information content at lower cost.

     New Product Introduction and Prototyping. We offer technical services that shorten the time it takes our customers to introduce their products into the market and that help them to optimize the commercial manufacturing of their products. Our integrated approach draws on our engineering, design, supply chain management, prototyping and production manufacturing, quality, and test engineering experience to enable a fast, cost-effective ramp to volume production. We are able to assist our customers with component selection, materials strategies, supply chain development, manufacturing process development, reliability modeling, quality plan development, and test plan implementation.

     Supply Chain Management. Our global supply chain services include materials, logistics, and storage of materials for the manufacturing of custom products and deliveries of those products to our customers. Our supply chain process starts by selecting suppliers that provide high levels of quality, flexibility, competitive prices, and value added delivery programs, all on a global basis to service those needs. We have established with our suppliers various delivery mechanisms from supplier delivery vehicles to consolidated shipping containers. These methods vary based on cost and proximity. These suppliers must also meet ongoing reviews for total cost reduction, flexibility, and quality. Our global supply chain provides value to our customers by increasing flexibility, reducing risk, improving time-to-market, and lowering cost.

     Assembly and Manufacturing. We provide turnkey and consigned manufacturing and assembly services. These services include printed circuit board and subsystems assembly, display modules and systems, RF modules, box build, system and subsystem integration, downloading software, and building and configuring the final product.

     Display Products. Our services include display products incorporating both monochrome and color LCDs. We utilize inquiries from customers for display products to offer a manufacturing solution for the customer’s entire product. We typically deal with customers seeking custom designed displays that provide unique functionality and differentiation. Our large-format monitor products offer customized solutions for the industrial, human-machine interface, and kiosk markets and integrate various levels of system solutions, including innovative features like wireless interfaces.

     Platform Display Business. In the custom display business in 2004, we also began to devote significant effort to TFT color displays. TFT is the acronym for “thin-film transistor” and is the type of color LCD display typically used in a laptop computer or monitor. Those displays are now becoming prevalent in mobile phone handsets, which is our principal market focus. We refer to the TFT business as “Platform” business because it is not cost effective to create a custom LCD for every product. Instead, we create a platform of semi-custom LCDs and then further customize a module to fit a customer’s unique handset design.

     Product Testing. We offer in-circuit testing of printed circuit boards and functional testing of subsystems and systems, which contributes significantly to our ability to deliver high-quality products on a consistent basis. We work with our customers to develop product-specific test strategies. Our test capabilities include design for test and manufacturing defect analysis, in-circuit development and implementation, and functional tests. We either custom design test equipment and software ourselves or use test equipment and software provided by our customers. In addition, we provide environmental stress tests to assure reliability.

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     Logistics and Distribution. We offer flexible services related to the configuration and shipment of our customers’ products. We perform final product packaging, out-of-box audit, and distribution services for completed products as well as direct order fulfillment. We can deliver final products directly into our customers’ distribution channels and to our customers’ end-users. We believe that these services compliment our comprehensive manufacturing solutions, enabling our customers to be more responsive to changing market demands and to get their products to market more quickly at a lower total cost.

     Aftermarket Service. We provide a wide range of aftermarket services, including repair, refurbishment, remanufacturing, system upgrades, and spare part manufacturing. These services are supported by specific information systems and testing technologies and can be tailored to meet specific customer requirements.

Other Business Factors

Sales and Marketing

     We achieve worldwide sales coverage through a direct sales force and direct sale representatives that focus on generating new accounts. Program managers are responsible for managing relationships with existing customers and making follow-on sales. Application engineers work with their counterparts at customers to ensure all technical details are addressed. In addition to our sales force, program managers, and application engineers, our executive staff plays an integral role in our sales efforts.

     Our sales to customers in North America represented approximately 54.0% of net sales in 2003 and 62.2% of net sales in 2004. Our sales to customers in Asia represented approximately 20.5% of net sales in 2003 and 18.4% of net sales in 2004. Our sales to customers in Europe represented approximately 25.5% of net sales in 2003 and 19.4% of net sales in 2004.

     Our sales to customers in our EMS business represented approximately 50.6% of net sales in 2003 and 66.6% of net sales in 2004. Our sales to customers in our Display business represented approximately 49.4% of net sales in 2003 and 33.4% of net sales in 2004.

Customers

     Our customers include large multinational and smaller OEMs that have chosen outsourcing as a core manufacturing strategy. We service a diverse range of industries, including medical, industrial, telecommunications, transportation, consumer, and computing. We believe we are able to offer customers an outsourcing solution that involves lower costs than typically would be provided by their internal operations. We seek to differentiate ourselves from our competitors by providing advanced methodologies and capabilities and exceptional customer focus by integrating our services into our customers’ operations. Additionally, we also offer unique expertise in designing and manufacturing display systems and RF modules. We believe that providing display modules as part of our EMS offering provides us with a unique value proposition in our target markets. The printed circuit board assembly and the display represent a large portion of an OEM’s bill of materials, thus allowing us to offer “one-stop shopping.”

     In fiscal 2004, our ten largest customers accounted for approximately 71% of our net sales. Our largest customer during fiscal 2004 was Avocent, accounting for approximately 38% of net sales. No other customer accounted for more than 10% of net sales in fiscal 2004.

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     The following table lists in alphabetical order a representative sample of our largest customers in fiscal 2004 and the products of those customers for which we provide manufacturing services:

Backlog

     As of December 31, 2004, we had a backlog of orders of approximately $47.0 million. The backlog of orders as of December 31, 2003 was approximately $46.7 million. Our backlog consists of product orders for which confirmed purchase orders or fixed forecasts have been received and which are scheduled for shipment within 12 months. Orders are typically given with only a six to eight week lead time. Some of our largest customers provide purchase orders of only one week and fixed forecasts beyond the one week. Most orders are subject to rescheduling or cancellation by the customer with limited penalties. Because of the possibility of customer changes in delivery schedules or cancellations and potential delays in product shipments, our backlog as of a particular date may not be indicative of net sales for any succeeding period.

Components and Raw Materials

     We purchase raw materials and electronic components from manufacturers and distribution companies. The key electronic components we purchase include printed circuit boards, specialized components, such as application-specific integrated circuits, LCD glass, semiconductors, interconnect products, electronic subassemblies (including memory modules, power supply modules, and cable and wire harnesses), inductors, resistors, and capacitors. Along with these electronic components, we also purchase components for use in higher-level assembly and manufacturing. These components include injection-molded plastics, pressure-formed plastics, vacuum-formed plastics, sheet metal fabrications, aluminum extrusions, die castings, and various other hardware and fastener components. These components range from standard to highly customized, and they vary widely in terms of market volatility and price.

     From time to time, allocation of components by suppliers becomes an integral part of the electronics industry, and component shortages can occur with respect to particular components. In response, we actively manage our business in a way to minimize our exposure to materials and component shortages. We create strong supplier alliances to ensure, to the extent possible, a steady flow of components at competitive prices. We have also established and continue to expand our strategic relationships with international purchasing offices, and we attempt to leverage our design position with suppliers.

     Our procurement strategy is to secure alternative supply sources for the majority of these materials. Many of these materials, however, must be obtained from foreign suppliers, which subjects us to the risks inherent in obtaining materials from foreign sources, including supply interruptions and currency fluctuations. Our suppliers generally are meeting our requirements, and we believe our strategic supplier alliances have further strengthened our relations with offshore suppliers. We have experienced material shortages in the past. Those shortages prevented us from meeting customer demand for certain services. Similar shortages in the future could have a material adverse effect on our business.

     We attempt to procure components and other raw materials only when a purchase order or forecast is received from a customer. We experience component shortages and longer lead times for various components and raw materials from time to time. We generally have been able to reduce the impact of shortages by working with customers to reschedule deliveries and by working with suppliers to provide the needed components using just-in-time vendor managed or consigned inventory programs.

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Intellectual Property

     We own various service marks, including “Three-Five Systems,” the stylized “TFS”, and our logo. Although we own certain patents, they are not currently material to our business. We do not have any material copyrights.

Information Technology

     We are implementing a multi-year phased roll-out of a new enterprise resource planning, or ERP, platform for certain of our locations. This ERP platform is intended to augment our management information systems and includes software from SAP and several other vendors. The ERP platform is intended to enhance and standardize our ability to translate information globally from production facilities into operational and financial information and to create a consistent set of core business applications at our worldwide facilities, although we will not necessarily convert all of our facilities to the same system. We believe that the related licenses are of a general commercial character on terms customary for these types of agreements. We have invested approximately $2.1 million as of December 31, 2004 for the new ERP platform. In February, this implementation project was put on hold as we evaluate our situation regarding the possible sale of our Manila facility and the move of our corporate headquarters. Our current plan is to restart the implementation in the second half of 2005.

Employees

     We currently employ approximately 1,800 full-time employees. Given the quick response time required by our customers, we seek to maintain flexibility to scale our operations as necessary to maximize efficiency. To do so, we use skilled temporary labor in addition to our full-time employees. None of our employees are covered by union agreements. We have no history of labor disputes at any of our facilities. We believe that our employee relationships are good.

Competition

     We believe Benchmark Electronics, Plexus, Pemstar, Suntron, and other smaller, proximity-based domestic EMS providers constitute our principal competitors. In addition, we believe that AU Optronics Corp., Philips, Samsung, Seiko-Epson, Hosiden, Optrex, Seiko Instruments, International Displayworks, Wintek, and Sharp constitute the principal competitors for our EMS services involving display solutions. We compete primarily on the basis of engineering, design, testing, and production capabilities; our technological know-how; the responsiveness, quality, flexibility, and price of our services; and geographic locations. Many of our competitors have substantially greater manufacturing, financial, and research and development resources than we possess and offer broader geographic operations and a greater range of services than we do. We also face competition from the manufacturing operations of current and potential customers, which continually evaluate the benefits of internal manufacturing versus outsourcing.

Acquisitions and Strategic Ventures

     In September 2002, we purchased the assets and ongoing business of Advanced Video Technologies, a privately held company, located in Marlborough, Massachusetts that specialized in the design and integration of complex, high-resolution display systems. As a result, we now design and provide customized and ruggedized flat panel, touchscreen, and rackmount systems for OEMs in the industrial and medical markets. We outsource display components from a variety of companies, including Sony, Sharp, NEC, LG, and Samsung. The purchase price of the acquisition was $12.0 million, which we paid entirely in cash.

     In December 2002, we purchased the stock of ETMA Corporation, located in Redmond, Washington, a privately held electronics manufacturer for OEM customers in the computer peripheral, medical monitoring, and Internet security industries. As a result, we now offer the manufacturing capabilities of five surface mount manufacturing lines, including one dedicated to new product introduction and prototyping activity. We also provide engineering support, automated printed circuit board assembly, in-circuit and functional testing, systems integration and box build, complete supply chain management, and turnkey packaging and fulfillment services. The purchase price of the ETMA acquisition was $38.1 million, which we paid entirely in cash.

     In January 2003, we signed licensing and manufacturing agreements with Data International Co., Ltd. of Taiwan. Under those agreements, we became the exclusive channel in the Americas for LCD products

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manufactured by Data International. We also obtained the right to sell those products through our worldwide channels. In conjunction with the agreement, we established a sales office in Orlando, Florida, and hired sales and applications engineering personnel from a distributor that had previously supported Data International’s products. The cost of the license was $3.9 million, of which $1.0 million was paid upon signing and $2.9 million was a term loan. In the first quarter of 2004, we paid $1.4 million against the term loan. The remaining $1.5 million was due in January 2005, although it was subject to a reduction if certain margin targets were not met. As a result of a dispute with Data International, however, that note has not yet been paid. We recently determined that certain of the specified Data International display products have been simultaneously available in the United States through a third party and that we had not been provided exclusive distribution rights to the United States market as required by the license. Based on that determination, we believe that the license was breached, and we are exercising our rights of rescission. We notified Data International in February 2005 that we will not make the final $1.5 million payment to Data International that was due in January 2005. We also asserted damages of at least $2.5 million, plus interest and other expenses, against Data International. We also notified Data International that we will off-set our claimed damages against money owed by us to Data International for product purchases. We recently filed a complaint against Data International in Arizona requesting a declaratory judgment for breach of contract.

     In March 2003, we signed an agreement with Microtune, Inc. under which we agreed to manufacture, assemble, and test Microtune’s radio frequency, or RF, tuner modules and wireless module products in our manufacturing facility in Manila, the Philippines. As part of the agreement, Microtune sold to us certain of its own equipment and inventory for $8.2 million, of which we paid $2.7 million with a note payable due in September 2003, and contracted with us to provide 100% of Microtune’s current demand for fully assembled RF subsystems. We also hired approximately 500 Microtune employees in Manila. In October 2003, we paid off approximately $300,000 of the $2.7 million note payable to Microtune and entered into an agreement to cancel the remaining $2.4 million balance on that note in exchange for the return of certain excess inventory to Microtune. As a result of this transaction, we now provide 100% of the manufacturing outsourcing for Microtune’s RF module products. We recently announced that we are exploring the possible sale of our Manila facility. If that occurs, it is likely that the Microtune business would be sold along with the facility.

     In April 2003, we acquired the business and certain assets of Unico Technology Bhd., a privately held Malaysian company located in Penang. Unico was an electronics manufacturer for OEM customers in the computer, computer peripheral, and communications industries. The Unico business was acquired by TFS Electronics Manufacturing Services Sdn. Bhd., or TFS-Malaysia, a former joint venture owned 60% by an overseas TFS subsidiary and 40% by Unico Holdings Bhd., the former parent of Unico. Unico Holdings is the investment arm of the Chinese Chamber of Commerce of Malaysia. Our share of the initial cost of capitalizing TFS-Malaysia was $3.8 million and Unico Holdings’ share was $2.5 million, most of which was used for working capital. TFS-Malaysia purchased $4.1 million in inventory from Unico, of which $2.7 million was paid at the time of the purchase and $1.4 million was subsequently paid. No advance payment was required for the acquisition of the property, plant, and equipment of Unico, all of which is leased from the seller. The equipment lease is accounted for as a capital lease payable by TFS-Malaysia. The principal balance on that lease was $6.1 million as of December 31, 2004. In the second quarter of 2004, Unico Holdings exchanged its ownership interest in TFS-Malaysia for approximately 423,000 shares of our common stock held in treasury in a transaction valued at $2.8 million, compared with Unico Holdings’ interest of $2.6 million. As a result of that transaction, we now own 100% of TFS-Malaysia.

     In February 2004, we entered into a transaction with Integrex, a Seattle-based electronics manufacturing services company that was liquidating its business. Under that transaction, we bought the raw materials inventory of Integrex for $1.4 million and hired certain of its employees. We also obtained the rights to most of its customers and agreed with those customers that we would manufacture those customers’ products in our Redmond manufacturing facility. In exchange for those customer rights, we agreed to pay a license fee for between 15 and 24 months based on revenue receipts from former Integrex customers. In February 2004 and at a second closing in April 2004, we paid $1.3 million in non-refundable license fees to Integrex. At the second closing in April, we also acquired $300,000 of capital equipment. We have since renegotiated the license fees, reducing the percentage fee on specific customers and, in one instance, extending by three months the time during which the reduced fee is paid.

Government Regulation

     Our operations are subject to certain federal, state, and local regulatory requirements relating to environmental, waste management, health, and safety matters. We believe we operate in substantial compliance

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with all applicable requirements. There can be no assurance, however, that material costs and liabilities will not arise from complying with these requirements or from complying with new, modified, or more stringent requirements. In addition, our past, current, or future operations may give rise to claims of exposure by employees or the public or to other claims or liabilities relating to environmental, waste management, or health and safety concerns.

     Our operations create a small amount of hazardous waste, including various epoxies, gases, inks, solvents, and other wastes. The amount of hazardous waste we produce may increase in the future depending on changes in our operations. The general issue of the disposal of hazardous waste has received increasing focus from federal, state, local, and international governments and agencies and has been subject to increasing regulation.

Executive Officers

     The following table sets forth certain information regarding our executive officers:

     Jack L. Saltich has served as a director and the President and Chief Executive Officer of our company since July 1999. Mr. Saltich served as Vice President of Advanced Micro Devices from May 1993 until July 1999; as Executive Vice President of Applied Micro Circuits Corp. from January 1991 until March 1993; and as Vice President of VLSI from July 1988 until January 1991. Mr. Saltich held a variety of executive positions for Motorola from July 1971 until June 1988. These positions included serving as an Engineering Manager from May 1974 until January 1980, an Operation Manager from January 1980 until May 1982, a Vice President and Director of the Bipolar Technology Center from May 1982 until June 1986, and a Vice President and Director of the Advanced Product Research and Development Laboratory from June 1986 until June 1988. Mr. Saltich serves as the Chairman of the Board of Brillian Corporation, a public company that designs and sells microdisplay products; as a member of the board of directors of Immersion Corporation, a public company that develops, licenses, and markets haptic technology and products; and as a member of the board of directors of Vitex Systems, Inc., a private company that commercializes transparent ultra-barrier films for use in flat panel displays.

     James E. Jurgens has served as Interim Chief Financial Officer of our company since February, 2005. Mr. Jurgens has been working with our company as a consultant since August 2004. From 2001 to 2003, Mr. Jurgens was an Operations Director for Intel Corporation. From 1999 to 2001, Mr. Jurgens was Chief Financial Officer and Operations Director of Ziatech Corporation, a privately held developer of embedded computers for telecom applications. From 1994 to 1999, Mr. Jurgens was Chief Financial Officer/Prokurist and European Finance Director for Advanced Micro Devices GmbH.

     David K. McQuiggan has served as Senior Vice President of Platform Display Products of our company since October 2004. Mr. McQuiggan served as Chief Executive Officer of Densitron Technologies, PLC from 2002 to 2004; General Management of North American Operations from 2000 to 2002; Vice President of Marketing and Business Development from 1998 to 2000; Regional Sales Manager from 1991 to 1996; and a Development Engineer from 1989 to 1991. Prior to joining Densitron Technologies, PLC, Mr. McQuiggan began his career in 1986 with Marconi Avionics.

     Van H. Potter has served as Senior Vice President — Electronic Manufacturing Services since October of 2004. From April through October of 2004, Mr. Potter served as Senior Vice President, Business Groups. Mr. Potter joined TFS as Vice President, Display Products in February 2003. Mr. Potter was Market Development Manager and Project Manager for Rogers Corporation, a manufacturer of specialty polymer composite materials,

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from February 2002 until February 2003. From April 1994 until February 2002, Mr. Potter held a variety of management, marketing, and new business development positions with Durel Corp., a joint venture between Rogers Corporation and 3M Corporation.

     Eric W. Haeussler has been Principal Accounting Officer of our company since May 2004 and Corporate Controller of our company since August 2002. Mr. Haeussler joined our company in October 1990 and served as Cost Accounting Supervisor until September 1996, Cost Accounting Manager from October 1996 until August 2000, and Director of Finance and Assistant Controller from September 2000 until August 2002.

DISCONTINUED OPERATIONS

     On September 1, 2003, we transferred all of the net assets of our microdisplay division, plus approximately $20.9 million in cash, to a newly created Delaware corporation called Brillian Corporation. On September 15, 2003, we spun off Brillian by distributing all of the outstanding common stock of Brillian to our stockholders on a pro rata basis, with each stockholder receiving one share of Brillian common stock for every four shares of our common stock. Brillian is now traded on the Nasdaq National Market under the symbol “BRLC.” Brillian had $44.1 million of net assets on the spin-off date. The microdisplay business that we transferred to Brillian is now reported in our consolidated financial statements as Discontinued Operations.

RISK FACTORS

     You should carefully consider the following factors, in addition to those discussed elsewhere in this report, in evaluating our company and our business.

We may be delisted from the New York Stock Exchange.

     Our common stock is listed on the New York Stock Exchange. To continue trading on the NYSE, we must meet the NYSE listing maintenance standards. If we are unable to continue to meet the NYSE’s listing maintenance standards, our common stock could be delisted from the NYSE. If our common stock were delisted, we likely would seek to list the common stock on the Nasdaq SmallCap Market, the American Stock Exchange, or on a regional stock exchange. Listing on such other market or exchange could reduce the liquidity for our common stock. If our common stock were not listed on the Nasdaq SmallCap Market or an exchange, trading of our common stock would be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities or directly through market makers in our common stock. If our common stock were to trade in the over-the-counter market, an investor would find it more difficult to dispose of, or to obtain accurate quotations for the price of, the common stock.

We have received an unqualified report on our consolidated financial statements with an explanation paragraph from our independent registered public accounting firm.

     The report by the independent registered public accounting firm of our company on our consolidated financial statements states that the consolidated financial statements have been prepared assuming that we will continue as a going concern. The report indicates that our recurring losses from operations and difficulties financing future working capital needs raise substantial doubt about our ability to continue as a going concern.

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

     Sales to our ten largest customers have represented a significant percentage of our net sales in recent periods. Our ten largest customers accounted for approximately 71% and 79% of net sales in fiscal 2004 and fiscal 2003, respectively. Our largest customer during fiscal 2004 was Avocent, accounting for approximately 38% of net sales. Our largest customers during fiscal 2003 were Avocent and Vitelcom, accounting for approximately 23% and 13% of net sales, respectively. No other customer accounted for more than 10% of net sales in fiscal 2004 or fiscal 2003.

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

Our recent history of losses makes financing our working capital and ongoing business needs difficult.

     We have had several years of operating losses and reduced working capital resources. As a result, to fund our operations, we will be required to reduce our expenses significantly or raise additional funds through an offering of debt or equity securities, borrowings from financial institutions, or the sale of assets. We can provide no assurance that these efforts will be successful.

We have key suppliers that could limit our credit.

     Our recent history of losses and liquidity position could result in a lowering or elimination of our credit with key suppliers. In such instance, this could result in a material adverse effect to us including an accelerated depletion of our cash and an inability to timely deliver products to our customers because of our inability to procure raw materials.

Our operating results may be adversely affected by excess inventory.

     We typically purchase components and other materials in anticipation of customer orders based on customer purchase orders or forecasts. For a variety of reasons, such as decreased OEM customer or end-user demand, we may not be able to utilize various components or other supplies that we have purchased in anticipation of customer demand. In such event, we generally attempt to recoup our materials and manufacturing costs by various means, including returning components to our suppliers, disposing of excess inventory through other channels, or attempting to require our OEM customers to purchase or otherwise compensate us for such excess inventory. These efforts, however, may not be successful. To the extent we are unsuccessful in recouping our materials and manufacturing costs, our operating results would be adversely affected and excess inventory would utilize our working capital. Our operating results have been materially and adversely affected in the past as a result of the write-off of excess or obsolete inventory. In 2004, for example, we had expenses of $5.2 million relating to scrap, excess or obsolete inventory.

We must integrate our acquired businesses.

     We recently acquired ETMA Corporation, Unico, and Integrex. Among other things, we have been working through the integration of those businesses. Integration has proved difficult with respect to ETMA and Integrex. We have experienced losses and unexpected charges as a result of the difficulties with those integration efforts. We may not yet have remedied all integration issues, which could result in additional unexpected expenses and charges.

     In addition to business integration risks, substantially expanding our electronics manufacturing services has resulted in various other risks, including the following:

	•	the information technology challenges relating to the integration of disparate worldwide systems;
	•	the ability to procure and install necessary additional equipment;
	•	the ability to hire, train, and manage additional manufacturing personnel;

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	•	production delays, unfavorable manufacturing yields, and lengthening delivery schedules;
	•	the ability to service widespread customers in varied industries;
	•	the need to satisfy increasingly rapid product turnaround time and rapid increases in production levels;
	•	the volume of customer orders relative to our capacity;
	•	the typically short life cycle of our customers’ products;
	•	changes in our sales mix to our customers;
	•	the timing of our expenditures in anticipation of future orders;
	•	our effectiveness in managing manufacturing processes;
	•	changes in cost and availability of labor and components;
	•	changes in economic conditions; and
	•	local events that affect our production volume.

We face intense competition.

     We serve intensely competitive industries that are characterized by price erosion, rapid technological change, and competition from major domestic and international companies. We compete against large EMS companies, which have greater market recognition, larger customer bases, and substantially greater financial, technical, marketing, distribution, and other resources than we possess. We compete primarily on the basis of our engineering, design, testing, and production capabilities; our technological know-how; the responsiveness, quality, flexibility, and price of our services; and our geographic locations. Certain sectors of the EMS industry are currently experiencing increased price competition, and a continuation of this increased level of competition would adversely affect our revenue and gross margin. In some cases, our smaller size may mean that we are required to accept less than favorable contractual obligations with larger vendors and customers. We also face competition from the manufacturing operations of current and potential customers, which continually evaluate the benefits of internal manufacturing versus outsourcing.

     Prior to the recent current economic downturn, many participants in the EMS industry, including us, substantially expanded their manufacturing capacity. In the last few years, however, the overall demand for electronics manufacturing services has decreased, resulting in increased capacity and substantial pricing pressures, which have harmed our operating results.

     Our ability to compete successfully depends on a number of factors, both within and outside our control. These factors include the following:

	•	our success in providing design and manufacturing services, and in incorporating new technologies, processes, and product solutions;
	•	our ability to address the needs of our customers;
	•	the quality of our customer services;
	•	our efficiency of production;
	•	product or technology introductions by our competitors;
	•	the pricing, quality, performance, reliability, timeliness, technological sophistication, geographic location, and efficiency of our design and manufacturing services; and
	•	foreign currency devaluations, especially in Asian currencies, such as the Japanese Yen, the Korean Won, and the Taiwanese Dollar, which may cause foreign competitors’ products to be priced significantly lower than our product solutions.

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We are subject to lengthy development periods and product acceptance cycles.

     OEMs make the determination during their product development programs whether to utilize our services or pursue other alternatives. This requires us to make significant investments of time and capital well before our customers introduce their products utilizing our services and before we can be sure that we will generate any significant revenue from our customers or even recover our investment.

     During a customer’s entire product development process, we face the risk that our services will fail to meet our customer’s technical, performance, or cost requirements or will be replaced by an alternative solution. Even if we provide our services in a manner satisfactory to our customer, the customer may delay or terminate its product development efforts. The occurrence of any of these events would adversely affect our operating results. The lengthy development period also means that it is difficult to immediately replace an unexpected loss of existing business.

We do not have long-term commitments from our customers.

     Our customers generally do not provide us with firm, long-term volume commitments. In addition, worldwide economic conditions have led to substantially shortened lead times on purchase orders. Although we sometimes enter into manufacturing contracts with our customers, these contracts clarify order lead times, inventory risk allocation, and similar matters rather than provide firm, long-term volume commitments. As a result, customers can generally cancel commitments or reduce or delay orders at any time. The cancellation, delay, or reduction of customer commitments could result in reduced revenue and in our holding excess and obsolete inventory or having unabsorbed manufacturing capacity. The large percentage of our revenue from customers in the electronics industry, which is subject to severe competitive pressures, rapid technological change, and product obsolescence, increases our inventory and overhead risks.

     In addition, we make significant decisions, including determining the levels of business that we will seek or accept, production schedules, component procurement commitments, facility requirements, personnel needs, and other resource requirements, based on our estimates of customer requirements. The short-term nature of our customers’ commitments and the possibility of rapid changes in demand for their products reduce our ability to estimate accurately the future requirements of those customers. Because many of our costs and operating expenses are relatively fixed, a reduction in customer demand can harm our gross margins and operating results.

     On occasion, customers may require rapid increases in production, which can stress our resources and reduce operating margins. We may not have sufficient capacity at any given time to meet all of our customers’ demands or to meet the requirements of a specific project.

     Our operating results have been materially and adversely affected in the past as a result of the failure to obtain anticipated orders and deferrals or cancellations of purchase commitments because of changes in customer requirements. For example, we have made announcements in the past that sales would not meet our expectations because of delays in customer programs.

We depend on the market acceptance of the products of our customers.

     In most instances, we do not provide services to end users. As a result, our success depends almost entirely upon the widespread market acceptance of our customers’ products. Any significant slowdown in the demand for our customers’ products would adversely affect our business.

     Because our success depends on the widespread market acceptance of our customers’ products, we must identify industries that have significant growth potential and establish relationships with OEMs in those industries. Our failure to identify potential growth opportunities or establish relationships with OEMs in those industries would adversely affect our business.

     Our dependence on the success of the products of our customers exposes us to a variety of risks, including the following:

	•	our ability to provide significant design and manufacturing services for customers on a timely and cost-effective basis;
	•	our success in maintaining customer satisfaction with our design and manufacturing services;

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	•	our ability to match our design and manufacturing capacity with customer demand and to maintain satisfactory delivery schedules;
	•	customer order patterns, changes in order mix, and the level and timing of orders placed by customers that we can complete in a quarter; and
	•	the cyclical nature of the industries and markets we serve.

Our failure to address these risks may cause our sales to decline.

Shortages of components and materials may delay or reduce our sales and increase our costs.

     We rely on a limited number of suppliers for many components used in our manufacturing and assembly processes. We especially depend on a small number of strategic suppliers for key components such as LCD glass and drivers. We do not have any long-term supply agreements. At various times, there have been shortages of some of the key electronic components. Our inability to obtain sufficient quantities of components and other materials to support our electronics manufacturing services could result in reduced, delayed, or lost orders, increased inventory, and underutilized manufacturing capacity. Any reduction, delay, or loss of customer orders could adversely impact our operating results. In addition, we may not be able to pass on component and materials price increases to our customers, particularly in the case of turnkey manufacturing agreements. We obtain many of the materials we use from a limited number of foreign suppliers, particularly suppliers located in Asia. As a result, we are subject to increased costs, supply interruptions, and difficulties in obtaining materials. Our customers also may encounter difficulties or increased costs in obtaining from others the materials necessary to produce their products into which our product solutions are incorporated.

Our revenue and gross margins depend upon our ability to utilize our manufacturing capacity.

     Our revenue and gross margins depend to a great extent upon our ability to utilize our manufacturing capacity. We must balance the need to maintain manufacturing capacity to fulfill new customers’ orders while maintaining sufficient utilization of our manufacturing capacity to cover our fixed overhead expenses. Like most EMS companies under current market conditions, we have underutilized manufacturing capacity. As a result, we are considering the sale of our operations in Manila. There is no assurance that this sale will resolve our overcapacity issues or that we will not experience difficulties in satisfying any significant additional customer demand for our manufacturing services.

We must maintain satisfactory manufacturing yields and capacity.

     Our inability to maintain high levels of productivity or satisfactory delivery schedules at our manufacturing facilities would adversely affect our operating results. The design and manufacture of electronic devices are highly complex processes that are sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in the materials used, and the performance of personnel and equipment. These problems could be heightened by moving the manufacturing of products to different facilities. As is typical in the EMS industry, at times we have experienced lower than anticipated manufacturing yields and lengthening of delivery schedules.

     Any problems with our manufacturing operations could result in the lengthening of our delivery schedules, reductions in the quality or performance of our design and manufacturing services, and reduced customer satisfaction.

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Products we manufacture may contain design or manufacturing defects, which could result in reduced demand for our services and liability claims against us.

     We manufacture products to our customers’ specifications, which are highly complex and may at times contain design or manufacturing errors or failures. Any defects in the products we manufacture, or in the products we purchase, whether caused by a design, manufacturing, or component failure or error, may result in delayed services to customers or reduced or cancelled customer orders. If these defects occur in large quantities or too frequently, our business reputation also may be impaired. In addition, these defects may result in liability claims against us.

Our inability to maintain our technological expertise in design and manufacturing processes would adversely affect our competitive condition.

     Our success depends on our ability to develop and provide design and manufacturing services that meet the changing needs of our customers. This requires us to anticipate and respond to technological changes in design and manufacturing processes in a cost-effective and timely manner. To achieve this goal, we continually evaluate the advantages and feasibility of new product design and manufacturing processes. We cannot assure that we will be successful.

We are exposed to intangible asset impairment.

     In 2004, we recorded charges of $23.1 million for impairment of goodwill and customer lists, leaving $13.4 million of goodwill and $0.6 million of customer lists assets on our balance sheet at the end of 2004. These intangible assets are attributable to acquisitions and represent the difference between the purchase price paid for the acquired businesses and the fair value of net tangible assets of the acquired businesses. We are required to evaluate goodwill for impairment on at least an annual basis, and other intangibles whenever changes in circumstances indicate that the carrying amount may not be recoverable from estimated future cash flows. As a result of our annual and other periodic evaluations, we may determine that these remaining intangible asset values should be written down to their fair values, which could result in material charges that could be adverse to our operating results and financial position.

We sublease some facilities and are subject to the credit risk of the subleases.

     We sold our 97,000 square foot Tempe facility in December 2004 and leased back the entire facility under a five-year lease. We subleased approximately 56,000 square feet of that Tempe facility to Brillian Corporation for the same five-year period. Brillian pays to us the same lease rate that we pay the lessor on the master lease. If Brillian were to default on its obligation to us, we would still be obligated on the master lease to continue to make payments on the Brillian space. In December 2004, we moved out of a building in Redmond, Washington, which we refer to as Building 1, into a new facility, which we refer to as Building 4. The lease on Building 1 expires in December 2007 and we have subleased that building to Pogo Linux for an amount that is approximately 70% of the original lease rate. Thus, we will continue to pay the 30% differential to the building owner. In addition, if Pogo Linux were to default on its lease obligations, we would still be obligated on the original lease to continue to make payments to the building owner. In January 2005, we moved out of another building in Redmond, which we refer to as Building 2. We are looking for a sublessor of that building, which has a lease that expires January 2006. We will continue to be obligated on that lease through its remaining term.

We have risks associated with our real property in China.

     We own our manufacturing facility in China. That facility is situated on land of which we are the sole and exclusive holder of the land use rights certificate approved and issued by the Natural Resources Administration Bureau of the local jurisdiction in which the property is located. The certificate provides for a land use rights term of 50 years until approximately 2048. After issuance of that certificate, we subsequently learned that the approval may have not been consistent with relevant law in China because a higher level land bureau had not approved the grant. Although the relevant authorities have indicated a likely favorable resolution with regard to this issue, a risk exists as to the ownership of the land and whether any penalties may be owed as a result of this issue.

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We face risks associated with international operations.

     Our Asia-based manufacturing operations, and our sales and distribution operations in Europe and Asia, create a number of logistical and communications challenges. Our international operations also expose us to various economic, political, and other risks, including the following:

	•	management of a multi-national organization;
	•	compliance with local laws and regulatory requirements as well as changes in those laws and requirements;
	•	imposition of restrictions on currency conversion or the transfer of funds;
	•	the possibility of appropriation of our assets without just compensation;
	•	transportation delays or interruptions and other effects of less developed infrastructures;
	•	foreign exchange rate fluctuations;
	•	limitations on imports and exports;
	•	difficulties in staffing and managing foreign personnel and diverse cultures;
	•	employment and severance issues;
	•	overlap of tax issues;
	•	tariffs and duties;
	•	possible employee turnover or labor unrest;
	•	the burdens and costs of compliance with a variety of foreign laws; and
	•	political or economic instability in countries in which we conduct business, including possible terrorist acts.

     Changes in policies by the United States or foreign governments resulting in, among other things, increased duties, higher taxation, currency conversion limitations, restrictions on the transfer or repatriation of funds, limitations on imports or exports, or the expropriation of private enterprises also could have a material adverse effect on us. Any actions by our host countries to reverse policies that encourage foreign investment or foreign trade also could adversely affect our operating results. In addition, U.S. trade policies, such as “most favored nation” status and trade preferences for certain Asian nations, could affect the attractiveness of our services to our U.S. customers.

We face risks associated with international trade and currency exchange.

     Political and economic conditions abroad may adversely affect our foreign manufacturing and sales operations. Protectionist trade legislation in either the United States or foreign countries, such as a change in the current tariff structures, export or import compliance laws, or other trade policies, could adversely affect our ability to provide design and manufacturing services in foreign markets or for foreign customers and to purchase materials or equipment from foreign suppliers.

     While we transact business predominantly in U.S. Dollars and bill and collect most of our sales in U.S. Dollars, we collect a portion of our revenue in non-U.S. currencies, such as the Chinese Renminbi. In the future, customers increasingly may make payments in non-U.S. currencies, such as the Euro. In addition, we account for a portion of our costs, such as payroll, rent, and indirect operating costs, in non-U.S. currencies, including Philippine Pesos, British Pounds Sterling, Malaysian Ringgit, and Chinese Renminbi.

     Fluctuations in foreign currency exchange rates could affect our cost of goods and operating margins and could result in exchange losses. In addition, currency devaluation can result in a loss to us if we hold deposits of that currency. Hedging foreign currencies can be difficult, especially if the currency is not freely traded. We cannot predict the impact of future exchange rate fluctuations on our operating results.

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     The risks described above are particularly important since sales outside North America represented 37.8% of our net sales in 2004 and 46.0% of our net sales in 2003. Sales in foreign markets, primarily Europe and Asia, to OEMs based in the United States accounted for almost all of our international sales in both of these periods.

Our operating results have significant fluctuations.

     In addition to the variability resulting from the short-term nature of our customers’ commitments, other factors contribute to significant periodic and seasonal quarterly fluctuations in our results of operations. These factors include the following:

	•	the timing of customer orders;
	•	the volume of customer orders relative to our capacity;
	•	changes in economic conditions generally or in our customers’ markets;
	•	product introductions and market acceptance of new products or new generations of products by customers and their competitors;
	•	evolution in the life cycles of customers’ products;
	•	timing of expenditures in anticipation of future customer orders;
	•	ability to manage inventory and inventory obsolescence;
	•	effectiveness in managing manufacturing processes and costs;
	•	changes in cost and availability of labor and components;
	•	product mix or our customers’ orders;
	•	pricing and other competitive pressures; and
	•	changes or anticipated changes in economic conditions.

     Accordingly, you should not rely on the results of any past periods as an indication of our future performance. It is likely that in some future period, our operating results may be below expectations of public market analysts or investors. If this occurs, our stock price may decline.

We depend on key personnel.

     We depend on the efforts and abilities of our senior management and technical personnel. The competition for qualified management and technical personnel is intense. The loss of services of one or more of our key employees or the inability to add key personnel could have a material adverse effect on us. Although we maintain non-competition and nondisclosure covenants with certain key personnel, we do not have any fixed-term agreements with, or key person life insurance covering, any officer or employee. We have announced that we are moving our corporate headquarters in 2005 from Tempe, Arizona to Redmond, Washington. Most of our finance staff will be replaced in the move. This change in staff may result in delayed financial reporting and other related issues during the course of the move. The move may also adversely affect our internal control over financial reporting.

Potential strategic alliances may not achieve their objectives.

     We have entered into various strategic alliances, and we plan on entering into other similar types of alliances in the future. Among other matters, we will explore strategic alliances designed to enhance or complement our technology or to work in conjunction with our technology; to increase our manufacturing capacity; to provide necessary know-how, components, or supplies; and to develop, introduce, and distribute products and services utilizing our technology and know-how. Any strategic alliances may not achieve their strategic objectives, and parties to our strategic alliances may not perform as contemplated.

The market price of our common stock may be volatile.

     The market price of our common stock has been extremely volatile. Our stock price increased dramatically during the three-year period ended December 31, 1994, but declined significantly during 1995 and 1996. Our stock

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price increased again during 1997, but declined significantly in 1998. Our stock price again increased significantly during 1999 and in early 2000, but suffered a major decline in the second half of 2000 and again in 2001 and 2002. It declined significantly again in the last half of 2004 and to date in 2005.

     The trading price of our common stock in the future could continue to be subject to wide fluctuations in response to various factors, including the following:

	•	variations in our quarterly operating results;
	•	announcements about the prospects or financial performance of the industries or customers we serve;
	•	changes in analysts’ estimates of our financial performance;
	•	failure to meet performance estimates of securities analysts;
	•	general conditions in the electronics industry; and
	•	worldwide economic and financial conditions.

     In addition, the stock market has experienced extreme price and volume fluctuations that have particularly affected the market prices for many technology-related companies and that often have been unrelated to the operating performance of these companies. These broad market fluctuations and other factors may adversely affect the market price of our common stock.

Adverse trends in the electronics industry may adversely affect our operating results.

     The electronics manufacturing services industry is impacted by the state of the electronics industry, general U.S. and global economic conditions, and worldwide events. A continued slowdown in the U.S. or global economies or the particular industries served by us may result in customers reducing orders. Our revenue may be adversely impacted by the slowdown in the worldwide electronics markets, which have been subject to reduced end-market demand and reduced capital spending.

     Our business also depends on the electronics industry in general, which is subject to rapid technological change, short product life cycles, and margin pressures. In addition, the electronics industry historically has been cyclical and subject to significant downturns characterized by diminished product demand, accelerated erosion of average selling prices, and production over-capacity. We seek to reduce our exposure to industry downturns and cyclicality by providing design and production services for leading companies in a variety of rapidly expanding segments of the electronics industry. Despite these efforts, economic conditions affecting the electronics industry in general or our major customers may adversely affect our operating results.

We could be required to expend substantial resources to comply with governmental regulations.

     Our operations are subject to certain federal, state, and local regulatory requirements relating to environmental, waste management, health, and safety matters. As a publicly traded company in the United States, we are also subject to federal and state governance and internal control requirements as well as to the New York St