DII GROUP INC, 10-K/A, 1999-09-08

DII GROUP INC
10-K/A, 1999-09-08
ELECTRONIC COMPONENTS & ACCESSORIES

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A

AMENDMENT NO. 1

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JANUARY 3, 1999

[ ] 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 0-21374
THE DII GROUP, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 84-1224426
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
6273 MONARCH PARK PLACE, NIWOT, COLORADO 80503
(Address of principal executive offices) (Zip Code)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 303-652-2221
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

<TABLE>
<CAPTION>
TITLE OF EACH CLASS
-------------------
<S> <C>
Common Stock, $0.01 par value
Series A Junior Participating Preferred Stock Purchase Rights
</TABLE>

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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 [X] No [ ]

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. [ ]

Aggregate market value of voting common stock held by non-affiliates based upon
the closing price at March 1, 1999:
$728,160,893

Shares of common stock outstanding at March 1, 1999:
30,659,406

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's 1998 Annual Report to Stockholders are incorporated
by reference into Part II of this Form 10-K. Portions of the Proxy Statement
relating to the Annual Meeting of Stockholders to be held on May 6, 1999 (to be
filed pursuant to Regulation 14A within 120 days after the close of the fiscal
year covered by this report on Form 10-K) are incorporated by reference into
Part III of this Form 10-K.
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<PAGE> 2

EXPLANATORY NOTE: Pursuant to this Form 10-K/A, The DII Group, Inc. amends
"ITEM 6. SELECTED FINANCIAL DATA," "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and "ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA" of Part II and "ITEM 14. EXHIBITS, FINANCIAL
STATEMENT SCHEDULES AND REPORTS ON FORM 8-K" of Part IV of its Annual Report on
Form 10-K for the year ended January 3, 1999.

This amendment includes additional disclosures concerning unusual charges
recognized by the Company. Additionally, the financial statements for the year
ended January 3, 1999 have been restated from amounts previously reported to
remove $3,842 from unusual charges and to increase selling, general and
administrative expenses by $3,842. The restatement had no impact on the
Company's net sales or net income for the 1998 fiscal year. See Note 13 of the
Consolidated Financial Statements for further information regarding this
restatement.

ITEM 6. SELECTED FINANCIAL DATA

"ITEM 6. SELECTED FINANCIAL DATA" is hereby amended to read as follows:

As more fully described in Note 2 of the Consolidated Financial Statements,
the Company merged (the "Merger") with Orbit Semiconductor, Inc. ("Orbit") on
August 22, 1996, and ultimately Orbit became a wholly owned subsidiary of the
Dii Group. This transaction was accounted for as a pooling-of-interests and,
accordingly, all prior period financial statements have been restated to reflect
the combined operations of the two companies. The following consolidated
financial data have been derived from the restated consolidated financial
statements:

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
----------------------------------------------------
1998(7) 1997 1996(6) 1995 1994(5)
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS(1):
Net sales................................................... $925,543 $779,603 $458,893 $396,978 $258,464
Income (loss) before extraordinary item..................... (17,032) 35,320 10,035 23,654 8,803
Basic earnings (loss) per share before extraordinary
item(2)................................................... (0.68) 1.43 0.42 1.05 0.44
Diluted earnings (loss) per share before extraordinary
item(2)................................................... (0.68) 1.26 0.40 0.95 0.41
CASH DIVIDENDS DECLARED..................................... $ -- $ -- $ -- $ -- $ --
</TABLE>

<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31, DECEMBER 31,
1999(7) 1997 1996(6) 1995 1994(5)
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and cash equivalents.................... $ 55,972 $ 85,067 $ 25,010 $ 55,533 $ 15,161
Total assets................................. 747,309 592,729 335,851 327,311 211,460
Convertible subordinated notes(3)............ 86,235 86,250 86,250 86,250 --
Long-term debt, excluding convertible
subordinated notes(4)...................... 273,684 156,545 12,938 9,401 31,872
Total stockholders' equity (2)(3)............ 175,721 207,348 159,037 145,549 118,452
</TABLE>

- ---------------

(1) See Notes 2 and 4 of the Company's 1998 Consolidated Financial Statements
included elsewhere herein.

(2) See Notes 10 and 12 of the Company's 1998 Consolidated Financial Statements
included elsewhere herein.

(3) As of February 18, 1999, substantially all of the Company's convertible
subordinated notes were converted into approximately 4,600,000 shares of
common stock and the unconverted portion was redeemed for $101. See Note 6
of the Company's 1998 Consolidated Financial Statements included elsewhere
herein.

(4) Long-term debt excludes current portion and includes bank term debt,
revolving line-of-credit borrowings, other long-term debt (including capital
lease obligations), and senior subordinated notes. See Notes 5 and 9 of the
Company's 1998 Consolidated Financial Statements included elsewhere herein.

(5) The Company recorded unusual pre-tax charges of $12,100 in fiscal 1994.
These unusual charges were primarily associated with the write-down of
certain assets to net realizable value relating to two under-capitalized
start-up customers.

(6) The Company recorded unusual pre-tax charges of $16,532 in fiscal 1996.
These charges consisted of $4,649 for costs associated with the Orbit merger
and closure costs of $11,883 related to Orbit's 4-inch, 1.2 micron wafer
fabrication facility, including impairment of long-lived assets and
non-recoverable inventory, write-off of a foreign investment of Orbit and
other exit costs. See Note 7 of the Company's 1998 Consolidated Financial
Statements included elsewhere herein.

(7) The Company recorded unusual pre-tax charges of $72,794 in fiscal 1998.
These charges consisted primarily of the write-down of the Orbit 6-inch, 0.6
micron wafer fabrication facility to net realizable value, losses on sales
contracts, incremental amounts of uncollectible accounts receivable,
incremental amounts of sales returns and allowances, inventory write-downs
and other exit costs. See Note 7 of the Company's 1998 Consolidated
Financial Statements included elsewhere herein.

<PAGE> 3

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" is hereby amended to read as follows:

OVERVIEW

The Company's fiscal year consists of either a 52-week or 53-week period
ending on the Sunday nearest to December 31. Accordingly, the accompanying
consolidated financial statements are presented as of January 3, 1999 and
December 28, 1997, and for the 53 weeks ended January 3, 1999 and 52 weeks ended
December 28, 1997 and December 29, 1996. Each fiscal year is referred to herein
as fiscal 1998, 1997, and 1996, respectively.

On July 29, 1997, the Company's Board of Directors declared a two-for-one
stock split of the Company's common stock effected in the form of a stock
dividend, which was distributed on September 2, 1997, to shareholders of record
as of August 15, 1997. All share and per-share data included herein have been
retroactively restated to reflect the split.

The Company is a leading provider of electronics design and manufacturing
services that operates through a global network of independent business units.
These business units are uniquely linked to provide the following related
products and services:

Design and Semiconductor Services -- Through Dii Technologies the
Company provides printed circuit board and back panel design services, as
well as design for manufacturability and test and total life cycle
planning.

Through Dii Semiconductor (formerly known as Orbit Semiconductor), the
Company provides the following application-specific integrated circuit ("ASIC")
design services to its OEM customers:

- Conversion services from field programmable gate arrays ("FPGAs") to
ASICs. These services focus on designs that utilize primarily
digital signals, with only a small amount of analog signals.

- Design services for mixed-signal ASICs. These services focus on
designs that utilize primarily analog signals, with only a small
amount of digital signals.

- Silicon integration design services. These services utilize silicon
design modules that are used to accelerate complex ASIC designs,
including system-on-a-chip.

Dii Semiconductor utilizes external foundry suppliers for its customers'
silicon manufacturing requirements, thereby using a "fabless" manufacturing
approach.

By integrating the combined capabilities of design and semiconductor
services, the Company can compress the time from product concept to market
introduction and minimize product development costs.

Printed Wiring Boards -- The Company manufactures high density,
complex multilayer printed wiring boards and back panels through Multek.

Systems Assembly and Distribution -- The Company assembles complex
electronic circuits and provides final system configuration ("box build")
and distribution through Dovatron. These services are commonly referred to
as contract electronics manufacturing ("CEM").

By offering comprehensive and integrated design and manufacturing services,
the Company believes that it is better able to differentiate its product and
service offerings from those of its competitors, develop long-term relationships
with its customers, and enhance profitability.

The Company also has a non-core business unit known as Process Technologies
International ("PTI"). Through this business unit, the Company manufactures
surface mount printed circuit board solder cream stencils through IRI
International and Chemtech; designs and manufactures in-circuit and functional
test

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<PAGE> 4

software and hardware through TTI Testron; and manufactures depaneling equipment
and automated handling systems used in the printed circuit board assembly
process through Cencorp Automation Systems. Management has undertaken an
initiative to divest this non-core business unit, in order to sharpen its focus
on the Company's core businesses of custom semiconductor design, printed wiring
board design and fabrication, and systems assembly and distribution.

The Company does not believe that a sale of PTI would result in any adverse
impact on the Company's 1999 consolidated financial position. If the Company
sells PTI, the Company's consolidated revenues and operating results will be
adversely impacted (by less than 10%) until such time as the proceeds are
reinvested back into the Company's core businesses of custom semiconductor
design, printed wiring board design and fabrication, and systems assembly and
distribution.

Operating results may also be affected by a number of factors including the
economic conditions in the markets the Company serves; price and product
competition; the level of volume and the timing of orders; product mix; the
amount of automation employed on specific manufacturing projects; efficiencies
achieved by inventory management; fixed asset utilization; the level of
experience in manufacturing a particular product; customer product delivery
requirements; shortages of components or experienced labor; the integration of
acquired businesses; start-up costs associated with adding new geographical
locations; expenditures required for research and development; and failure to
introduce, or lack of market acceptance of, new processes, services,
technologies, and products on a timely basis. Each of these factors has had in
the past, and may have in the future, an adverse effect on the Company's
operating results.

A majority of the Company's sales are to customers in the electronics
industry, which is subject to rapid technological change, product obsolescence,
and price competition. The factors affecting the electronics industry, in
general, or any of the Company's major customers, in particular, could have a
material adverse effect on the Company's operating results. The electronics
industry has historically been cyclical and subject to significant economic
downturns at various times, which have been characterized by diminished product
demand, accelerated erosion of average selling prices, and over-capacity. The
Company's customers also are subject to short product life cycles and pricing
and margin pressures, which risks are in turn borne by the Company. The Company
seeks a well-balanced customer profile across most sectors of the electronics
industry in order to reduce exposure to a downturn in any particular sector. The
primary sectors within the electronics industry served by the Company are office
automation, mainframes and mass storage, data communications, computers and
peripherals, telecommunications, industrial and instrumentation, and medical.

The Company offers manufacturing capabilities in three major electronics
markets of the world (North America, Europe and Asia). The Company's operations
located outside of the United States generated approximately 43%, 42% and 25% of
total net sales in fiscal 1998, 1997 and 1996, respectively. The Company's
international operations subject the Company to the risks of doing business
abroad, including currency fluctuations, export duties, import controls and
trade barriers, restrictions on the transfer of funds, greater difficulty in
accounts receivable collection, burdens of complying with a wide variety of
foreign laws, and, in certain parts of the world, political and economic
instability.

Although management believes the Company has a broad diversification of
customers and markets, the Company has few material, firm long-term commitments
or volume guarantees from its customers. In addition, customer orders can be
canceled and volume levels can be changed or delayed. From time to time, some of
the Company's customers have terminated their manufacturing arrangements with
the Company, and other customers have reduced or delayed the volume of design
and manufacturing services performed by the Company. The timely replacement of
canceled, delayed, or reduced contracts with new business cannot be

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<PAGE> 5

assured, and termination of a manufacturing relationship or change, reduction,
or delay in orders could have a material adverse effect on the Company's
operating results. In the past, changes in customer orders have had a
significant impact on the Company's results of operations due to corresponding
changes in the level of overhead absorption.

ACQUISITIONS

The Company has actively pursued acquisitions in furtherance of its
strategy to be the fastest and most comprehensive global provider of custom
electronics design and manufacturing services, ranging from microelectronics
design through the fabrication, final assembly, and distribution of printed
circuits and finished products for customers. The Company's acquisitions have
enabled the Company to provide more integrated outsourcing technology solutions
with time-to-market and lower cost advantages. Acquisitions have also played an
important part in expanding the Company's presence in the global electronics
marketplace.

Acquisitions involve numerous risks, including difficulties in assimilating
the operations, technologies, and products and services of the acquired
companies; the diversion of management's attention from other business concerns;
risks of entering markets in which the Company has no or limited direct prior
experience and where competitors in such markets have stronger market positions;
and the potential loss of key employees of the acquired company. There can be no
assurance that the Company will be able to successfully integrate newly acquired
businesses. Such a failure could have a material adverse effect on the Company's
business, financial condition, and results of operations. The integration of
certain operations following an acquisition will require the dedication of
management resources that may distract attention from the day-to-day business of
the Company.

In August 1998 the Company acquired Greatsino Electronic Technology, a
printed wiring board fabricator and contract electronics manufacturer with
operations in the People's Republic of China. The cash purchase price, net of
cash acquired, amounted to $51,795. The initial purchase price is subject to
adjustment for contingent consideration of no more than $40,000, based upon the
business achieving specified levels of earnings through August 31, 1999. As of
January 3, 1999, the Company had accrued $9,000 of contingent consideration. In
October 1998, the Company acquired Hewlett-Packard's printed wiring board
fabrication facility located in Boeblingen, Germany, and its related production
equipment, inventory and other assets, for a purchase price of approximately
$89,900, subject to certain post-closing adjustments. In connection with the
purchase, the Company entered into a three-year supply agreement with
Hewlett-Packard. These two transactions represent significant steps in the
Company's strategy of expanding its worldwide operations, enhancing its
technology offerings, increasing its volume production capabilities, and
diversifying its customer base. However, these transactions subject the Company
to acquisition-related risks, as well as risks associated with international
operations. If these operations do not prove to be as successful as the Company
expects, the Company's financial condition and results of operations could be
materially adversely affected. In addition, the Greatsino acquisition, as well
as certain prior acquisitions, are subject to contingent purchase price
adjustments for varying periods, all of which end no later than June 2001. Such
adjustments would increase the goodwill allocated to these acquisitions.

See Note 2 and Note 4 of the Company's 1998 Consolidated Financial
Statements included elsewhere herein for information regarding acquisitions and
manufacturing facility purchases.

OPERATING RESULTS

FISCAL 1998 COMPARED WITH FISCAL 1997

Subsequent to the issuance of the Company's financial statements for the
year ended January 3, 1999, management determined that certain costs included in
its accrual for estimated losses on sales contracts recorded as unusual charges
in fiscal 1998 (see Note 7) should have been reflected as selling, general and
administrative expenses in the quarters in which those costs were incurred. As a
result, the financial statements for the year ended January 3, 1999 have been
restated from amounts previously reported to remove $3,842 from unusual charges
and to increase selling, general and administrative expenses by $3,842. See

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Note 15 of the Company's 1998 Consolidated Financial Statements for further
information regarding this restatement.

Total net sales in fiscal 1998 increased $145,940 to $925,543 from $779,603
in fiscal 1997. This represents a 19% increase in total net sales, which is
substantially lower than the Company's five year compound annual growth rate of
41%. The Company believes this lower growth rate is partially attributable to
the electronics industry's downturn in fiscal 1998, as evidenced by diminished
product demand, declines in average selling prices, and overcapacity, all of
which reduced the Company's customers' growth rates.

Net sales from systems assembly and distribution, which represented 64% of
net sales in fiscal 1998, increased $75,208 (15%) to $589,286 from $514,078 (66%
of net sales) in fiscal 1997. This increase is primarily the result of increases
in sales volume of $122,343 from existing and new customers, partially offset by
approximately $66,050 in reduced orders of certain product lines from some of
Dovatron's major customers in the office automation segment. The Dovatron
acquisitions described in Note 2 of the Company's 1998 Consolidated Financial
Statements included elsewhere herein, also accounted for $18,915 of this sales
growth.

Net sales from printed wiring board design and manufacturing operations,
which represented 23% of net sales in fiscal 1998, increased $80,589 (63%) to
$208,696 from $128,107 (16% of net sales) in fiscal 1997. This increase is
attributable to increases in sales to both existing and new customers of
$25,790, offset by approximately $27,696 in reduced orders of certain product
lines from some of Multek's major customers primarily in the semiconductor test
equipment industry. Additionally, $82,495 of the sales growth is attributable to
the Multek acquisitions and the purchases of the manufacturing facilities
described in Notes 2 and 4 of the Company's 1998 Consolidated Financial
Statements included elsewhere herein.

Net sales for the Company's other products and services, which represented
13% of net sales in fiscal 1998, decreased $9,857 (7%) to $127,561 from $137,418
(18% of net sales) in fiscal 1997. This decrease is primarily attributable to
the downturn in the semiconductor and machine tool industries, which was
characterized by diminished product demand, accelerated erosion of average
selling prices, and overcapacity.

Gross profit in 1998 decreased $63,348 to $68,592 from $131,940 in fiscal
1997. Gross margin decreased to 7.4% in fiscal 1998 from 16.9% in fiscal 1997.
The gross margin was adversely affected by unusual pre-tax charges of $70,340
during fiscal 1998 associated with the exit from wafer fabrication at Orbit.
Excluding unusual charges, gross profit in fiscal 1998 increased $6,992 to
$138,932 from $131,940 in fiscal 1997. Excluding unusual charges, gross margin
decreased to 15.0% in fiscal 1998 as compared with 16.9% in fiscal 1997. In
addition to the unusual charges, gross margin was adversely affected by (i) the
increased level of systems build ("box-build") projects for Dovatron, which
typically have lower margins than its non box-build projects; (ii) the
incremental production from the Multek acquisitions described in Note 2 and the
purchases of manufacturing facilities described in Note 4 of the Company's 1998
Consolidated Financial Statements included elsewhere herein, which carry lower
gross margins than historical Multek high-technology and quick-turn business;
(iii) continued manufacturing inefficiencies, underutilization, and yield
problems at Orbit; and (iv) the electronics industry downturn experienced in
1998 (especially in the semiconductor and machine tool industries),
characterized by diminished product demand, accelerated erosion of average
selling prices, and overcapacity.

Selling, general and administrative (SG&A) expense increased $12,377 to
$81,160 in fiscal 1998 from $68,783 in fiscal 1997. The percentage of SG&A
expense to net sales was 8.8% in both fiscal 1998 and 1997. The increase in
absolute dollars is related to (i) the continued expansion of the Company's
sales and marketing, finance, and other general and administrative
infrastructure necessary to support the Company's growth; (ii) incremental SG&A
expense of $1,095 attributable to the acquisitions described in Note 2 of the
Company's 1998 Consolidated Financial Statements included elsewhere herein; and
(iii) incremental SG&A expense of $2,834 attributable to the purchases of the
manufacturing facilities described in Note 4 of the Company's 1998 Consolidated
Financial Statements included elsewhere herein.

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manufacturing strategy to complement Orbit's design and engineering services.
The charges were primarily due to the impaired recoverability of inventory,
intangible assets and fixed assets, and other costs associated with the exit of
semiconductor manufacturing. The manufacturing facility was ultimately sold in
January 1999. As discussed below, $70,340 of the unusual pre-tax charges have
been classified as a component of cost of sales.

The components of the unusual charge recorded in fiscal 1998 are as
follows:

<TABLE>
<CAPTION>
FIRST FOURTH FISCAL NATURE OF
QUARTER QUARTER 1998 CHARGE
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Severance..................................... $ 498 $ 900 $ 1,398 cash
Long-lived asset impairment................... 38,257 15,083 53,340 non-cash
Losses on sales contracts..................... 2,658 3,100 5,758 non-cash
Incremental uncollectible accounts
receivable.................................. 900 -- 900 non-cash
Incremental sales returns and allowances...... 1,500 500 2,000 non-cash
Inventory write-downs......................... 5,500 250 5,750 non-cash
Other exit costs.............................. 1,845 1,803 3,648 cash
------- ------- -------
Total unusual pre-tax charges....... $51,158 $21,636 $72,794
======= ======= =======
</TABLE>

The following table summarizes the components and activity related to the
charges taken in connection with the 1998 unusual charges:

<TABLE>
<CAPTION>
LONG-LIVED LOSSES UNCOLLECTIBLE SALES INVENTORY
ASSET ON SALES ACCOUNTS RETURNS AND WRITE- OTHER
SEVERANCE IMPAIRMENT CONTRACTS RECEIVABLE ALLOWANCES DOWNS EXIT COSTS TOTAL
--------- ---------- --------- ------------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 28,
1997..................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Activities during the year:
1998 provision........... 1,398 53,340 5,758 900 2,000 5,750 3,648 72,794
Cash charges............. (498) -- -- -- -- -- (465) (963)
Non-cash charges......... -- (53,340) (4,658) (767) (1,500) (5,500) (643) (66,408)
------ -------- ------- ----- ------- ------- ------ --------
Balance at January 3,
1999..................... $ 900 $ -- $ 1,100 $ 133 $ 500 $ 250 $2,540 $ 5,423
====== ======== ======= ===== ======= ======= ====== ========
</TABLE>

Of the total unusual pre-tax charges, $1,398 relate to employee termination
costs and have been classified as a component of costs of sales. As of January
3, 1999, approximately 40 people have been terminated, and another 170 people
were terminated when the Fab was sold in the first quarter of fiscal 1999. The
Company paid approximately $498 of employee termination costs during fiscal
1998. The remaining $900 is classified as accrued compensation and benefits as
of January 3, 1999 and was paid out in the first quarter of fiscal 1999.

The unusual pre-tax charges include $53,340 for the write-down of
long-lived assets to fair value. This amount has been classified as a component
of cost of sales. Included in the long-lived asset impairment are charges of
$50,739, which relate to the Fab which was written down to its net realizable
value based on its sales price. The Company kept the Fab in service until the
sale date in January 1999. In accordance with SFAS No. 121, the Company
discontinued depreciation expense on the Fab when it determined that it would be
disposed of and its net realizable value was known. The impaired long-lived
assets consisted primarily of machinery and equipment of $52,418, which were
written down by $43,418 to a carrying value of $9,000 and building and
improvements of $7,321, which were written down to a carrying value of zero. The
long-lived asset impairment also includes the write-off of the remaining
goodwill related to Orbit of $601. The remaining $2,000 of asset impairment
relates to the write-down to net realizable value of a facility the Company
exited during 1998.

The Company entered into certain non-cancelable sales contracts to provide
semiconductors to customers at fixed prices. Because the Company was obligated
to fulfill the terms of the agreements at selling prices which were not
sufficient to cover the cost to produce or acquire such products, a liability
for losses on sales contracts was recorded for the estimated future amount of
such losses. The unusual pre-tax charges include $8,658 for losses on sales
contracts, incremental amounts of uncollectible accounts receivable, and
estimated incremental costs for sales returns and allowances. Of this amount,
$6,925 was incurred during fiscal 1998 and

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<PAGE> 8

$1,733 is expected to be incurred in the first quarter of fiscal 1999 and is
included in accrued expenses at January 3, 1999. These losses are classified as
a component of cost of sales.

The unusual pre-tax charges also include $9,398 for losses on inventory
write-downs and other exit costs. The Company has written off and disposed of
approximately $5,750 of inventory, which has been classified as a component of
cost of sales. The loss on the sale of the Fab includes $3,648 of incremental
costs and contractual obligations for items such as lease termination costs,
litigation, environmental clean-up costs, and other exit costs incurred directly
as a result of the exit plan. Of the $3,648, approximately $1,194 have been
classified as a component of cost of sales. The Company had remaining
liabilities of $2,540 related to these other exit costs, which have been
classified as accrued expenses as of January 3, 1999.

The exit plan is expected to be completed in the third quarter of 1999.
Total remaining cash expenditures expected to be incurred in 1999 are $3,440,
consisting of $900 of severance and $2,540 of other exit costs, including legal
settlement costs, lease and other exit fees, and environmental costs. These
expenditures will continue to be funded through operating cash flows of the
Company which are expected to be sufficient to fund these expenditures.

Interest expense increased $11,019 to $21,680 in fiscal 1998 from $10,661
in fiscal 1997. The increase is primarily due to increased borrowings described
in Note 5 of the Company's 1998 Consolidated Financial Statements included
elsewhere herein used to fund the business acquisitions and purchases of
manufacturing facilities.

Amortization expense increased $693 to $4,661 in fiscal 1998 from $3,968 in
fiscal 1997. This increase is attributable to the amortization of debt issue
costs associated with the increased borrowings used to fund the business
acquisitions and purchases of manufacturing facilities as well as amortization
of goodwill associated with such acquisitions.

Other expense (net) decreased $544 in fiscal 1998 from fiscal 1997 mainly
due to increased net gains realized on foreign currency transactions and reduced
provisions for doubtful accounts.

The Company's estimated effective income tax rate differs from the U.S.
statutory rate due to domestic income tax credits and lower effective income tax
rates on foreign earnings considered permanently invested abroad. The effective
tax rate for a particular year will vary depending on the mix of foreign and
domestic earnings, income tax credits, and changes in previously established
valuation allowances for deferred tax assets based upon management's current
analysis of the realizability of these deferred tax assets. As foreign earnings
considered permanently invested abroad increase as a percentage of consolidated
earnings, the overall consolidated effective income tax rate will usually
decrease because the foreign earnings are generally taxed at a lower rate than
domestic earnings.

Foreign income from operations before income taxes amounted to $32,721 and
$25,936 in fiscal 1998 and 1997, respectively. Domestic loss from operations
before income taxes amounted to $71,253 in fiscal 1998. Domestic income from
operations before income taxes amounted to $23,729 in fiscal 1997. The mix of
foreign and domestic income or loss from operations before income taxes, the
recognition of income tax loss and tax credit carryforwards, and management's
current assessment of the required valuation allowance resulted in an estimated
effective income tax rate of 56% in fiscal 1998. Excluding the unusual charges,
the effective income tax rate in fiscal 1998 was 20%. The Company's effective
income tax rate was 29% in fiscal 1997.

FISCAL 1997 COMPARED WITH FISCAL 1996

Total net sales in fiscal 1997 increased $320,710 (70%) to $779,603 from
$458,893 in fiscal 1996. Net sales from systems assembly and distribution, which
represented 66% of net sales in fiscal 1997, increased $239,427 (87%) to
$514,078 from $274,651 (60% of net sales) in fiscal 1996. The sales growth is
primarily attributable to significant increases in orders from both existing and
new customers, such as the high volume, multi-site production order for
Hewlett-Packard, which began ramping in early fiscal 1997.

Net sales from printed wiring board design and manufacturing operations,
which represented 16% of net sales in fiscal 1997, increased $55,256 (76%) to
$128,107 from $72,851 (16% of net sales) in fiscal 1996. The

7
<PAGE> 9

sales growth in fiscal 1997 is attributable to increases in sales to both
existing and new customers of $17,321. Additionally, $37,935 of the sales growth
is attributable to the Multek acquisitions described in Note 2 of the Company's
1998 Consolidated Financial Statements included elsewhere herein and the
purchase of the manufacturing facility in 1997 described in Note 4 of the
Company's 1998 Consolidated Financial Statements included elsewhere herein.

Net sales for the Company's other products and services, which represented
18% of net sales in fiscal 1997, increased $26,027 (23%) to $137,418 from
$111,391 (24% of net sales) in fiscal 1996. This increase is attributable to
increases in sales to both existing and new customers of $16,222. Additionally,
$9,805 of the sales growth is attributable to the acquisitions described in Note
2 of the Company's 1998 Consolidated Financial Statements included elsewhere
herein.

Gross profit in 1997 increased $55,540 to $131,940 from $76,400 in fiscal
1996. Gross margin increased to 16.9% in fiscal 1997 compared to 16.6% in fiscal
1996. The increase in gross margin is primarily attributable to $11,883 of
unusual pre-tax charges during 1996 related to the transition of wafer
fabrication facilities at Orbit. Excluding unusual charges, gross profit in
fiscal 1997 increased $43,657 to $131,940 from $88,283 in fiscal 1996. Excluding
unusual charges, the gross margin decreased to 16.9% in fiscal 1997 from 19.2%
in fiscal 1996. Offsetting the increase attributable to the 1996 unusual pre-tax
charges were reductions in gross margin attributable primarily to (i) the
increase in systems assembly and distribution revenues, which generate lower
margins than the Company's other products and service offerings, (ii) Multek's
underabsorbed overhead associated with the transition of its printed wiring
board facility purchased in August 1997 to the merchant market, and (iii)
Orbit's underabsorption of overhead associated with its transition into its new
6-inch, 0.6 micron wafer fabrication facility. The transition into Orbit's
6-inch, 0.6 micron fabrication facility took longer than originally anticipated.
The Company completed the transition into its 6-inch, 0.6 micron facility and
sold its 4-inch, 1.2 micron wafer fabrication facility during the first quarter
of 1998.

SG&A expense increased $20,243 to $68,783 in fiscal 1997 from $48,540 in
fiscal 1996. The percentage of SG&A expense to net sales was 8.8% and 10.6% for
fiscal years 1997 and 1996, respectively. The increase in absolute dollars was
primarily attributable to (i) additional costs associated with the start-up of
Orbit's newly acquired wafer fabrication facility while winding down its old
wafer fabrication facility, (ii) the continued expansion of the Company's sales
and marketing, finance, and other general and administrative infrastructure
necessary to support the Company's growth, (iii) increased incentive-based stock
compensation in the amount of $3,189, the recognition of which is based upon
expected achievement of certain earnings per share targets established by the
Compensation Committee of the Board of Directors, (iv) incremental SG&A expense
of $2,965 attributable to the acquisitions described in Note 2 of the Company's
1998 Consolidated Financial Statements included elsewhere herein; and (v)
incremental SG&A expense of $2,194 attributable to the purchase of the
manufacturing facility in 1997 described in Note 4 of the Company's 1998
Consolidated Financial Statements included elsewhere herein. The percentage of
SG&A expense to net sales decreased in fiscal 1997 when compared with fiscal
1996 due to better absorption from the increase in revenues.

In fiscal 1996, the Company recognized $16,532 of unusual charges related
to its merger with Orbit and the closure of Orbit's 4-inch, 1.2 micron wafer
fabrication facility. The components of the unusual charges recorded in fiscal
1996 are as follows:

<TABLE>
<CAPTION>
AMOUNT OF NATURE OF
CHARGE CHARGE
--------- ---------
<S> <C> <C>
Merger costs................................................ $ 4,649 cash
Long-lived asset impairment................................. 7,970 non-cash
Impairment of investment in foreign subsidiary.............. 1,763 non-cash
Inventory write-downs....................................... 1,500 non-cash
Other exit costs............................................ 650 cash
-------
Total unusual pre-tax charges..................... $16,532
=======
</TABLE>

8
<PAGE> 10

The following table summarizes the components and activities related to the
charges taken in connection with the 1996 unusual charges:

<TABLE>
<CAPTION>
IMPAIRMENT LONG-LIVED INVENTORY
MERGER OF ORBIT ASSET WRITE- OTHER
COSTS ISRAEL IMPAIRMENT DOWNS EXIT COSTS TOTAL
------------ ---------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995..... $ -- $ -- $ -- $ -- $ -- $ --
Activities during the year:
1996 provision................. 4,649 1,763 7,970 1,500 650 16,532
Cash charges................... (4,649) -- -- -- (220) (4,869)
Non-cash charges............... -- (1,763) (7,970) (1,500) -- (11,233)
------- ------- ------- ------ ----- --------
Balance at December 29, 1996..... -- -- -- -- 430 430
Activity during the year:
Cash charges................... -- -- -- -- (430) (430)
------- ------- ------- ------ ----- --------
Balance at December 28, 1997..... $ -- $ -- $ -- $ -- $ -- $ --
======= ======= ======= ====== ===== ========
</TABLE>

The Company recorded unusual pre-tax charges of $4,649 for transaction
costs associated with its merger with Orbit Semiconductor, Inc. The merger
transaction costs consisted primarily of $2,303 of investment banking related
costs, $1,625 of attorney, accountant and consulting fees and $721 of other
costs, such as registration fees, financial printing and other incremental
merger related costs.

The unusual pre-tax charges include $7,970 for the write-down of long-lived
assets to fair value. This amount has been classified as a component of cost of
sales. These write-offs related to the 4-inch 1.2 micron fab, which the Company
kept in service until the sale date in January 1998. In accordance with SFAS No.
121, the Company discontinued depreciation expense on the Fab when it was
determined that it would be disposed of and its net realizable value was
estimable. The impaired long-lived assets consisted primarily of the following:
buildings of $6,533 which were written down by $4,041 to a carrying value of
$2,492 and machinery and equipment of $3,929 which were written down to a
carrying value of zero.

The unusual pre-tax charges include $1,763 associated with the write-off of
Orbit's investment in a subsidiary established to expand its manufacturing
capacity in Israel. The Israel expansion was no longer required with the
acquisition of a 6-inch, 0.6 micron facility in fiscal 1996. These charges had
been classified as a component of cost of sales.

The unusual pre-tax charges also include $2,150 for losses on inventory
write-downs and other exit costs. The Company wrote-off and disposed of
approximately $1,500 of inventory, which was classified as a component of cost
of sales. The loss on the closure of the Fab includes $650 of incremental costs
and contractual obligations for items such as lease termination costs and
environmental clean-up costs incurred directly as a result of the exit plan. All
of the other exit costs were classified as a component of cost of sales.

The total cash expenditures incurred in connection with the exit plan were
funded through operating cash flows. All previously established provisions
associated with the closure were completely utilized in fiscal 1997. The
original accrual estimates approximated the actual amounts required to complete
the transaction.

Interest expense increased $4,394 to $10,661 in fiscal 1997 from $6,267 in
fiscal 1996. The increase is primarily due to increased borrowings described in
Note 5 of the Company's 1998 Consolidated Financial Statements included
elsewhere herein used to fund the 1997 business acquisitions and purchase of
manufacturing facility.

Amortization expense increased $850 to $3,968 in fiscal 1997 from $3,118 in
fiscal 1996. This increase is attributable to the amortization of debt issue
costs associated with the increased borrowings described in Note 5 of the
Company's 1998 Consolidated Financial Statements included elsewhere herein used
to fund the 1997 business acquisitions and purchase of manufacturing facility as
well as amortization of goodwill associated with the 1997 business acquisitions.

9
<PAGE> 11

Other expense (net) increased $722 in fiscal 1997 from fiscal 1996 mainly
as the result of increased provisions for doubtful accounts receivable.

Foreign income from operations before income taxes amounted to $25,936 and
$4,650 in fiscal 1997 and 1996, respectively. Domestic income from operations
before income taxes amounted to $23,729 and $11,023 in fiscal 1997 and 1996,
respectively. The mix of foreign and domestic earnings, income tax credits, the
recognition of income tax loss and tax credit carryforwards, changes in
previously established valuation allowances for deferred tax assets, and certain
Orbit merger costs not being deductible for income tax purposes in fiscal 1996
resulted in an estimated effective income tax rate of 29% and 36% in fiscal 1997
and 1996, respectively.

LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS

At January 3, 1999, the Company had working capital of $87,310 and a
current ratio of 1.4x, compared with working capital of $160,618 and a current
ratio of 2.2x at December 28, 1997. Cash and cash equivalents at January 3,
1999, were $55,972, a decrease of $29,095 from $85,067 at December 28, 1997.
This decrease resulted primarily from cash used by 1998 investing activities of
$204,924, offset by cash provided by fiscal 1998 operating and financing
activities of $68,105 and $107,277, respectively.

Cash provided by operating activities amounted to $68,105 and $51,607 in
fiscal 1998 and 1997, respectively. In fiscal 1998, cash provided by operating
activities included a net loss of $17,032, offset by the effects of the non-cash
unusual charges of $67,748. Additionally, in fiscal 1998 cash provided by
operating activities included depreciation and amortization of $32,999 versus
$22,342 in fiscal 1997. This represents a $10,657 increase that is mainly
attributable to the Company's acquisitions. Cash provided by operating
activities also reflects a $10,782 decrease in inventory and a $12,591 increase
in accounts payable, offset by an increase in accounts receivable of $15,737. In
fiscal 1997, cash provided by operating activities reflects net income of
$35,320 and $22,342 in depreciation and amortization expense, offset by a
$52,297 increase in accounts receivable and a $26,474 increase in inventory.
Cash provided by operating activities in fiscal 1997 also reflects increases in
accounts payable of $50,619 and accrued expenses of $22,284.

Net cash flows used by investing activities amounted to $204,424 and
$126,491 in fiscal 1998 and 1997, respectively. Capital expenditures amounted to
$153,891 and $121,269 in fiscal 1998 and 1997, respectively. A significant
portion of the capital expenditures in fiscal 1998 were related to the $89,900
purchase of a manufacturing facility in Germany, as more fully described in Note
4 of the Company's 1998 Consolidated Financial Statements included elsewhere
herein. Remaining capital expenditures represent the Company's continued
investment in state-of-the-art, high-technology equipment, which enables the
Company to accept increasingly complex and higher-volume orders and to meet
current and expected production levels, as well as to replace or upgrade older
equipment that was either returned or sold. The Company received proceeds of
$3,362 and $2,717 from the sale of equipment in fiscal 1998 and 1997,
respectively, to allow for the potential replacement of older equipment with
state-of-the-art, high-technology equipment. The Company expects capital
expenditures in fiscal 1999 to be in the range of $80,000 to $100,000.

During 1998 and 1997, the Company made certain business acquisitions. The
cash purchase price, net of cash acquired, for these acquisitions amounted to
$53,895 and $7,939 in fiscal 1998 and 1997, respectively. The original purchase
prices for these acquisitions are subject to adjustments for contingent
consideration based upon the businesses achieving specified levels of earnings
for varying periods, all of which end no later than June 2001. See Note 2 of the
Company's 1998 Consolidated Financial Statements included elsewhere herein for
information regarding business acquisitions.

Net cash flows provided by financing activities amounted to $107,277 and
$134,682 in fiscal 1998 and 1997, respectively, primarily resulting from the
proceeds from issuance of long-term debt amounting to $137,500 and $150,000 in
fiscal 1998 and 1997, respectively. These borrowings, as described in Note 5 of
the Company's 1998 Consolidated Financial Statements included elsewhere herein,
were used to fund the business acquisitions and purchases of manufacturing
facilities described in Notes 2 and 4, respectively, of the Company's 1998
Consolidated Financial Statements included elsewhere herein. In addition, the
Company repaid $3,375 and $2,455 in capital lease obligations in fiscal 1998 and
1997, respectively. The Company also
10
<PAGE> 12

repaid $5,593 and $10,219 in long-term debt in fiscal 1998 and 1997,
respectively. The Company received $6,156 and $6,900 in proceeds from stock
issued under its stock plans in fiscal 1998 and 1997, respectively. The Company
repurchased 1,454,500 and 192,500 shares of its common stock at a cost of
$24,335 and $4,209 in fiscal 1998 and 1997, respectively. The Company could
repurchase an additional 353,000 shares of common stock in future years as a
part of its share repurchase plan, subject to certain restrictions under its
Credit Agreement.

In October 1998, the Company replaced its $80,000 senior secured revolving
line-of-credit facility with a $210,000 Credit Agreement with a syndicate of
domestic and foreign banks. The Credit Agreement is more fully described in Note
5 of the Company's 1998 Consolidated Financial Statements included elsewhere
herein. The Company anticipates that it will from time to time borrow from its
credit facility to fund its operations and growth. Debt issue costs associated
with the issuance of the Company's $210,000 Credit Agreement amounted to $3,076
in fiscal 1998. Debt issue costs associated with the issuance of the $150,000
senior subordinated notes and the Company's line-of-credit amounted to $5,335 in
fiscal 1997.

As of February 18, 1999, substantially all of the Company's convertible
subordinated notes were converted into approximately 4,600,000 shares of common
stock and the unconverted portion was redeemed for $101.

Management believes that its current level of working capital, together
with cash generated from operations, existing cash reserves, leasing
capabilities, and line-of-credit availability will be adequate to fund the
Company's current capital expenditure plan for fiscal 1999. The Company intends
to continue its acquisition strategy and it is possible that future acquisitions
may be significant. If available resources are not sufficient to finance the
Company's acquisitions, the Company would be required to seek additional equity
or debt financing. There can be no assurance that such funds, if needed, will be
available on terms acceptable to the Company or at all.

The Company's operations are subject to certain federal, state and local
regulatory requirements relating to the use, storage, discharge and disposal of
hazardous chemicals used during its manufacturing processes. The Company
believes that it is currently operating in compliance with applicable
regulations and does not believe that costs of compliance with these laws and
regulations will have a material effect upon its capital expenditures, results
from operations or competitive position.

The Company determines the amount of its accruals for environmental matters
by analyzing and estimating the range of possible costs in light of information
currently available. The imposition of more stringent standards or requirements
under environmental laws or regulations, the results of future testing and
analysis undertaken by the Company at its operating facilities, or a
determination that the Company is potentially responsible for the release of
hazardous substances at other sites could result in expenditures in excess of
amounts currently estimated to be required for such matters. No assurance can be
given that actual costs will not exceed amounts accrued or that costs will not
be incurred with respect to sites as to which no problem is currently known.
Further, there can be no assurance that additional environmental matters will
not arise in the future.

See Note 9 of the Company's Consolidated Financial Statements included
elsewhere herein for a description of commitments and contingencies.

YEAR 2000 ISSUE

The Year 2000 date conversion issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
This issue affects computer systems that have time-sensitive programs that may
not properly recognize the Year 2000. This could result in major system failures
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in normal business activities.

Management has implemented a company-wide program to prepare its financial,
manufacturing, and other critical systems and applications for the Year 2000.
This comprehensive program was developed to ensure the Company's information
technology assets, including embedded microprocessors ("IT assets") and
11
<PAGE> 13

non-IT assets are Year 2000 ready. The Company has formed a Year 2000 project
team of approximately 75 employees, overseen by a corporate officer, which team
is responsible for monitoring the progress of the program and ensuring timely
completion. The team has a detailed project plan in place with tasks,
milestones, critical paths, and dates identified.

The Company's comprehensive program covers the following six phases: (i)
inventory of all IT and non-IT assets; (ii) assessment of repair requirements;
(iii) repair of IT and non-IT assets; (iv) testing of individual IT and non-IT
assets to determine the correct manipulation of dates and date-related data; (v)
communication with the Company's significant suppliers and customers to
determine the extent to which the Company is vulnerable to any failures by them
to address the Year 2000 issue; and (vi) creation of contingency plans in the
event of Year 2000 failures.

Implementation of the program is ongoing with all of the operating entities
having completed the inventory phase. Each operating company has identified
those software programs and related hardware that are non-compliant and is in
the process of developing remediation or replacement plans and establishing
benchmark dates for completion of each phase of those plans. The Company
anticipates that all mission-critical software and hardware will be compliant by
the third quarter of 1999. The Company has yet to begin system integration
testing. Until system integration testing is substantially in process, the
Company cannot fully estimate the risks of its Year 2000 issue. To date,
management has not identified any IT assets that present a material risk of not
being Year 2000-ready, or for which a suitable alternative cannot be
implemented. However, as the program proceeds into subsequent phases, it is
possible that the Company may identify assets that do present a risk of a Year
2000-related disruption. It is also possible that such a disruption could have a
material adverse effect on financial condition and results of operations.

As of January 3, 1999, the Company is approximately 80% complete in
contacting suppliers who provide both critical IT assets and non-information
technology related goods and services (e.g. transportation, packaging,
production materials, production supplies, etc.). The Company mailed surveys to
its suppliers in order to (i) evaluate the suppliers' Year 2000 compliance plans
and state of readiness and (ii) determine whether a Year 2000-related event will
impede the ability of such suppliers to continue to provide such goods and
services as the Year 2000 is approached and reached. For a vast majority of
those suppliers of IT assets who have responded, the Company has received
assurances that these assets will correctly manipulate dates and date-related
data as the Year 2000 is approached and reached. The Company has received
responses from approximately 70% of suppliers of non-IT assets. The Company is
in the process of reviewing responses for accuracy and adequacy, and sending
follow-up surveys or contacting suppliers directly via phone for those non-
responsive suppliers.

The Company also relies, both domestically and internationally, upon
government agencies, utility companies, telecommunications services, and other
service providers outside of the Company's control. There is no assurance that
such suppliers, governmental agencies, or other third parties will not suffer a
Year 2000 business disruption. Such failures could have a material adverse
affect on the Company's financial condition and results of operations.

Further, the Company has initiated formal communications with its
significant suppliers, customers and critical business partners to determine the
extent to which the Company may be vulnerable in the event those parties fail to
properly remediate their own Year 2000 issues. The Company has taken steps to
monitor the progress made by those parties, and intends to test critical system
interfaces as the Year 2000 approaches. The Company will develop appropriate
contingency plans in the event that a significant exposure is identified
relative to the dependencies on third-party systems. While the Company is not
presently aware of any such significant exposure, there can be no guarantee that
the systems of third parties on which the Company relies will be converted in a
timely manner, or that a failure to properly convert by another company would
not have a material adverse effect on the Company.

The program calls for the development of contingency plans for the
Company's at-risk business functions. Because the Company has not completed
testing of mission critical systems, and, accordingly, has not fully assessed
its risks from potential Year 2000 failures, the Company has not yet developed
specific Year 2000 contingency plans. The Company will develop such plans if the
results of testing mission-critical systems
12
<PAGE> 14

identify a business function risk. In addition, as a normal course of business,
the Company maintains and deploys contingency plans to address various other
potential business interruptions. These plans may be applicable to address the
interruption of support provided by third parties resulting from their failure
to be Year 2000-ready.

The Company does not expect the costs associated with its Year 2000 efforts
to be substantial. To date, the Company estimates that it has spent
approximately $1,854 on implementation of the program, with the majority of the
work being performed by Company employees. Less than $7,000 has been allocated
to address the Year 2000 issue. The Company's aggregate cost estimate includes
certain internal recurring costs, but does not include time and costs that may
be incurred by the Company as a result of the failure of any third parties,
including suppliers, to become Year 2000-compliant or costs to implement any
contingency plans. The Company is expensing as incurred all costs related to the
assessment and remediation of the Year 2000 issue. These costs are being funded
through operating cash flows. Certain inventory and manufacturing software-
related projects were accelerated to ensure Year 2000 compliance. However, such
acceleration did not increase the anticipated costs of the projects. The Company
has not deferred any specific information technology project as a result of the
implementation of the program. The Company is committed to achieving Year 2000
compliance; however, because a significant portion of the problem is external to
the Company and therefore outside its direct control, there can be no assurances
that the Company will be fully Year 2000 compliant. If the modifications and
conversions required to make the Company Year 2000-ready are not made, or are
not completed on a timely basis, the resulting problems could have a material
impact on the operations of the Company. This impact could, in turn, have a
material adverse effect on the Company's results of operations and financial
condition.

NEW ACCOUNTING STANDARDS

The FASB has issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133). This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in its statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
(that is, gains and losses) are recognized in earnings or in other comprehensive
income each reporting period, depending on the intended use of the derivative
and the resulting designation. Generally, changes in the fair value of
derivatives not designated as a hedge, as well as changes in fair value of
fair-value designated hedges (and the item being hedged), are required to be
reported in earnings. Changes in fair value of other types of designated hedges
are generally reported in other comprehensive income. The ineffective portion of
a designated hedge, as defined, is reported in earnings immediately. The Company
will be required to adopt SFAS 133 as of January 2, 2001. The Company has not
completed the process of evaluating the impact, if any, that will result from
adopting SFAS 133.

This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Report contain "forward-looking"
statements about matters that are inherently difficult to predict. Those
statements include statements regarding the intent, belief or current
expectations of the Company and its management. Some of the important factors
that affect these statements have been described above as each subject is
discussed. Such forward-looking statements involve risks and uncertainties that
may affect future developments such as, for example, the ability to deal with
the Year 2000 issue, including problems that may arise on the part of third
parties.

13
<PAGE> 15

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" is hereby amended to
read as follows:

The following consolidated financial statements and supplementary data
(included in Note 14 of the Notes to Consolidated Financial Statements), are
included herein:

Independent Auditors' Reports
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K"
is hereby amended for the sole purpose of including updated consent of
independent auditors.

(a)(3) List of Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.1 -- Consent of Independent Auditors -- Deloitte & Touche LLP
23.2 -- Consent of Independent Auditors -- KPMG
</TABLE>

14
<PAGE> 16

INDEPENDENT AUDITORS' REPORT

The Board of Directors
The DII Group, Inc.:

We have audited the accompanying consolidated balance sheet of The DII
Group, Inc. and subsidiaries (the "Company") as of January 3, 1999 and December
28, 1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the 53 and 52 weeks then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of January 3, 1999 and
December 28, 1997, and the results of its operations and its cash flows for the
53 and 52 weeks then ended in conformity with generally accepted accounting
principles.

We also audited the adjustments described in Note 12 that were applied to
restate the 1996 financial statements to give retroactive effect to the change
in the method of accounting for earnings per share in accordance with Statement
of Financial Accounting Standards No. 128 "Earnings Per Share." In our opinion,
such adjustments are appropriate and have been properly applied.

As discussed in Note 15, the accompanying fiscal 1998 consolidated
financial statements have been restated.

DELOITTE & TOUCHE LLP

Denver, Colorado
January 28, 1999
(February 18, 1999 as to the redemption of convertible

subordinated notes described in Note 6, September 8, 1999, as to Note 15)

15
<PAGE> 17

INDEPENDENT AUDITORS' REPORT

The Board of Directors
The DII Group, Inc.

We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of The DII Group, Inc. and subsidiaries
(the "Company") for the 52 weeks ended December 29, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of the Company for the 52 weeks ended December 29, 1996 in conformity with
generally accepted accounting principles.

We did not audit the adjustments described in Note 12 that were applied to
restate the 1996 financial statements for the adoption of Statement of Financial
Accounting Standards No. 128 "Earnings Per Share".

KPMG LLP

Denver, Colorado
January 28, 1997

16
<PAGE> 18

THE DII GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
----------------------------------
(AS RESTATED
SEE NOTE 15)
1998 1997 1996
------------ -------- --------
<S> <C> <C> <C>
Net sales:
Systems assembly and distribution........................ $589,286 $514,078 $274,651
Printed wiring boards.................................... 208,696 128,107 72,851
Other.................................................... 127,561 137,418 111,391
-------- -------- --------
Total net sales.................................. 925,543 779,603 458,893
-------- -------- --------
Cost of sales:
Cost of sales............................................ 786,611 647,663 370,610
Unusual charges.......................................... 70,340 -- 11,883
-------- -------- --------
Total cost of sales.............................. 856,951 647,663 382,493
-------- -------- --------
Gross profit..................................... 68,592 131,940 76,400
Selling, general, and administrative expenses.............. 81,160 68,783 48,540
Unusual charges............................................ 2,454 -- 4,649
Interest income............................................ (2,894) (1,744) (1,732)
Interest expense........................................... 21,680 10,661 6,267
Amortization expense....................................... 4,661 3,968 3,118
Other, net................................................. 63 607 (115)
-------- -------- --------
Income (loss) before income taxes................ (38,532) 49,665 15,673
Income tax expense (benefit)............................... (21,500) 14,345 5,638
-------- -------- --------
Net income (loss)................................ $(17,032) $ 35,320 $ 10,035
======== ======== ========
Earnings (loss) per common share:
Basic.................................................... $ (0.68) $ 1.43 $ 0.42
Diluted.................................................. $ (0.68) $ 1.26 $ 0.40
Weighted average number of common shares and equivalents
outstanding:
Basic.................................................... 24,888 24,719 23,678
Diluted.................................................. 24,888 30,702 25,074
</TABLE>

See accompanying notes to consolidated financial statements.

17
<PAGE> 19

THE DII GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)

ASSETS

<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1999 1997
---------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 55,972 $ 85,067
Accounts receivable, net of allowance for doubtful
accounts of $5,900 and $2,893.......................... 153,861 132,590
Inventories............................................... 66,745 74,059
Deferred income taxes..................................... 7,249 769
Other assets.............................................. 11,570 7,766
-------- --------
Total current assets.............................. 295,397 300,251
-------- --------
Property, plant and equipment............................... 326,226 207,257
Goodwill, net of accumulated amortization of $12,130 and
$8,223.................................................... 97,475 70,371
Debt issue costs, net of accumulated amortization of $2,247
and $1,208................................................ 9,319 7,282
Deferred income taxes....................................... 11,428 --
Other assets................................................ 7,464 7,568
-------- --------
$747,309 $592,729
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $122,536 $ 98,688
Accrued expenses.......................................... 32,414 16,099
Accrued compensation and benefits......................... 11,720 13,667
Accrued interest payable.................................. 6,769 4,688
Current portion of capital lease obligations.............. 5,617 2,482
Current portion of long-term debt......................... 29,031 4,009
-------- --------
Total current liabilities......................... 208,087 139,633
-------- --------
Long-term debt, net of current portion...................... 271,864 151,703
Convertible subordinated notes payable...................... 86,235 86,250
Capital lease obligations, net of current portion........... 1,820 4,842
Deferred income taxes....................................... -- 739
Other....................................................... 3,582 2,214
Commitments and contingent liabilities Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; none issued................................ -- --
Common stock, $0.01 par value; 90,000,000 and 45,000,000
shares authorized; 26,169,344 and 25,328,914 shares
issued; and 24,522,344 and 25,136,414 shares
outstanding............................................ 262 253
Additional paid-in capital................................ 124,410 117,612
Retained earnings......................................... 93,071 110,103
Treasury stock, at cost; 1,647,000 and 192,500 shares..... (28,544) (4,209)
Accumulated other comprehensive loss...................... (4,139) (4,095)
Deferred compensation..................................... (9,339) (12,316)
-------- --------
Total stockholders' equity........................ 175,721 207,348
-------- --------
$747,309 $592,729
======== ========
</TABLE>

See accompanying notes to consolidated financial statements

18
<PAGE> 20

THE DII GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
PREFERRED COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE DEFERRED
STOCK STOCK CAPITAL EARNINGS STOCK LOSS COMPENSATION TOTAL
--------- ------ ---------- -------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995.... $ -- $228 $87,360 $64,748 $ -- $(3,443) $ (3,344) $145,549
==== ==== ======= ======== ======== ======= ======== ========
Net income...................... -- -- -- 10,035 -- -- -- 10,035
Foreign currency translation
adjustments................... -- -- -- -- -- (406) -- (406)
Net comprehensive income...... 9,629
--------
Issuance of 938,562 shares of
common stock under employee
stock plans................... -- 9 1,686 -- -- -- -- 1,695
Tax benefit on common stock
issued under employee stock
plans......................... -- -- 846 -- -- -- -- 846
Amortization of deferred
employee stock compensation... -- -- -- -- -- -- 1,084 1,084
Deferred employee stock
compensation.................. -- -- 1,733 -- -- -- (1,733) --
Issuance of 173,332 shares of
common stock under deferred
employee stock compensation
plan.......................... -- 2 (2) -- -- -- -- --
Issuance of 14,750 shares of
common stock under directors'
stock plan.................... -- -- 234 -- -- -- -- 234
---- ---- ------- -------- -------- ------- -------- --------
BALANCE AT DECEMBER 29, 1996.... -- 239 91,857 74,783 -- (3,849) (3,993) 159,037
==== ==== ======= ======== ======== ======= ======== ========
Net income...................... -- -- -- 35,320 -- -- -- 35,320
Foreign currency translation
adjustments................... -- -- -- -- -- (246) -- (246)
Net comprehensive income...... 35,074
--------
Issuance of 1,180,136 shares of
common stock under employee
stock plans................... -- 12 6,888 -- -- -- -- 6,900
Tax benefit on common stock
issued under employee stock
plans......................... -- -- 6,029 -- -- -- -- 6,029
Treasury stock, at cost (192,500
shares)....................... -- -- -- -- (4,209) -- -- (4,209)
Amortization of deferred
employee stock compensation... -- -- -- -- -- -- 4,375 4,375
Deferred employee stock
compensation.................. -- -- 12,698 -- -- -- (12,698) --
Issuance of 212,332 shares of
common stock under deferred
employee stock compensation
plan.......................... -- 2 (2) -- -- -- -- --
Issuance of 7,616 shares of
common stock under directors'
stock plan.................... -- -- 142 -- -- -- -- 142
---- ---- ------- -------- -------- ------- -------- --------
BALANCE AT DECEMBER 28, 1997.... -- 253 117,612 110,103 (4,209) (4,095) (12,316) 207,348
==== ==== ======= ======== ======== ======= ======== ========
Net loss........................ -- -- -- (17,032) -- -- -- (17,032)
Foreign currency translation
adjustments................... -- -- -- -- -- (44) -- (44)
Net comprehensive loss........ (17,076)
--------
Issuance of 555,935 shares of
common stock under employee
stock plans................... -- 6 6,150 -- -- -- -- 6,156
Tax benefit on common stock
issued under employee stock
plans......................... -- -- 1,635 -- -- -- -- 1,635
Treasury stock, at cost
(1,454,500 shares)............ -- -- -- -- (24,335) -- -- (24,335)
Amortization of deferred
employee stock compensation... -- -- -- -- -- -- 1,805 1,805
Deferred employee stock
compensation.................. -- -- (1,172) -- -- -- 1,172 --
Issuance of 274,836 shares of
common stock under deferred
employee stock compensation
plan.......................... -- 3 (3) -- -- -- -- --
Issuance of 8,859 shares of
common stock under directors'
stock plan.................... -- -- 173 -- -- -- -- 173
Conversion of convertible notes
(800 shares).................. -- -- 15 -- -- -- -- 15
---- ---- ------- -------- -------- ------- -------- --------
BALANCE AT JANUARY 3, 1999...... $ -- $262 $124,410 $93,071 $(28,544) $(4,139) $ (9,339) $175,721
==== ==== ======= ======== ======== ======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

19
<PAGE> 21

THE DII GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
------------------------------
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (17,032) $ 35,320 $10,035
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and fixed asset impairment charge......... 81,077 18,374 24,842
Amortization and goodwill impairment charge............ 5,262 3,968 3,544
Provision for doubtful receivables..................... 854 1,237 519
Deferred income taxes.................................. (17,012) 2,179 (1,855)
Loss (gain) on sales of equipment...................... 92 (11) (26)
Stock plan compensation................................ 1,978 4,517 1,318
Other.................................................. 3,511 (4,637) (17,551)
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Accounts receivable.................................. (15,737) (52,297) (16,504)
Inventories.......................................... 10,782 (26,474) 5,586
Other assets......................................... (4,371) (3,472) (1,832)
Accounts payable..................................... 12,591 50,619 (871)
Accrued expenses..................................... 6,110 22,284 254
--------- -------- -------
Net cash provided by operating activities......... 68,105 51,607 7,459
========= ======== =======
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for business acquisitions, net of cash
acquired............................................... (53,895) (7,939) (2,056)
Additions to property, plant, and equipment............... (153,891) (121,269) (33,274)
Proceeds from sales of property, plant, and equipment..... 3,362 2,717 276
--------- -------- -------
Net cash used by investing activities............. (204,424) (126,491) (35,054)
========= ======== =======
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital leases.............................. (3,375) (2,455) (2,480)
Repayments of long-term debt.............................. (5,593) (10,219) (4,060)
Proceeds from issuance of long-term debt.................. 137,500 150,000 1,190
Debt issuance costs....................................... (3,076) (5,335) (297)
Proceeds from stock issued under stock plans.............. 6,156 6,900 1,695
Payments to acquire treasury stock........................ (24,335) (4,209) --
Proceeds from notes receivable............................ -- -- 1,000
--------- -------- -------
Net cash provided (used) by financing
activities...................................... 107,277 134,682 (2,952)
--------- -------- -------
Effect of exchange rate changes on cash..................... (53) 259 24
--------- -------- -------
Net increase (decrease) in cash and cash
equivalents..................................... (29,095) 60,057 (30,523)
--------- -------- -------
Cash and cash equivalents at beginning of year.............. 85,067 25,010 55,533
--------- -------- -------
Cash and cash equivalents at end of year.................... $ 55,972 $ 85,067 $25,010
========= ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

20
<PAGE> 22

THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) BACKGROUND

The Dii Group, Inc. (the "Dii Group" or the "Company") was incorporated in
March 1993 as Dovatron International, Inc., in order to serve as a holding
company to effectuate the spin-off of Dover Corporation's electronic outsourcing
business, which occurred on May 21, 1993.

As more fully described in Note 2 below, the Company merged (the "Merger")
with Orbit Semiconductor, Inc. ("Orbit"), on August 22, 1996, and ultimately
Orbit became a wholly owned subsidiary of the Dii Group. This transaction was
accounted for as a pooling-of-interests and, accordingly, all prior period
financial statements have been restated to reflect the combined operations of
the two companies.

(b) DESCRIPTION OF BUSINESS

The Dii Group is a leading provider of electronics design and manufacturing
services, which operates through a global network of independent business units.
The Company provides the following related products and services to customers in
the global electronics manufacturing industry:

Design and Semiconductor Services -- Through Dii Technologies the
Company provides printed circuit board and design services, as well as
design for manufacturability and test and total life cycle planning.

Through Dii Semiconductor (formerly known as Orbit Semiconductor), the
Company provides the following application-specific integrated circuit ("ASIC")
design services to its OEM customers:

Conversion services from field programmable gate arrays ("FPGAs") to
ASICs. These services focus on designs that utilize primarily digital
signals, with only a small amount of analog signals.

Design services for mixed-signal ASICs. These services focus on
designs that utilize primarily analog signals, with only a small amount of
digital signals.

Silicon integration design services. These services utilize silicon
design modules that are used to accelerate complex ASIC designs, including
system-on-a-chip.

Dii Semiconductor utilizes external foundry suppliers for its customers'
silicon manufacturing requirements, thereby using a "fabless" manufacturing
approach.

By integrating the combined capabilities of design and semiconductor
services, the Company can compress the time from product concept to market
introduction and minimize product development costs.

Printed Wiring Boards -- The Company manufactures high density,
complex multilayer printed wiring boards and back panels through Multek.

21
<PAGE> 23
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Process Technologies -- The Company also has a non-core business unit
know as Process Technologies International ("PTI"). Through this business
unit, the Company manufactures surface mount printed circuit board solder
cream stencils through IRI International and Chemtech; manufactures in-
circuit and functional test software and hardware through TTI Testron; and
manufactures depaneling equipment and automated handling systems used in
the printed circuit board assembly process through Cencorp Automation
Systems.

Management has undertaken an initiative to divest of this non-core business
unit, in order to sharpen its focus on the Company's core businesses of custom
semiconductor design, printed wiring board design and fabrication, and systems
assembly and distribution.

The Dii Group has actively pursued acquisitions in furtherance of its
strategy to be the fastest and most comprehensive provider of custom design,
engineering and manufacturing services for original equipment customers, from
microelectronic circuits through the final assembly and distribution of finished
products. Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies, and products and services of the
acquired companies; the diversion of management's attention from other business
concerns; risks of entering markets in which the Dii Group has no or limited
direct prior experience and where competitors in such markets have stronger
market positions; and the potential loss of key employees of the acquired
company. The integration of certain operations following an acquisition requires
the dedication of management resources, which may distract attention from the
day-to-day business of the Company.

A majority of the Company's sales are to customers in the electronics
industry, which is subject to rapid technological change, product obsolescence,
and price competition. The factors affecting the electronics industry, in
general, or any of the Company's major customers, in particular, could have a
material adverse effect on the Company's operating results. The electronics
industry has historically been cyclical and subject to significant economic
downturns at various times, which are characterized by diminished product
demand, accelerated erosion of average selling prices, and overcapacity. The
Company's customers also are subject to short product life cycles and pricing
and margin pressures, which risks are in turn borne by the Company. The Company
seeks a well-balanced customer profile across most sectors of the electronics
industry in order to reduce exposure to a downturn in any particular sector. The
primary sectors within the electronics industry served by the Company are office
automation, mainframes and mass storage, data communications, computers and
peripherals, telecommunications, industrial and instrumentation, and medical.

22
<PAGE> 24
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company offers manufacturing capabilities in three major electronics
markets of the world (North America, Europe and Asia). The Company's operations
located outside of the United States generated approximately 43%, 42%, and 25%
of total net sales in fiscal 1998, 1997, and 1996, respectively. The Company's
international operations subject the Company to the risks of doing business
abroad, including currency fluctuations, export duties, import controls and
trade barriers, restrictions on the transfer of funds, greater difficulty in
accounts receivable collection, burdens of complying with a wide variety of
foreign laws, and, in certain parts of the world, political and economic
instability.

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions are
eliminated.

(d) TRANSLATION OF FOREIGN CURRENCIES

The Company's primary functional currency is the U.S. dollar. Foreign
subsidiaries with a functional currency other than the U.S. dollar translate net
assets at year-end exchange rates, while income and expense accounts are
translated at weighted-average exchange rates. Adjustments resulting from these
translations are reflected in stockholders' equity as cumulative foreign
currency translation adjustments. Some transactions of the Company and its
subsidiaries are made in currencies different from their functional currencies.
Gains and losses from these transactions are included in income as they occur.
To date, the effect on income of such amounts has been immaterial.

In order to minimize foreign exchange transaction risk, the Company
selectively hedges certain of its foreign exchange exposures through forward
exchange contracts, principally relating to nonfunctional currency monetary
assets and liabilities. Gains and losses resulting from these agreements are
deferred and reflected as adjustments to the related foreign currency
transactions. The strategy of selective hedging can reduce the Company's
vulnerability to certain of its foreign currency exposures, and the Company
expects to continue this practice in the future. To date, the Company's hedging
activity has been immaterial, and there were no open foreign exchange contracts
as of the balance sheet dates included in the accompanying Consolidated
Financial Statements. As of January 3, 1999, the Company had the following
unhedged net foreign currency monetary asset (liability) positions:

<TABLE>
<CAPTION>
U.S. DOLLAR
FOREIGN CURRENCY EQUIVALENT
ASSETS ASSETS
(LIABILITY) (LIABILITY)
---------------- -----------
<S> <C> <C>
German Deutsche Mark....................................... 4,300 $ 2,600
British Pound Sterling..................................... 88 147
Irish Punt................................................. 989 1,500
Chinese Renminbi........................................... 38,100 4,600
Hong Kong Dollar........................................... (42,000) (5,430)
Malaysian Ringgit.......................................... 4,081 1,074
</TABLE>

(e) CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all
investment instruments with original maturities of three months or less to be
cash equivalents.

23
<PAGE> 25
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(f) INVENTORIES

Inventory costs include material, labor, and overhead. An allowance is
provided to reduce inventories to the lower of cost or market. Consideration is
given to deterioration, obsolescence, and other factors when establishing the
allowance. Cost is determined using the first-in, first-out (FIFO) method.

(g) PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment includes the cost of land, buildings,
machinery and equipment, and significant improvements of existing plant and
equipment. Expenditures for maintenance, repairs, and minor renewals are
expensed as incurred.

Plant and equipment are depreciated on straight-line methods over the
estimated useful lives of the assets, which are 30 years for buildings and 3 to
10 years for machinery and equipment.

(h) GOODWILL AND DEBT ISSUANCE COSTS

Goodwill arising from business acquisitions is amortized on the
straight-line basis over 15 to 30 years. Debt issuance costs are amortized on
the straight-line basis over the term of the related debt.

(i) IMPAIRMENT OF ASSETS

Long-lived assets, including goodwill, are reviewed for impairment if
events or circumstances indicate the carrying amount of these assets may not be
recoverable. If this review indicates that these assets will not be recoverable,
based on the forecasted undiscounted future operating cash flows expected to
result from the use of these assets and their eventual disposition, the
Company's carrying value of these assets is reduced to fair value. Except as
disclosed in Note 7, management does not believe current events or circumstances
indicate that its long-lived assets, including goodwill, are impaired as of
January 3, 1999.

(j) INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

(k) EMPLOYEE BENEFIT PLANS

The Company maintains various defined contribution plans for employees who
have completed certain length of service and age requirements. Participants may
elect to contribute a certain portion of their compensation on a pre-tax basis
to these plans. The Company matches various percentages of the participants'
contributions up to a maximum percentage of their compensation.

The Company also maintains various deferred profit sharing plans for
certain employees who have completed certain length of service requirements with
certain business units. The Company may, subject to approval by the Board of
Directors, contribute a portion of its profits to these Plans. Such
contributions will be allocated to employees of the business units based upon
their salary and years of service.

In connection with the purchase of a manufacturing facility in Germany, as
discussed in Note 4, the Company assumed a defined benefit pension plan for the
employees of that facility. As of January 3, 1999, plan assets approximated the
accumulated benefit obligation. Pension expense for the period from the date of
purchase to January 3, 1999, was immaterial.

24
<PAGE> 26
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Additionally, the Company provides a nonqualified deferred compensation
plan for select senior executives and directors of the Company. Contributions to
the deferred compensation plan are held in an irrevocable "rabbi trust." The
participants elect to make contributions of portions of their cash and incentive
stock compensation on a pre-tax basis to the plan. The Company matches various
percentages of the participants' cash compensation contributions up to a maximum
percentage of such contributions.

The Company's contribution to all of its employee benefit plans amounted to
$1,983, $1,233, and $464 in fiscal 1998, 1997, and 1996, respectively.

(l) FAIR VALUE OF FINANCIAL INSTRUMENTS

Unless otherwise stated herein, the fair value of the Company's financial
instruments approximates their carrying amount due to the relatively short
periods to maturity of the instruments and/or variable interest rates of the
instruments, which approximate current market interest rates.

(m) COMMITMENTS AND CONTINGENCIES

Liabilities for loss contingencies, including environmental remediation
costs, arising from claims, assessments, litigation, fines and penalties, and
other sources are recorded when the amount of assessment and/or remediation
costs are probable and can be reasonably estimated. The costs for a specific
clean-up site are discounted if the aggregate amount of the obligation and the
amount and timing of the cash payments for that site are fixed or reliably
determinable, generally based upon information derived from the remediation plan
for that site.

Recoveries from third parties that are probable of realization are
separately recorded, and are not offset against the related liability.

(n) LOSSES ON SALES CONTRACTS

From time to time, the Company enters into certain non-cancelable
agreements to provide products and services to customers at fixed prices. Once
the Company enters into such agreements, the Company becomes obligated to
fulfill the terms of the agreement. If the Company is committed under such
agreements to supply products and services at selling prices which are not
sufficient to cover the cost to produce such products and services, a liability
is recorded for the estimated future amount of such losses at the time that the
loss is probable and reasonably estimable.

(o) REVENUE RECOGNITION

The Company recognizes revenue upon shipment of product to its customers.

(p) EARNINGS PER SHARE

Basic and diluted earnings-per-share ("EPS") amounts for all periods
presented have been calculated, and where necessary restated, to conform to the
requirements of Statement of Financial Accounting Standards No. 128, "Earnings
per Share." Basic EPS excludes dilution and is computed by dividing earnings
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS assumes the conversion of the
convertible subordinated notes, if dilutive, and the issuance of common stock
for other potentially dilutive equivalent shares outstanding.

25
<PAGE> 27
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(q) PERVASIVENESS OF ESTIMATES

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

(r) RECLASSIFICATIONS

Certain 1997 and 1996 balances have been reclassified to conform with the
1998 presentation.

(s) COMPREHENSIVE INCOME

The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS 130), effective January 1, 1998. SFAS 130
requires that changes in equity during a reporting period, except transactions
with owners in their capacity as owners (for example, the issuance of common
stock and dividends paid on common stock) and transactions reported as direct
adjustments to retained earnings, be reported as a component of comprehensive
income. Comprehensive income is required to be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Disclosure of comprehensive income for the fiscal years ended January 3, 1999,
December 28, 1997, and December 29, 1996, are included in the accompanying
financial statements as part of the statement of stockholders' equity.

NOTE 2 BUSINESS COMBINATIONS

During fiscal 1998, 1997, and 1996, the Company completed certain other
business combinations that are immaterial to the Company's results from
operations and financial position. The cash purchase price, net of cash
acquired, amounted to $2,100, $7,939, and $2,056, in fiscal 1998, 1997, and
1996, respectively. The fair value of the assets acquired and liabilities
assumed from these acquisitions was immaterial. The cost in excess of net assets
acquired through these acquisitions amounted to $9,133 and $3,677 in fiscal 1997
and 1996, respectively.

The costs of acquisitions have been allocated on the basis of the estimated
fair value of assets acquired and liabilities assumed. Goodwill is subject to
future adjustments from contingent purchase price adjustments for varying
periods, all of which end no later than June 2001. The Company increased
goodwill and notes payable to sellers of businesses acquired in the amount of
$11,550 and $1,134 for contingent purchase price adjustments during fiscal 1998
and 1996, respectively. There were no contingent purchase price adjustments in
fiscal 1997.

The acquisitions described above were accounted for by the purchase method
of accounting for business combinations. Accordingly, the accompanying
consolidated statements of income do not include any revenue or expenses related
to these acquisitions prior to their respective closing dates. The pro forma
results for fiscal

26
<PAGE> 28
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1998, 1997, and 1996, assuming these acquisitions had been made at the beginning
of the prior year, would not be materially different from reported results.

On August 22, 1996, the Dii Group issued 7,359,250 shares of the Dii Group
common stock for all outstanding shares of Orbit common stock, based upon one
share of Orbit common stock converted into 45/100ths (0.45) of a share of Dii
Group common stock, and as further adjusted to account for the two-for-one stock
split.

Results of operations for the separate companies prior to the Merger and
for the combined companies as restated are as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1996
(UNAUDITED)
----------------
<S> <C>
NET SALES:
Dii Group................................................. $196,230
Orbit..................................................... 31,810
--------
Combined, as restated....................................... 228,040
========
NET INCOME:
Dii Group................................................. 9,499
Orbit..................................................... 2,174
--------
Combined, as restated....................................... 11,673
========
</TABLE>

NOTE 3 INVENTORIES

Inventories consisted of the following:

<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1999 1997
---------- ------------
<S> <C> <C>
Raw materials............................................... $44,669 $51,802
Work in process............................................. 24,922 24,890
Finished goods.............................................. 6,622 2,839
------- -------
76,213 79,531
Less allowance.............................................. 9,468 5,472
------- -------
$66,745 $74,059
======= =======
</TABLE>

NOTE 4 PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following:

<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1999 1997
---------- ------------
<S> <C> <C>
Land........................................................ $ 12,816 $ 7,714
Buildings................................................... 125,886 48,859
Machinery and equipment..................................... 234,221 203,777
Construction in progress.................................... 40,313 9,938
-------- --------
413,236 270,288
Less accumulated depreciation and amortization.............. 87,010 63,031
-------- --------
$326,226 $207,257
======== ========
</TABLE>

27
<PAGE> 29
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In October 1998, the Company acquired Hewlett-Packard Company's ("HP")
printed wiring board fabrication facility located in Boeblingen, Germany, and
its related production equipment, inventory and other assets for a purchase
price of approximately $89,900, subject to certain post-closing adjustments.

In August 1997, the Company acquired International Business Machine's
("IBM") Austin, Texas, printed wiring board fabrication facility, and its
related production equipment, inventory, and intellectual property, for a
purchase price of approximately $46,064.

NOTE 5 LONG-TERM DEBT

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1999 1997
---------- ------------
<S> <C> <C>
Senior subordinated notes................................... $150,000 $150,000
Bank term loan.............................................. 100,000 --
Revolving line-of-credit advances........................... 37,500 --
Notes payable with interest rates ranging from 7.74% to
9.05%..................................................... 1,845 5,712
Non-interest-bearing notes payable to sellers of businesses
acquired due in 1999...................................... 11,550 --
-------- --------
Total long-term debt.............................. 300,895 155,712
Less current portion........................................ 29,031 4,009
-------- --------
Long-term debt, net of current portion.................... $271,864 $151,703
======== ========
</TABLE>

The aggregate maturities of long-term debt for fiscal years subsequent to
January 3, 1999, are as follows: $29,031 in 1999; $18,356 in 2000; $20,008 in
2001; $22,000 in 2002; $61,500 in 2003; and $150,000 in 2007.

The senior subordinated notes bear interest at 8.5% and mature on September
15, 2007. Interest is payable on March 15 and September 15 of each year. The
Company may redeem the notes on or after September 15, 2002. The indenture
contains certain covenants that, among other things, limit the ability of the
Company and certain of its subsidiaries to (i) incur additional debt, (ii) issue
or sell capital stock of certain subsidiaries, (iii) engage in asset sales, (iv)
incur layered debt, (v) create liens on its properties and assets, and (vi) make
distributions or pay dividends. The covenants are subject to a number of
significant exceptions and qualifications. The fair value of the Company's
senior subordinated notes approximated $143,685 at January 3, 1999 and
approximated its carrying amount at December 28, 1997.

On October 30, 1998, the Company replaced its $80,000 senior secured
revolving line-of-credit facility with a $210,000 Credit Agreement (the
"Agreement") with a syndicate of domestic and foreign banks. The Agreement
provides for a $100,000 5-year term loan ("Bank term loan"), and a $110,000
revolving line-of-credit facility ("Revolver"). The Revolver expires on November
1, 2003. Borrowings under the Agreement bear interest, at the Company's option,
at either: (i) the Applicable Base Rate ("ABR") (as defined in the Agreement)
plus the Applicable Margin for ABR Loans ranging between 0.00% and 0.75%, based
on certain financial ratios of the Company; or (ii) the Eurodollar Rate (as
defined in the Agreement) plus the Applicable Margin for Eurodollar Loans
ranging between 1.00% and 2.25%, based on certain financial ratios of the
Company. The Company is required to pay a quarterly commitment fee ranging from
0.25% to 0.50% per annum, based on certain financial ratios of the Company, of
the unused commitment under the Revolver. At January 3, 1999, the
weighted-average interest rate for the Company's Bank term loan was 7.15%. At
January 3, 1999, borrowings of $37,500 were outstanding under the Revolver at a
weighted-average interest rate of 7.21%.

The credit facility is secured by substantially all of the Company's
assets, and contains certain restrictions on the Company's ability to (i) incur
certain debt, (ii) create liens on its properties and assets, (iii) make
28
<PAGE> 30
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

certain investments and capital expenditures, (iv) merge or consolidate with
other entities, (v) pay dividends or make distributions, (vi) repurchase or
redeem common stock, or (vii) dispose of assets. The Agreement also requires
that the Company maintain certain financial covenants, including, among other
things, a maximum ratio of consolidated funded debt to EBITDA (earnings before
interest, taxes, depreciation, and amortization), a minimum ratio of
consolidated interest coverage, and minimum levels of consolidated net worth, as
defined, during the term of the Agreement. At January 3, 1999, the Company was
in compliance with all loan covenants.

The Company made long-term debt interest payments of $13,004, $1,353, and
$1,091 during fiscal 1998, 1997, and 1996, respectively.

NOTE 6 CONVERTIBLE SUBORDINATED NOTES

The fair market value of the Company's 6% convertible subordinated notes
approximated $107,794 and $127,969, based upon the last sales price on January
3, 1999, and December 28, 1997, respectively. Interest is payable on April 15
and October 15 of each year. As of February 18, 1999, substantially all of the
Company's convertible subordinated notes were converted into approximately
4,600,000 shares of common stock and the unconverted portion was redeemed for
$101.

The Company made convertible subordinated note interest payments of $5,175
during fiscal 1998 and 1997, and $5,247 in 1996.

NOTE 7 UNUSUAL CHARGES

During fiscal 1998, the Company recognized unusual pre-tax charges of
$72,794, substantially all of which related to the operations of the Company's
wholly owned subsidiary, Orbit Semiconductor. The Company decided to sell
Orbit's 6-inch, 0.6 micron wafer fabrication facility ("Fab") and adopt a
fabless manufacturing strategy to complement Orbit's design and engineering
services. The charges were primarily due to the impaired recoverability of
inventory, intangible assets and fixed assets, and other costs associated with
the exit of semiconductor manufacturing. The manufacturing facility was
ultimately sold in January 1999. As discussed below, $70,340 of the unusual
pre-tax charges have been classified as a component of cost of sales.

The components of the unusual charges recorded in fiscal 1998 are as
follows:

29
<PAGE> 31
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the components and activity related to the
charges taken in connection with the 1998 unusual charges:

30
<PAGE> 32
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

continue to be funded through operating cash flows of the Company which are
expected to be sufficient to fund these expenditures.

<TABLE>
<CAPTION>
AMOUNT OF NATURE OF
CHARGE CHARGE
--------- ---------
<S> <C> <C>
Merger costs (Orbit Merger described in Note 2)............. $ 4,649 cash
Long-lived asset impairment................................. 7,970 non-cash
Impairment of investment in foreign subsidiary.............. 1,763 non-cash
Inventory write-downs....................................... 1,500 non-cash
Other exit costs............................................ 650 cash
-------
Total unusual pre-tax charges..................... $16,532
=======
</TABLE>

The following table summarizes the components and activities related to the
charges taken in connection with the 1996 unusual charges:

31
<PAGE> 33
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8 INCOME TAXES

Income (loss) before income taxes for domestic and foreign operations were
as follows:

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
----------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Domestic............................................... $(71,253) $23,729 $11,023
Foreign................................................ 32,721 25,936 4,650
-------- ------- -------
$(38,532) 49,665 15,673
======== ======= =======
Income taxes (benefit) were allocated as follows:
Income (loss) from operations........................ $(21,500) $14,345 $ 5,638
Stockholders' equity (for compensation expense for
tax purposes in excess of amounts recognized for
financial reporting purposes)..................... (1,635) (5,805) (846)
-------- ------- -------
$(23,135) $ 8,540 $ 4,792
======== ======= =======
</TABLE>

Income tax expense (benefit) attributable to income from operations
consists of:

<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- --------
<S> <C> <C> <C>
FISCAL 1998:
U.S. Federal........................................ $(7,983) $(15,710) $(23,693)
State............................................... (185) (1,479) (1,664)
Foreign............................................. 3,680 177 3,857
------- -------- --------
$(4,488) $(17,012) $(21,500)
======= ======== ========
FISCAL 1997:
U.S. Federal........................................ $ 8,983 $ 297 $ 9,280
State............................................... 672 1,339 2,011
Foreign............................................. 2,511 543 3,054
------- -------- --------
$12,166 $ 2,179 $ 14,345
======= ======== ========
FISCAL 1996:
U.S. Federal........................................ $ 5,859 $ (1,500) $ 4,359
State............................................... 489 (176) 313
Foreign............................................. 1,145 (179) 966
------- -------- --------
$ 7,493 $ (1,855) $ 5,638
======= ======== ========
</TABLE>

32
<PAGE> 34
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
---------------------------
1998 1997 1996
-------- ------ -------
<S> <C> <C> <C>
The significant components of deferred tax expense
(benefit) attributable to income from operations are:
Deferred tax expense (exclusive of the effects of
other components listed below)..................... $(19,414) $ 812 $(3,891)
Charge in lieu of taxes resulting from initial
recognition of acquired tax liabilities that are
allocated to goodwill related to an acquired
entity............................................. -- (326) --
Increase in the valuation allowance for deferred tax
assets............................................. 2,402 1,693 2,036
-------- ------ -------
$(17,012) $2,179 $(1,855)
======== ====== =======
</TABLE>

Income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rate of 35 percent for fiscal 1998 and 1997, respectively,
and 34 percent for fiscal 1996 to income (loss) before income taxes as a result
of the following:

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
----------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit).............. $(13,486) $17,383 $ 5,329
Increase (reduction) in income taxes resulting from:
Foreign tax rate differential........................ (7,695) (5,825) (560)
State income taxes, net of federal income tax
benefit........................................... (1,098) 1,307 207
Tax credits and carryforwards........................ (1,166) (786) (1,498)
Change in the valuation allowance for deferred tax
assets............................................ 2,402 1,693 2,036
Other................................................ (457) 573 124
-------- ------- -------
$(21,500) $14,345 $ 5,638
======== ======= =======
</TABLE>

33
<PAGE> 35
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:

<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1997
--------------- -----------------
<S> <C> <C>
Deferred tax assets:
Inventories.......................................... $ 1,604 $ 1,499
Deferred revenues.................................... 5,595 542
Deferred compensation................................ 1,594 1,522
Compensated absences................................. 1,093 815
Allowance for doubtful accounts...................... 593 664
Accrued liabilities.................................. 3,598 713
Net operating loss and tax credit carryforwards...... 7,284 581
Federal and state credits............................ 6,628 3,983
Merger costs......................................... 368 492
Other................................................ 22 555
------- -------
Total gross deferred tax assets.............. 28,379 11,366
Less valuation allowance..................... 6,966 4,564
------- -------
21,413 6,802
======= =======
Deferred tax liabilities:
Accumulated depreciation............................. -- 2,718
Goodwill............................................. 2,723 2,674
Leasing.............................................. -- 985
Other................................................ 13 395
------- -------
Total gross deferred tax liabilities......... 2,736 6,772
------- -------
Net deferred tax asset....................... $18,677 $ 30
======= =======
</TABLE>

At January 3, 1999, approximately $17,483 of tax losses were available to
carry forward. These carryforwards generally expire in tax years 1999 through
2018. State manufacturing investment tax credits of $4,081 expire in tax years
2002 through 2005. State investment tax credits of $567 expire in tax years 2008
through 2012. State research and development tax credits and alternative minimum
tax credits total $397 and $1,583, respectively, and carry forward with no
expiration. Capital loss carryforwards totaling $254 expire in 1999.

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of these
deductible differences, net of the established valuation allowance.

The Company does not provide for federal income taxes on the undistributed
earnings of its foreign subsidiaries, as such earnings are not intended by
management to be repatriated in the foreseeable future. Deferred income taxes
have not been provided on undistributed foreign earnings of $74,562 as of
January 3, 1999. Determination of the amount of the unrecognized deferred tax
liability on these undistributed earnings is not practicable.

34
<PAGE> 36
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company made income tax payments of $2,575, $5,235, and $5,936 in
fiscal 1998, 1997, and 1996, respectively.

NOTE 9 COMMITMENTS AND CONTINGENCIES

As of January 3, 1999, and December 28, 1997, the Company has financed a
total of $8,849 and $10,758, respectively, in machinery and equipment purchases
with capital leases. Accumulated amortization for machinery and equipment under
capital leases totals $3,426 and $2,790 at January 3, 1999, and December 28,
1997, respectively. These capital leases have interest rates ranging from 6.77%
to 9.05%. The Company also has several non-cancelable operating leases,
primarily for equipment. These leases generally contain renewal options and
require the Company to pay all executory costs, such as maintenance and
insurance. The capital and operating leases expire in various years through
2005, and require the following minimum lease payments:

<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- -------
<S> <C> <C>
1999........................................................ $ 3,670 $5,938
2000........................................................ 3,438 2,168
2001........................................................ 3,127 120
2002........................................................ 1,817 --
2003........................................................ 1,157 --
Thereafter.................................................. 1,136 --
------- ------
Total minimum lease payments...................... $14,345 8,226
=======
Less amount representing interest........................... 789
------
Present value of net minimum capital lease payments......... 7,437
Less current portion........................................ 5,617
------
Obligations under capital leases, excluding current
portion................................................... $1,820
======
</TABLE>

Rental expense for operating leases amounted to $6,474, $7,213, and $4,623
in fiscal 1998, 1997, and 1996, respectively.

The Company has approximately $14,294 of capital commitments as of January
3, 1999. The majority of these commitments are expected to be completed by the
end of fiscal 1999.

In 1997 two related complaints, as amended, were filed in the District
Court of Boulder, Colorado, and the U.S. District Court for the District of
Colorado, against the Company and certain of its officers. The lawsuits purport
to be brought on behalf of a class of persons who purchased the Company's common
stock during the period from April 1, 1996, through September 8, 1996, and claim
violations of Colorado and federal laws based on allegedly false and misleading
statements made in connection with the offer, sale, or purchase of the Company's
common stock at allegedly artificially inflated prices, including statements
made prior to the Company's acquisition of Orbit. The complaints seek
compensatory and other damages, as well as equitable relief. The Company filed
motions to dismiss both amended complaints. The motion to dismiss the state
court complaint has been denied, and the Company has filed its answer denying
that it misled the securities market. The motion to dismiss the federal court
complaint is still pending. Both actions were brought by the same plaintiffs'
law firm as the Orbit action discussed below. A May 1999 trial date for the
state court action has been vacated, and a new trial date has not been set. No
trial date has been set in the federal court action. Discovery has commenced in
the state court action. The Company believes that the claims asserted in both
actions are without merit, and intends to defend against such claims vigorously.

A class action complaint (as amended in March 1996) for violations of
federal securities law was filed against Orbit and three of its officers in 1995
in the U.S. District Court for the Northern District of California. The amended
complaint was dismissed on November 12, 1996, with leave to amend only as to
certain

35
<PAGE> 37
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

specified claims relating to statements made by securities analysts. In January
1997 a second amended complaint was filed. The second amended complaint alleges
that Orbit and three of its officers are responsible for actions of securities
analysts that allegedly misled the market for Orbit's then existing public
common stock. The second amended complaint seeks relief under Section 10(b) and
20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The second
amended complaint seeks compensatory and other damages, as well as equitable
relief. In September 1997, Orbit filed its answer to the second amended
complaint denying responsibility for the actions of securities analysts and
further denying that it misled the securities market. The parties have entered
into a Memorandum of Understanding reflecting a proposed settlement of the
action subject to the final terms, which are being negotiated.

In addition to the above matters, the Company is involved in certain other
litigation arising in the ordinary course of business.

Although management is of the opinion that these matters will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company, the ultimate outcome of these matters cannot, at this
time, be predicted, in light of the uncertainties inherent in litigation.

The Company has joined together with other potentially responsible parties
("PRPs") to negotiate with the New York Department of Environmental Conservation
(NYDEC) concerning the performance of a remedial investigation/feasibility study
(RI/FS) at the Roblin Steel Site. In connection therewith, the Company executed
the Roblin Steel Site Deminimus Contributors Participation Agreement. The
Company's share of the agreement is less than 2%. A Consent Order concerning the
performance of a RI/FS was reached with the NYDEC in July of 1997.

In April 1998 the Company entered into Consent Orders with NYDEC concerning
the performance of a RI/FS with respect to environmental matters at a formerly
owned facility in Kirkwood, New York, and a facility that is owned and leased
out to a third party in Binghamton, New York.

The ultimate outcome of these matters cannot, at this time, be predicted in
light of the uncertainties inherent in these matters. Based upon the facts and
circumstances currently known, management cannot estimate the most likely loss
or the maximum loss for the above environmental matters. The Company has accrued
the minimum estimated costs, which amounts are immaterial, associated with these
matters in the accompanying consolidated financial statements.

NOTE 10 STOCKHOLDERS' EQUITY

On July 29, 1997, the Company's Board of Directors declared a two-for-one
stock split of the Company's common stock effected in the form of a stock
dividend, which was distributed on September 2, 1997, to shareholders of record
as of August 15, 1997. All share and per-share data included in this report have
been retroactively restated to reflect the split.

During 1998 and 1997, the Company repurchased 1,454,500 and 192,500 shares
of its common stock at a cost of $24,335 and $4,209, respectively. The Company
could repurchase an additional 353,000 shares of

36
<PAGE> 38
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

common stock in future years as a part of its share repurchase plan, subject to
certain restrictions under its Credit Agreement.

Each outstanding share of common stock carries a dividend of one preferred
share purchase right ("Right"). The Rights are not exercisable until the earlier
of (i) ten days following a public announcement that, without consent of the
Company, a person or group (an "Acquiring Person") has acquired beneficial
ownership of 20% or more of the voting power of all outstanding securities of
the Company or (ii) ten days following the commencement of a tender or exchange
offer that would result in a person or group becoming an Acquiring Person,
without the prior consent of the Company. In the event that a person or group
becomes an Acquiring Person, each holder of a Right, other than the Acquiring
Person, shall have the right to receive, upon exercise, that number of shares of
the Common Stock of the Company having a market value of two times the exercise
price of the Right. In addition, after a person or group becomes an Acquiring
Person, if the Company is involved in a merger or other business combination
transaction in which the Company is not the surviving corporation, holders of
the Rights, other than the Acquiring Person, will be entitled to purchase shares
of the acquiring company at a similar discount. The Rights will expire, unless
earlier redeemed by the Company, on May 3, 2004.

NOTE 11 STOCK PLANS

Under the Company's 1993 Stock Option Plan, the Compensation Committee of
the Board of Directors is authorized to grant stock options to purchase up to an
aggregate of 1,100,000 shares of common stock. In addition, under the 1994 Stock
Incentive Plan, the Committee is also authorized to make awards of performance
shares and/or grant stock options to purchase up to an aggregate of 4,000,000
shares of common stock. Under the terms of these Plans, shares may be awarded or
options may be granted to key employees to purchase shares of the Company's
common stock. Options are granted at a purchase price equal to the fair market
value of the common stock on the date of the grant, and performance shares are
awarded in the form of shares of restricted common stock.

At the time of the Merger, Orbit had three stock option plans, the KMOS
Semiconductor, Inc., 1989 Stock Option Plan ("1989 Plan"), the KMOS
Semiconductor, Inc., 1990 Non-Qualified Stock Option Plan ("1990 Plan"), and the
Orbit Semiconductor, Inc., 1994 Stock Incentive Plan ("1994 Orbit Plan"), under
which incentive and non-qualified stock options were granted to key employees,
directors, and consultants. The options were generally granted at the fair
market value of Orbit's stock on the date of grant. As a result of the merger,
outstanding options to purchase Orbit common stock at the time of the Merger
were converted into options to acquire an aggregate of 1,990,492 shares of Dii
Group common stock, which is equal to the product of the number of shares of
Orbit common stock that were issuable upon exercise of such options multiplied
by the Exchange Ratio and as further adjusted to account for the two-for-one
stock split. At the time of conversion, the exercise price of the converted
options was determined by dividing the original exercise price of such options
by the Exchange Ratio. Stock options will no longer be granted under the Orbit
stock option plans.

37
<PAGE> 39
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the stock option transactions under the
Company's Stock Option Plans:

<TABLE>
<CAPTION>
SHARES UNDERLYING WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
----------------- ----------------
<S> <C> <C>
OPTIONS OUTSTANDING AT DEC. 31, 1995.................. 3,513,884 $ 7.28
Granted............................................. 344,250 10.34
Exercised........................................... (330,872) 2.79
Canceled............................................ (138,592) 10.96
OPTIONS OUTSTANDING AT DEC. 29, 1996.................. 3,388,670 $ 7.81
Granted............................................. 627,700 16.08
Exercised........................................... (1,082,680) 5.60
Canceled............................................ (373,100) 9.43
OPTIONS OUTSTANDING AT DEC. 28, 1997.................. 2,560,590 $10.53
Granted............................................. 1,596,134 14.20
Exercised........................................... (327,734) 7.96
Canceled............................................ (340,723) 14.01
OPTIONS OUTSTANDING AT JAN. 3, 1999................... 3,488,267 $11.99
OPTIONS EXERCISABLE AT JAN. 3, 1999................... 1,519,855 $ 9.90
</TABLE>

The following table summarizes stock option information under the Company's
Stock Option Plans:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT JANUARY 3, 1999 OPTIONS EXERCISABLE AT JANUARY 3, 1999
- ---------------------------------------------------------------- --------------------------------------
WEIGHTED-AVERAGE
NUMBER WEIGHTED-AVERAGE REMAINING CONTRACTUAL NUMBER WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE TERM (IN YEARS) OUTSTANDING EXERCISE PRICE
- --------------------- ---------------- --------------------- --------------- --------------------
<S> <C> <C> <C> <C>
784,785 $ 7.18 4.27 758,069 $ 7.17
1,056,430 9.96 8.98 181,083 9.01
603,912 10.66 7.19 353,844 10.73
613,856 15.64 8.82 123,549 14.75
429,284 22.44 8.84 103,310 22.90
--------- ------ ---- --------- ------
3,488,267 $11.99 7.56 1,519,855 $ 9.90
--------- ------ ---- --------- ------
</TABLE>

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations, in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The weighted-average grant date fair value of options granted was
$5.20, $8.56, and $6.52 for fiscal 1998, 1997, 1996 respectively, using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 5.41%, 5.47%, and 5.76% in fiscal 1998,
1997, and 1996, respectively; volatility factors of the expected market price of
the Company's common stock of 52% in fiscal 1998, 51% in fiscal 1997, and 50% in
fiscal 1996; a weighted-average expected life of the option of three years; and
no expected dividend yields.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including expected stock price
volatility. Because the Company's

38
<PAGE> 40
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
the employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information follows:

<TABLE>
<CAPTION>
FISCAL YEARS
---------------------------
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
PRO FORMA:
Net income (loss)..................................... $(19,453) $33,272 $8,019
Basic earnings (loss) per share....................... $ (.78) $ 1.35 $ 0.34
Diluted earnings (loss) per share..................... $ (.78) $ 1.08 $ 0.32
</TABLE>

Pro forma net income (loss) reflects only options granted in fiscal 1998,
1997, and 1996. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost for options granted prior to
January 1, 1996, are not considered.

Under the 1993 Stock Option Plan and the 1994 Stock Incentive Plan, most
outstanding options expire ten years from the date of grant and vest over a
three-year period. All outstanding options under the 1994 Orbit Plan, the 1989
Plan, and 1990 Plan were fully vested on January 3, 1999, and expire no later
than 10 years after grant date.

The Compensation Committee of the Board of Directors awarded 456,000,
250,000, and 142,000 shares in fiscal 1998, 1997, and 1996, respectively, to key
executives under the 1994 Stock Incentive Plan. Shares vest over a period of
time, which in no event exceeds eight years. Certain shares may vest at an
accelerated rate upon the achievement of certain annual earnings-per-share
targets established by the Compensation Committee. Non vested shares for
individual participants who are no longer employed by the Company on the plan
termination date are forfeited. Participants will receive all unissued shares
upon their death or disability, or in the event of a change of control of the
Company. The shares are not reported as outstanding until vested. The number of
shares vested amounted to 62,500, 262,336, and 212,332 for fiscal 1998, 1997,
and 1996, respectively.

Unearned compensation equivalent to the market value at the date the shares
were awarded is charged to stockholders' equity and is amortized to expense
based upon the estimated number of shares expected to be issued in any
particular year. Unearned compensation expense amounting to $1,805, $4,375, and
$1,084 was amortized to expense during fiscal 1998, 1997, and 1996,
respectively. The weighted-average fair value of performance shares awarded in
1998, 1997, and 1996 was $19.97, $10.67, and $12.21 per share, respectively.

As of January 3, 1999, there are 92,445 shares available for future grant
under the Company's 1993 Stock Option Plan and 1994 Stock Incentive Plan.

The Company's Non-Employee Directors' Stock Compensation Plan (the
"Directors' Plan") provides for the automatic grant to each non-employee
director of the Company of 2,000 shares of common stock per annum as
consideration for regular service as a director. Shares will be issued in
quarterly installments at the end of each fiscal quarter. The Company recognizes
quarterly compensation expense equal to the fair market value of the stock to be
issued at the end of each quarter. The aggregate number of shares which may be
issued under the Directors' Plan is 60,000 shares, and the plan will terminate
on December 31, 2004. As of January 3, 1999, there are 24,557 shares available
for future grant under this plan. The weighted-average fair value of director
shares awarded in fiscal 1998, 1997, and 1996 was $18.36, $21.95, and $12.90 per
share, respectively.

39
<PAGE> 41
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company also has a 1994 Employee Stock Purchase Plan under which all
U.S. and international employees may be granted the opportunity to purchase up
to 1,000,000 shares of common stock at 85% of market value on the first or last
business day of a six-month payment period, whichever is lower. As of January 3,
1999, there are 613,721 shares available for sale under this plan. The shares
sold under this plan in fiscal 1998, 1997, and 1996 amounted to 228,201, 64,224,
and 57,076, respectively. The weighted-average fair value of shares sold under
this plan in fiscal 1998, 1997, and 1996 was $17.13, $16.33, and $11.97 per
share, respectively. Compensation expense pursuant to SFAS No. 123 associated
with this plan in fiscal 1998, 1997, and 1996 was immaterial.

NOTE 12 EARNINGS PER SHARE

Earnings (loss) per common share ("EPS") data were computed as follows:

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
----------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
BASIC EPS:
Net income (loss).................................... $(17,032) $35,320 $10,035
Shares used in computation:
Weighted-average common shares outstanding........ 24,888 24,719 23,678
Basic EPS.............................................. $ (0.68) $ 1.43 $ 0.42
======== ======= =======
DILUTED EPS:
Net income (loss).................................... $(17,032) $35,320 $10,035
Plus income impact of assumed conversions:
Interest expense (net of tax) on convertible
subordinated notes.............................. -- 3,105 --
Amortization (net of tax) of debt issuance cost on
convertible subordinated notes.................. -- 260 --
-------- ------- -------
Net income (loss) available to common stockholders..... $(17,032) $38,685 $10,035
======== ======= =======
SHARES USED IN COMPUTATION:
Weighted-average common shares outstanding........... 24,888 24,719 23,678
Shares applicable to exercise of dilutive options.... -- 1,242 1,280
Shares applicable to deferred stock compensation..... -- 141 116
Shares applicable to convertible subordinated
notes............................................. -- 4,600 --
-------- ------- -------
Shares applicable to diluted earnings.................. 24,888 30,702 25,074
-------- ------- -------
Diluted EPS............................................ $ (0.68) $ 1.26 $ 0.40
======== ======= =======
</TABLE>

The common equivalent shares from common stock options, deferred stock
compensation and convertible subordinated notes were antidilutive for fiscal
1998, and therefore were not assumed to be converted for diluted
earnings-per-share computations. Additionally, the convertible subordinated
notes were antidilutive for fiscal 1996, and therefore not assumed converted for
diluted earnings-per-share computations.

NOTE 13 BUSINESS CONCENTRATIONS AND GEOGRAPHIC AREAS

During the fourth quarter of fiscal 1998, the Company adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." The
Company's businesses are organized, managed, and internally reported as three
reportable segments. These segments, which are based on differences in products,
technologies, and services are Systems Assembly and Distribution, Printed Wiring
Boards, and Other (which includes Dii Semiconductor and PTI). See Note 1(b) for
further information regarding the products and

40
<PAGE> 42
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

services provided by these segments. These segments offer products and services
across most sectors of the electronics industry in order to reduce exposure to
downturn in any particular sector.

Transactions between segments are recorded at cost. The Company's
businesses are operated on an integrated basis and are characterized by
substantial intersegment cooperation, cost allocations, and marketing efforts.
Substantially all interest expense is incurred at Corporate. Therefore,
management does not represent that these segments, if operated independently,
would report the operating income and other financial information shown.

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES:
Systems assembly and distribution.................. $589,286 $514,078 $274,651
Printed wiring boards.............................. 208,696 128,107 72,851
Other.............................................. 127,561 137,418 111,391
-------- -------- --------
$925,543 $779,603 $458,893
======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES*:
Systems assembly and distribution.................. $ 32,558 $ 30,645 $ 13,621
Printed wiring boards.............................. 29,084 26,935 17,442
Other.............................................. 6,647 12,048 11,152
Unallocated general corporate...................... (30,185) (19,963) (10,010)
-------- -------- --------
$ 38,104 $ 49,665 $ 32,205
======== ======== ========
IDENTIFIABLE ASSETS AT THE END OF EACH FISCAL YEAR:
Systems assembly and distribution.................. $238,027 $209,886 $126,253
Printed wiring boards.............................. 390,194 170,503 92,594
Other.............................................. 79,453 143,110 96,281
Unallocated general corporate...................... 39,635 69,230 20,723
-------- -------- --------
$747,309 $592,729 $335,851
======== ======== ========
DEPRECIATION AND AMORTIZATION**:
Systems assembly and distribution.................. $ 10,629 $ 6,915 $ 7,326
Printed wiring boards.............................. 10,925 7,008 5,627
Other.............................................. 10,283 7,628 7,230
Unallocated general corporate...................... 1,162 791 677
-------- -------- --------
$ 32,999 $ 22,342 $ 20,860
======== ======== ========
CAPITAL EXPENDITURES:
Systems assembly and distribution.................. $ 21,317 $ 25,493 $ 10,869
Printed wiring boards.............................. 118,818 61,326 6,586
Other.............................................. 11,912 34,334 15,377
Unallocated general corporate...................... 1,844 116 442
-------- -------- --------
$153,891 $121,269 $ 33,274
</TABLE>

- ---------------

* Excludes unusual charges of $72,794 and $16,532 in fiscal 1998 and 1996,
respectively, which related primarily to other services. See Note 7 for
additional information regarding the unusual charges.

** Excludes unusual charges related to property, plant, and equipment and
goodwill impairment charges of $53,340 and $7,970 in fiscal 1998 and 1996,
respectively, which related primarily to other services. See Note 7 for
additional information regarding the unusual charges.

41
<PAGE> 43
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following summarizes financial information by geographic areas:

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES:
North America...................................... $637,795 $543,469 $356,917
Europe............................................. 175,675 150,174 65,348
Asia............................................... 112,073 85,960 36,628
TRANSFERS BETWEEN GEOGRAPHIC AREAS:
North America...................................... 166 3,021 1,500
Europe............................................. 85 61 33
Asia............................................... 1,091 220 48
Eliminations....................................... (1,342) (3,302) (1,581)
-------- -------- --------
$925,543 $779,603 $458,893
======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES:
North America...................................... $(38,053) $ 47,780 $ 23,551
Europe............................................. 20,027 17,635 6,063
Asia............................................... 9,874 4,035 (1,471)
Unallocated general corporate...................... (30,380) (19,785) (12,470)
-------- -------- --------
$(38,532) $ 49,665 $ 15,673
======== ======== ========
LONG-LIVED ASSETS AT THE END OF EACH FISCAL YEAR:
North America...................................... $232,134 $257,673 $155,681
Europe............................................. 110,296 12,466 7,335
Asia............................................... 80,635 7,065 6,971
Unallocated general corporate...................... 9,955 7,706 3,197
-------- -------- --------
$433,020 $284,910 $173,184
======== ======== ========
</TABLE>

Export sales from the United States are immaterial.

At any given time, certain customers may account for significant portions
of the Company's business. Hewlett-Packard accounted for 10% and 17% of net
sales in fiscal 1998 and 1997, respectively. IBM accounted for 10% of net sales
in fiscal 1998. No other customer accounted for more than 10% of net sales in
fiscal 1998, 1997, or 1996. The Company's top ten customers accounted for 48%,
50%, and 43% of net sales in fiscal 1998, 1997, and 1996, respectively. The
percentage of the Company's sales to its major customers may fluctuate from
period to period. Significant reductions in sales to any of these customers
would have a material adverse effect on the Company's operating results. The
Company has few material, firm, long-term commitments or volume guarantees from
its customers. In addition, customer orders can be canceled and volume levels
can be changed or delayed. From time to time, some of the Company's customers
have terminated their manufacturing arrangements with the Company, and other
customers have reduced or delayed the volume of design and manufacturing
services performed by the Company. The timely replacement of canceled, delayed,
or reduced contracts with new business cannot be assured, and termination of a
manufacturing relationship or change, reduction, or delay in orders could have a
material adverse effect on the Company's operating results. In the past, changes
in customer orders have had a significant impact on the Company's results of
operations due to corresponding changes in the level of overhead absorption.

Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties completely failed to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet)

42
<PAGE> 44
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

that arise from financial instruments exist for groups of customers or
counterparties when they have similar economic characteristics that would cause
their ability to meet contractual obligations to be similarly affected by
changes in economic or other conditions. The Company has concentrations of
credit risk in accounts receivable from its top ten customers. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintained reserves for potential credit losses
of $5,900 and $2,893 at January 3, 1999, and December 28, 1997, respectively. In
addition, the Company has concentrations of credit risk in cash and cash
equivalents, which are maintained at recognized financial institutions. The
Company performs ongoing financial evaluations of these financial institutions.

NOTE 14 SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

As discussed in Note 15, subsequent to the issuance of the Company's
financial statements for the year ended January 3, 1999, management determined
that $3,842 of costs included in its original estimate of losses on sales
contracts previously recorded as unusual charges in fiscal 1998 (see Note 7)
should have been reflected as selling, general and administrative expenses in
the quarters in which such costs were incurred.

The Company previously recorded $54,000 and $22,636 of unusual charges
during the first and fourth quarters of fiscal 1998, respectively, relating to
Orbit's semiconductor wafer fabrication facility. The restated unusual charges
amounted to $51,158 and $21,636 in the first and fourth quarters of fiscal 1998,
respectively.

The following summarizes the impact and timing of the restatement on the
quarterly financial information for the year ended January 3, 1999:

<TABLE>
<CAPTION>
1998 FISCAL QUARTERS
----------------------------------------- FISCAL
FIRST SECOND THIRD FOURTH 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales:
As previously reported................ $235,374 $221,938 $205,917 $262,314 $925,543
As restated........................... 235,374 221,938 205,917 262,314 925,543
Gross profit:
As previously reported................ (18,714) 33,142 32,022 18,300 64,750
As restated........................... (15,872) 33,142 32,022 19,300 68,592
Net income (loss):
As previously reported................ (32,047) 6,127 6,532 2,356 (17,032)
As restated........................... (30,001) 5,023 5,590 2,356 (17,032)
Basic earnings (loss) per share:
As previously reported................ (1.27) 0.24 0.26 0.10 (0.68)
As restated........................... (1.19) 0.20 0.23 0.10 (0.68)
Diluted earnings (loss) per share:
As previously reported................ (1.27) 0.23 0.25 0.09 (0.68)
As restated........................... (1.19) 0.19 0.21 0.09 (0.68)
</TABLE>

The following summarizes quarterly financial information for the year ended
December 28, 1997:

<TABLE>
<CAPTION>
DILUTED EARNINGS
GROSS PROFIT NET BASIC EARNINGS (LOSS) PER
NET SALES (LOSS) INCOME (LOSS) (LOSS) PER SHARE SHARE
--------- ------------ ------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
1997 Quarters
First.............. $137,080 $ 26,180 $ 5,077 $0.21 $0.20
Second............. 184,097 32,679 7,540 0.31 0.27
Third.............. 212,864 33,302 9,955 0.40 0.35
Fourth............. 245,562 39,779 12,748 0.50 0.44
-------- -------- ------- ----- -----
$779,603 $131,940 $35,320 $1.43 $1.26
</TABLE>

43
<PAGE> 45
THE DII GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(15) RESTATEMENT

<TABLE>
<CAPTION>
AS PREVIOUSLY AS
REPORTED RESTATED
------------- --------
<S> <C> <C>
Total cost of sales......................................... $860,793 $856,951
SG&A expenses............................................... 77,318 81,160
</TABLE>

44
<PAGE> 46

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K"
is hereby amended for the sole purpose of including updated Consents of
Independent Auditors.

(a)(3) List of Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.1 -- Consent of Independent Auditors -- Deloitte & Touche
LLP
23.2 -- Consent of Independent Auditors -- KPMG
</TABLE>

45
<PAGE> 47

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K/A to be
signed on its behalf by the undersigned, thereunto duly authorized.

The DII Group, Inc.
(Registrant)

By:
----------------------------------
Thomas J. Smach
Chief Financial Officer

Dated: September 8, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K/A has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

Chairman and Chief Executive September 8, 1999
- ----------------------------------------------------- Officer (Principal
Ronald R. Budacz Executive Officer)

Executive Vice President and September 8, 1999
- ----------------------------------------------------- Director (Principal
Carl R. Vertuca, Jr. Financial Officer)

Chief Financial Officer and September 8, 1999
- ----------------------------------------------------- Senior Vice President
Thomas J. Smach (Principal Accounting
Officer)

Director September 8, 1999
- -----------------------------------------------------
Robert L. Brueck

Director September 8, 1999
- -----------------------------------------------------
Constantine S. Macricostas

Director September 8, 1999
- -----------------------------------------------------
Gerard T. Wrixon, Ph.D.

Director September 8, 1999
- -----------------------------------------------------
Alexander W. Young
</TABLE>

46
<PAGE> 48

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.1 -- Consent of Independent Auditors -- Deloitte & Touche
LLP
23.2 -- Consent of Independent Auditors -- KPMG
</TABLE>

<PAGE> 1
EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
The DII Group, Inc.:

We consent to the incorporation by reference in registration statements Nos.
33-73556, 33-90572, 33-79940, 333-10999, 333-11001, 333-11005 and 333-11007 of
the DII Group, Inc. on Form S-8, of our reports dated January 28, 1999 (February
18, 1999 as to the redemption of convertible subordinated notes described in
Note 6 and September 8, 1999 as to Note 15), which expresses an unqualified
opinion and includes an explanatory paragraph referring to the restatement
discussed in Note 15, incorporated by reference in this Annual Report on Form
10-K/A of the DII Group, Inc. for the 53 weeks ended January 3, 1999.

DELOITTE & TOUCHE LLP

Denver, Colorado
September 8, 1999

<PAGE> 1
EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
The DII Group, Inc.:

We consent to the incorporation by reference in registration statements Nos.
33-73556, 33-90572, 33-79940, 333-10999, 333-11001, 333-11005 and 333-11007 on
Form S-8, and No. 33-80175 on Form S-3 of The DII Group, Inc. of our reports
dated January 28, 1997, relating to the consolidated statements of operations,
stockholders' equity and cash flows of the DII Group, Inc. for the 52 weeks
ended December 29, 1996 and related schedule, which reports appear in the 1998
Annual Report on Form 10-K/A of The DII Group, Inc.

KPMG LLP

Denver, Colorado
September 8, 1999