Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations.

For an understanding of the significant factors that influenced the company's performance during the past three years, the following discussion should be read in conjunction with the consolidated financial statements and other information appearing elsewhere in this annual report on Form 10-K. In May 2002, the company sold substantially all of the assets of Gates/Arrow, a business unit within the company's North American Computer Products group ("NACP") that sold commodity computer products such as printers, monitors, other peripherals, and software in North America. The disposition of the Gates/Arrow operations represents a disposal of a "component of an entity" as defined in Financial Accounting Standards Board ("FASB") Statement No. 144. Accordingly, the company's consolidated financial statements and related notes have been presented to reflect Gates/Arrow as a discontinued operation for all periods. In April 2002, the FASB issued Statement No. 145, which requires that gains and losses on the extinguishment of debt be classified as income or loss from continuing operations rather than as an extraordinary item as previously required. Accordingly, the company's 2002 consolidated financial statements and related notes have been restated to reflect the loss on prepayment of debt as a component of income or loss from continuing operations.

Overview

The company has two business segments: electronic components and computer products. Consolidated sales grew by 17.4% in 2003 as a result of the acquisition of the Industrial Electronics Division ("IED") of Agilysys, Inc. (formerly Pioneer-Standard Electronics, Inc.) on February 28, 2003, the impact of the strengthening Euro, strong sales growth in the components businesses in North America and Asia/Pacific, and continued growth in the NACP businesses. The growth in the North American Components ("NAC") business is due to the cyclical upturn that began during the summer months. The growth in the Asia/Pacific components business is a result of that region's strong growth coupled with the company's increased focus in the region. The growth in NACP is due to an increasing market for the mid-range related products as well as a company initiative to grow sales of servers and software.

Net income increased to $25.7 million in 2003 compared with a loss of $610.5 million in 2002. In 2003, the company recorded pre-tax restructuring charges of $37.9 million associated with an initiative to reduce operating costs resulting in cost savings of $75.0 million annually, a pre-tax integration charge of $6.9 million associated with the acquisition of IED, an acquisition indemnification charge of $13.0 million associated with an acquisition in 2000, and a pre-tax loss on the prepayment of debt of $6.6 million. In 2002, the company recorded a goodwill impairment charge of $603.7 million in connection with the adoption of FASB Statement No. 142, "Goodwill and Other Intangible Assets," a pre-tax loss on the prepayment of debt of $20.9 million, a pre-tax severance charge of $5.4 million, and a net loss associated with discontinued operations of $5.9 million. In addition to the impact of the aforementioned items that have an effect on comparability, the increase in net income is due to the impact of efficiency initiatives reducing operating expenses by $60.0 million in 2003, the company's ability to increase sales, both organically generated as well as those resulting from the acquisition of IED, without operating expenses increasing at the same rate, and lower interest costs as a result of the prepayment of debt.

Sales

Consolidated sales for 2003 increased 17.4% from $7.4 billion in 2002 to $8.7 billion. Sales in the Americas increased in 2003 by $799.6 million or 18.6% when compared with the year-earlier period principally due to the acquisition of the IED business, as well as organic growth in both the components and computer products businesses. European sales for 2003 increased by $326.8 million or 13.4% compared with the year-earlier period principally as a result of the impact of a weakening U.S. dollar on the translation of the company's European financial statements. Asia/Pacific sales for 2003 increased by $162.8 million or 24.7%, compared with the year-earlier period, as a result of improved market conditions as well as the company's increased focus in this region. The consolidated increase in sales was impacted by the translation of

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Sales of electronic components increased by $1.1 billion or 20.6% for 2003 compared with the year-earlier period. Sales in the NAC business for 2003 increased by 24.9% compared with the year-earlier period. This increase was primarily a result of the acquisition of the IED business in late February 2003. The remaining factors impacting the overall increase in worldwide sales of electronic components include the impact of a weakened U.S. dollar on the translation of the company's financial statements and the aforementioned increased sales in the Asia/Pacific region, as well as North America.

Computer products sales increased by $191.8 million or 9.3% for 2003 compared with the year-earlier period. Sales in the North American Enterprise Computing Solutions business increased by 18.9% in 2003 compared with the year-earlier period. Sales in the computer products' original equipment manufacturers ("OEM") business increased by 16.5% in 2003 compared with the year-earlier period, though the OEM market continues to be impacted by reduced activity levels at large complex telecommunications and networking companies. These increases were offset, in part, by the 43.8% decrease in sales of the Nordic commodity computer products business, which was exited during the third quarter of 2003.

In 2002, consolidated sales decreased by 22.1% from $9.5 billion in 2001 to $7.4 billion. This decline was principally due to a $1.8 billion or 25.6% decrease in sales of electronic components as a result of severely depressed demand at telecommunications and networking customers and the contract manufacturers that serve them, and lower demand in the company's core OEM business due to weakened general economic conditions. In addition, the company terminated a single customer engagement in the Asia/Pacific region during 2001. Sales of computer products decreased by $266.2 million or 11.4% in 2002 when compared with 2001. Beginning in mid-2001, the company's computer products businesses implemented a new strategy, which focused less on sales volume and placed more emphasis on profitability. While sales of computer products declined compared with 2001, operating income increased by 33.2%. Sales in the North American Enterprise Computing Solutions business (formerly North American mid-range computer products) were relatively flat compared with 2001, while operating income increased by 38.0%. In 2002, sales of low margin microprocessors (a product segment not considered a part of the company's core business) decreased by $185.0 million or 27.9% when compared with 2001. Lastly, translation of the financial statements of the company's international operations into U.S. dollars resulted in increased revenues of $118.3 million because of a weakening U.S. dollar in 2002 when compared with 2001.

In 2001, consolidated sales decreased by 21.4% from $12.1 billion in 2000 to $9.5 billion. This decline was principally due to a $2.7 billion or 27.1% decrease in sales of electronic components as a result of severely depressed demand at telecommunications and networking customers and the contract manufacturers that serve them, and lower demand in the company's core OEM business due to weakened general economic conditions. In addition, the company terminated a single customer engagement in the Asia/Pacific region during 2001, which resulted in a sales decline of approximately $193 million versus 2000. Sales of computer products increased by $78.1 million or 3.5% in 2001 when compared with 2000. In the fourth quarter of 2000, Hewlett Packard modified its agreements with its distributors transforming the previously existing relationship from that of a distributor to that of an agent. Thus, the company modified its method of recognizing revenue to include only the payment from Hewlett Packard for the company's sales and marketing efforts. The modification resulted in a reduction of more than $300 million in revenue in 2001 compared with 2000. In 2001, sales of low margin microprocessors (a product segment not considered a part of the company's core business) decreased by nearly $207 million. Lastly, translation of the financial statements of the company's international operations into U.S. dollars resulted in reduced revenues of $117.7 million because of a strengthened U.S. dollar in 2001 when compared with 2000. Each of these factors was offset, in part, by the acquisitions that occurred in 2000.

Restructuring, Integration, and Other Charges

Restructuring

2003

During 2003, the company implemented actions to become more effectively organized and to improve its operating efficiencies, with targeted annualized savings of $75.0 million, of which approximately $60.0 million was realized in 2003. The company has taken these steps in order to make its organizational structure, systems, and processes more efficient. The estimated restructuring charges associated with these actions total approximately $42.4 million, of which $37.9 million ($27.1 million net of related taxes or $.27 per share) was recorded in 2003. The remaining amount of approximately $4.5 million will be recorded over the next several quarters. Approximately $39.0 million of the total charge is expected to be spent in cash. A summary of the restructuring charges included in operating income is as follows (in millions):

The company recorded a charge of $26.8 million related to personnel costs as part of the 2003 restructuring. The total number of positions eliminated was approximately 1,085 positions, or 9%, out of prior year's ending worldwide total of 11,700 positions. There was no single group of employees impacted by these restructuring actions. Instead it impacted both exempt and non-exempt employees across multiple locations, segments, and functions.

The company recorded a charge of $6.0 million relating to facilities closed. As part of the physical logistics network rationalization, one primary distribution center in England was closed and another will be closed over the next several months, and their operations will be centralized in the newer, state-of-the-art, Pan-European facility in Venlo, the Netherlands. In addition, the primary distribution center in Brookhaven, New York was partially closed and the remaining operations will be closed over the next several months, and customers and suppliers will be serviced out of a newer, more efficient distribution center in Reno, Nevada. Further, the company exited its Nordic commodity computer products business serving hardware integrators and resellers in Norway, Sweden, Denmark, and Finland.

The company recorded a provision of $3.1 million for asset write-downs. The provision was principally for fixed assets and was recorded in North America and Europe.

Also included in the charge was $2.0 million for IT systems and other miscellaneous items related to the early termination of computer equipment, logistics support, and service commitments no longer being used.

On February 17, 2004, the company announced, as part of on-going evaluations, a series of additional steps designed to enhance the company's operating efficiencies, primarily related to the elimination of corporate support functions. The net result is estimated to reduce the company's cost structure by an additional $15.0 million annually. Approximately 50% of this annual cost savings will begin in the first quarter of 2004, with the remaining 50% beginning late in the second quarter of 2004. The company expects to record a restructuring charge relating to these actions over several quarters in 2004 totaling $2.0 million to $5.0 million, before taxes.

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2001

In mid-2001, the company took a number of significant steps, including a reduction in its worldwide workforce, salary freezes and furloughs, cutbacks in discretionary spending, deferral of non-strategic projects, consolidation of facilities, and other major cost containment and cost reduction actions, to mitigate, in part, the impact of significantly reduced revenues. As a result of these actions, the company recorded restructuring costs and other charges of $227.6 million ($145.1 million net of related taxes or $1.47 per share). These charges include costs associated with headcount reductions, the consolidation or closing of facilities, valuation adjustments to inventory and Internet investments, the termination of certain customer engagements, and various other miscellaneous items. Of the total charge, $174.6 million reduced operating income (including $97.5 million in cost of products sold) and $53.0 million was recorded as a loss on investments. There were no material revisions to these actions and their related costs. A summary of charges included in operating income is as follows (in millions):

The company recorded a charge of $15.2 million related to personnel costs as part of the mid-2001 restructuring. The total number of positions eliminated was nearly 1,200, out of the then existing worldwide total of 14,150, or approximately 9%. The actual number of employees terminated approximated original estimates. The reduction in headcount was principally due to reduced activity levels across all functions throughout the company. There was no single group of employees or business segment that was impacted by this restructuring. Instead it impacted both exempt and non-exempt employees across a broad range of functions including sales and marketing, warehouse employees, employees working in value-added centers, finance personnel in credit/collections and accounts payable, human resources and IT. The company's approach was to reduce its headcount in the areas with reduced activities.

The company also consolidated or closed 15 facilities and accordingly recorded a charge of $10.0 million related to vacated leases, including write-offs of related leasehold improvements.

The company also terminated certain customer programs principally related to services not traditionally provided by the company because they were not profitable. The $38.8 million provision included charges for inventory these customers no longer required, pricing disputes, non-cancelable purchase commitments, and value-added taxes.

The company recorded an inventory provision of $97.5 million, which was included in cost of products sold. The provision related to a substantial number of parts. In addition to North America, provisions were recorded in Europe and the Asia/Pacific region. The inventory charge was principally related to products purchased for single or limited customer engagements and in certain instances from non-traditional, non-franchised sources for which no contractual protections such as return rights, scrap allowance, or price protection exist. The inventory provision was principally for electronic components. The parts were written down to estimated realizable value; in many cases to estimated scrap value or zero. At December 31, 2003, approximately 66% of the inventory for which a provision was made had been scrapped and approximately 34% of this inventory was sold at its reduced carrying value with minimal impact on gross margins.

Also included in the charge was $13.1 million for IT systems and other miscellaneous items related to logistics support and service commitments no longer being used, hardware and software not utilized by the company, professional fees related to contractual obligations of certain customer terminations, and the write-off of an investment in an IT-related service provider.

In connection with the restructuring costs and other charges discussed above, operating expenses declined, in part, as a result of the reduction in workforce, cutbacks in discretionary spending, deferral of non-strategic projects, and consolidation of facilities initiated in mid-2001 as a result of the significant reduction in sales and related activities. The financial impact of these actions, commencing in the second quarter of 2002, of approximately $100.0 million for 2003 and $70.0 million for 2002 is reflected as a reduction in selling, general and administrative expenses. These cost savings may not be permanent as increased activity levels resulting from, among other factors, increased revenues may require an increase in headcount and other increased spending.

Internet Investments Write-Down

As a result of the significant decline in the Internet sector during 2001, the company assessed the value of its investments early in the third quarter of 2001. In order to assess the value of its investments, the company selected a pool of comparable publicly traded companies and obtained the stock price of each company at the date of the company's original investment and in the third quarter of 2001. The percentage change in the average stock price was applied to the related investment to determine the change in the value of the investment, modified to the extent that the entity had cash to repay the investors. The company determined that certain of these investments had experienced an other-than-temporary decline in their realizable values. Accordingly, included in the $227.6 million charge recorded in the third quarter of 2001, the company recorded a charge of $53.0 million to write various Internet investments down to their realizable values. At December 31, 2003, the remaining book value of these investments was $1.3 million, which represents the company's interest in Viacore, Inc.

Integration

2003

In February 2003, the company acquired substantially all the assets of the IED business. IED serves industrial OEMs and contract manufacturers. The net consideration paid for this acquisition was $238.1 million, of which $226.0 million was paid through December 31, 2003. In order to ensure the best financial returns as a result of the acquisition, the company fully integrated the IED business into the NAC group. The full integration included, among other actions, the conversion of data into the company's IT platform, the transfer and combination of the acquired inventories to the company's distribution centers, and the closing of duplicative facilities. As a result of these actions, the acquired business does not exist as a seperate division or profit and loss center. As the financial performance of the acquired business is no longer separately identifiable, it is not possible to quantify the impact of the acquisition on operating income. Through the combined businesses, the company expects to achieve cost savings and additional revenue that is expected to improve earnings by approximately $.20 per share annually.

For financial reporting purposes, the acquisition is accounted for as a purchase transaction in accordance with FASB Statement No. 141, "Business Combinations." Accordingly, the consolidated results of the company in 2003 include IED's performance from the date of acquisition. The company has recorded cost in excess of net assets acquired of $75.1 million.

In the first quarter of 2003, the company recorded integration costs of $18.4 million ($14.1 million net of related taxes) related to the acquisition of IED. Of the total amount recorded, $6.9 million ($4.8 million net of related taxes or $.05 per share) relating primarily to severance costs for the company's employees was charged to income from continuing operations, and $11.5 million ($9.2 million net of related taxes) relating primarily to severance costs for IED employees and professional fees was recorded as additional goodwill. As of December 31, 2003, approximately $1.2 million of this accrual was required to address remaining contractual obligations.

2001 and prior

In 2001, the company recorded an integration charge of $9.4 million ($5.7 million net of related taxes or $.06 per share) related to the acquisition of Wyle Electronics and Wyle Systems (collectively, "Wyle"). Of the total amount recorded, $1.4 million represented costs associated with the closing of various overlapping office facilities and distribution and value-added centers, $4.1 million represented costs associated with the termination of certain personnel largely performing duplicate functions, $2.7 million represented costs associated with outside services related to the conversion of systems and certain other costs of the integration of Wyle into the company, and $1.2 million represented the write-down of property, plant and equipment to estimated fair value. As of December 31, 2003, approximately $1.8 million of this accrual was required to address remaining contractual obligations.

During 1999, the company acquired Richey Electronics, Inc. ("Richey") and the electronics distribution group of Bell Industries, Inc. ("EDG"). As a result of these acquisitions, in 1999, the company recorded an integration charge of $24.6 million ($16.5 million net of related taxes or $.17 per share) and an additional $38.0 million ($25.8 million net of related taxes), as cost in excess of net assets of companies acquired, to integrate Richey and EDG into the company. Of the total amount recorded, $30.1 million was associated with the closing of various office facilities and distribution and value-added centers with the remaining amounts associated with severance, the termination of certain supplier relationships, and professional fees. As of December 31, 2003, approximately $3.3 million of this accrual was required to address remaining contractual obligations.

The remaining integration accrual as of December 31, 2003, of approximately $10.4 million, relates to numerous acquisitions made prior to 2000, which individually are not significant and principally represent payments for remaining contractual obligations.

The remaining restructuring and integration charges of $37.8 million as of December 31, 2003, of which $29.3 million is expected to be spent in cash, will be utilized as follows:

The company's integration and restructuring programs principally impacted its electronic components operations.

Acquisition Indemnification

In 2000, the company purchased Tekelec Europe SA ("Tekelec"), a French company, from Tekelec Airtronic SA ("Airtronic") and certain other selling shareholders. Pursuant to the share purchase agreement, Airtronic agreed to

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The VAT Matter is currently the subject of administrative proceedings in France. Airtronic elected to assume the defense of this claim, in accordance with the terms of the purchase agreement, and asserted certain defenses to the claim. In September 2003, the French courts confirmed the criminal conviction of the son of the former president of Airtronic, who was an employee of Tekelec prior to the acquisition, for tax fraud involving conduct similar in part to that alleged in connection with the tax claim against Tekelec.

The product liability claim is subject to French legal proceedings under which separate determinations are made as to whether the products were defective and the amount of damages sustained by the purchaser. The manufacturer of the product is also a party to these proceedings. The company believes that it has valid defenses to this claim and intends to contest it vigorously.

During 2003, judgments were rendered in favor of the former employees, and Tekelec, while appealing, has been ordered to pay damages in the amount of €.4 million ($.5 million at the year-end exchange rate). This amount has previously been accrued by the company in connection with the accounting for the acquisition of Tekelec. Tekelec has demanded payment of this amount from Airtronic and received in response a letter, dated October 8, 2003, asserting that the indemnification provisions of the purchase agreement are not enforceable. The company has been advised by counsel that the indemnification provisions are enforceable and intends to pursue its rights vigorously. Based on Airtronic's position on the enforceability of the indemnity, which the company believes creates a conflict of interest on the part of Airtronic's lawyer in representing Tekelec before the tax authorities, Tekelec has dismissed Airtronic's counsel in favor of retaining its own tax lawyer and intends to pursue separate discussions with the tax authorities. Were Tekelec to enter into a settlement of this matter without the consent of Airtronic, the company's right to claim against Airtronic under the indemnification provisions could be impaired.

In light of the company's inability to assess Airtronic's ability and intent to fulfill its obligations under the indemnity with respect to the VAT Matter, an acquisition indemnification charge of €11.3 million ($13.0 million or $.13 per share at the September 30, 2003 foreign exchange rate) was recognized in the third quarter of 2003.

Loss on Prepayment of Debt

During 2003, the company repurchased $169.0 million accreted value of its zero coupon convertible debentures (the "convertible debentures") due in 2021, which could have been put to the company in February 2006. The related loss on the repurchase aggregated $3.6 million ($2.2 million net of related taxes or $.02 per share), which includes the write-off of related deferred financing costs offset, in part, by the discount on the repurchase. The loss on the repurchase is recognized in income from continuing operations in the company's consolidated statement of operations. As a result of these transactions, interest expense will be reduced by approximately $5.0 million annually from the dates of repurchase through the 2006 put date, if interest rates remain the same.

During 2003, the company repurchased, prior to maturity, $84.8 million principal amount of its 8.2% senior notes, which matured in October 2003. The premium paid and the related deferred financing costs written-off upon the repurchase of this debt aggregated $2.9 million ($1.8 million net of related taxes or $.02 per share), and is recognized in income from continuing

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During 2002, the company repurchased $398.2 million principal amount of its 6.45% and 8.2% senior notes, due in the fourth quarter of 2003. The premium paid and the related deferred financing costs written-off upon the repurchase of this debt aggregated $20.9 million ($12.9 million net of related taxes or $.13 per share) and is recognized in the loss from continuing operations in the company's consolidated statement of operations. As a result of these transactions, interest expense was reduced by approximately $31.1 million from the dates of repurchase through the 2003 maturity date. As required by FASB Statement No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," the 2002 loss on extinguishment of debt, which was previously recorded as an extraordinary item, was reclassified as a component of the loss from continuing operations.

Discontinued Operations

In May 2002, the company sold substantially all of the assets of Gates/Arrow, a business unit within NACP that sold commodity computer products such as printers, monitors, other peripherals, and software to value-added resellers in North America. The total cash proceeds of $42.9 million, after price adjustments, have been collected. The assets sold consisted primarily of accounts receivable, inventories, and property and equipment. The buyer also assumed certain liabilities.

The company recorded a loss of $10.2 million ($6.1 million net of related taxes or $.06 per share) on the disposal of Gates/Arrow. The loss consists of the following (in millions):

Personnel costs relate to the termination of 88 individuals employed by the Gates/Arrow business and 57 NACP warehouse personnel due to reduced activity levels as a result of the sale of Gates/Arrow. Facilities costs are principally related to vacated warehouse space no longer required as a result of the sale. The write-down of assets adjusted the carrying value of the assets sold to the value agreed upon under the terms of the contract of sale.

Change in Accounting Principle

In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets." This Statement, among other things, eliminates the amortization of goodwill and requires annual tests for determining impairment of goodwill. On January 1, 2002, the company adopted Statement No. 142, and accordingly, discontinued the amortization of goodwill.

As required by Statement No. 142, the company completed the two steps required to identify and measure goodwill impairment for each reporting unit as of January 1, 2002. The first step involved identifying all reporting units with carrying values (including goodwill) in excess of fair value determined by reference to comparable businesses using a weighted average EBIT multiple. The reporting units identified from the first step were then measured for impairment by comparing the units' fair value to their carrying value. Those reporting units having a carrying value substantially exceeding their fair value were identified as being fully impaired, and the company fully wrote down the related goodwill. For reporting units with potential impairment, the company determined the fair value of the assets and liabilities of the unit and wrote down the goodwill to its implied fair value accordingly. The majority of the reporting units' assets and liabilities were inventories, accounts receivable, accounts payable, and accrued expenses, which are carried at fair value. No other impairment indicators have arisen since January 1, 2002.

As a result of the evaluation process performed during the second quarter of 2002, the company recorded an impairment charge of $603.7 million ($6.05 per share), which was recorded as a cumulative effect of change in accounting principle at January 1, 2002.

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The company's annual impairment tests in 2003 and 2002 did not result in any additional impairments to the carrying value of goodwill.

Severance Charge

During 2002, the company's former chief executive officer resigned. As a result, the company recorded a severance charge totaling $5.4 million ($3.2 million net of related taxes or $.03 per share), principally based on the terms of his employment agreement. Included therein are provisions principally related to salary continuation, retirement benefits, and the vesting of restricted stock and options.

Operating Income

The company recorded gross profit of $1.4 billion for 2003, compared with gross profit of $1.3 billion in the year-earlier period. The increase in gross profit is principally due to the 17.4% increase in sales in 2003. The gross profit margins for 2003 decreased by approximately 70 basis points when compared with the year-earlier period. The decrease in gross profit percentage is principally due to margin pressures in the components businesses around the world.

The company recorded operating income of $184.0 million in 2003 as compared with $167.5 million in 2002. Included in operating income for 2003 are the aforementioned acquisition indemnification charge of $13.0 million, restructuring charges of $37.9 million, and integration charge of $6.9 million. Included in operating income for 2002 is the aforementioned severance charge of $5.4 million associated with the resignation of the company's former chief executive officer. The increase in operating income of $16.5 million for 2003 compared with the year-earlier period is principally a result of higher gross profit resulting from the 17.4% increase in sales and lower operating costs resulting from the company's ability to improve operating efficiencies offset by increasing variable costs associated with higher sales, the restructuring charges, the acquisition indemnification charge, and the integration charge.

The company recorded gross profit of $1.3 billion for 2002, compared with gross profit of $1.5 billion in the year-earlier period. Included in gross profit for 2001 are restructuring costs and other charges of $97.5 million. The decline in gross profit is principally due to the 22.1% decline in sales in 2002. The gross profit margins for 2002 improved by approximately 140 basis points when compared with the year-earlier period. The increase in gross profit percentage is principally due to a change in the mix of sales, which in 2002 is more heavily concentrated on the businesses serving core OEM customers that typically have higher margins, a corresponding smaller proportion of sales to large accounts that typically have a lower gross profit percentage, and the aforementioned charges included in 2001. It also reflects the computer products businesses' increasing focus on higher margin business.

The company recorded operating income of $167.5 million in 2002 as compared with $152.7 million in 2001. Included in operating income for 2002 is the aforementioned severance charge of $5.4 million. Included in operating income for 2001 are $174.6 million of restructuring costs and other charges described above, the integration charge of $9.4 million associated with the acquisition of Wyle, and goodwill amortization of $48.0 million. The increase in operating income of $14.9 million for 2002 compared with the year-earlier period is principally a result of a 17.9% reduction in expenses, partially as a result of the decline in selling, general and administrative costs of approximately $104.6 million from December 31, 2001, principally due to lower variable

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The company recorded gross profit of $1.5 billion for 2001, compared with gross profit of $2.0 billion in the year-earlier period. Included in gross profit for 2001 are the aforementioned restructuring costs and other charges of $97.5 million. The decline in gross profit is principally due to the decline in sales of 21.4% in 2001. The gross profit margins for 2001 decreased by approximately 80 basis points when compared with the year-earlier period. The decrease in gross profit percentage is principally due to the decline in sales in 2001 and the aforementioned charges included in 2001.

The company's operating income decreased to $152.7 million in 2001 compared with $773.2 million in 2000. The decrease in operating income was due to the sudden and dramatic reduction in sales that began in the latter part of the first quarter of 2001, and accelerated thereafter.

Interest Expense

Interest expense of $135.0 million (net of interest income of $11.3 million) in 2003 decreased from $152.6 million (net of interest income of $21.2 million) in the year-earlier period principally as a result of the generation of cash from operations of $291.6 million in 2003, which was utilized to reduce debt by $62.5 million offset, in part, by the loss of interest income from the cash utilized to pay for the acquisition of IED and declining interest rates on high quality liquid investments.

Net interest expense of $152.6 million in 2002 decreased from $210.6 million in the year-earlier period as a result of significantly lower debt balances. During 2002, cash flow from operations totaled $667.9 million, thereby permitting the company to reduce debt by $385.8 million and increase cash by $137.2 million. The positive cash flow reflected the decline in sales coupled with improved working capital utilization.

Interest expense of $210.6 million (net of interest income of $5.0 million) in 2001 increased from $169.9 million in the year-earlier period. The increase in interest expense was the result of the full year impact of interest on $1.2 billion of additional borrowings incurred in 2000 to fund acquisitions offset, in part, by the generation of $1.7 billion in cash flow from operations in 2001. The increase in cash flow from operations was due to the company's decreased working capital and capital expenditure requirements. The cash generated from operations in 2001 was utilized to reduce debt by $1.1 billion and to increase cash on hand by $501.3 million.

Income Taxes

The company recorded an income tax provision of $21.2 million on income before income taxes and minority interest of $47.3 million for 2003 (an effective tax rate of 44.8%), compared with a tax benefit of $1.8 million on a loss before income taxes and minority interest of $3.3 million in the year-earlier period (an effective tax benefit rate of 53.1%). As required by FASB Statement No. 145, the loss on extinguishment of debt of $20.9 million ($12.9 million net of related taxes) in 2002, previously recorded as an extraordinary item, was reclassified as a component of the loss from continuing operations. Accordingly, the 2002 income tax provision of $6.1 million on income before income taxes and minority interest of $17.5 million (an effective tax rate of 35.1%) has been restated to reflect this presentation. The income taxes and effective tax rates recorded in 2003 and 2002 were impacted by the estimated tax benefit related to the aforementioned restructuring, integration, acquisition indemnification, and severance charges. The company's effective tax rate and income tax provision is principally impacted by, among other factors, a tax reorganization completed at the end of 2002, the statutory tax rates in the countries in which it operates, and the related level of income generated by these operations.

The 2002 income tax benefit of $1.8 million on a loss before income taxes and minority interest of $3.3 million (an effective tax benefit rate of 53.1%), compared with a tax benefit of $35.2 million on a loss before income taxes and minority interest of $112.1 million in 2001 (an effective tax benefit rate of

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The company recorded an income tax benefit of $35.2 million (an effective tax benefit rate of 31.4%) in 2001 compared with a provision for taxes of $244.7 million (an effective tax rate of 40.7%) in 2000.

Net Income (Loss)

The company recorded net income of $25.7 million for 2003, compared with a net loss of $610.5 million in the year-earlier period. Included in the results for 2003 are the acquisition indemnification charge of $13.0 million, restructuring charges of $27.1 million (net of related taxes), integration charge of $4.8 million (net of related taxes), and loss on prepayment of debt of $3.9 million (net of related taxes). Included in the results for 2002 are the loss associated with discontinued operations of $5.9 million (net of related taxes), loss on prepayment of debt of $12.9 million (net of related taxes), cumulative effect of change in accounting principle of $603.7 million related to the impairment of goodwill as mandated by FASB Statement No. 142, and severance charge of $3.2 million (net of related taxes) related to the resignation of the company's former chief executive officer.

The company recorded income from continuing operations of $25.7 million in 2003, compared with losses from continuing operations of $.9 million in the year-earlier period. The improvement of results from continuing operations is principally due to the increase in sales, cost savings realized from the aforementioned restructuring efforts, decrease in interest expense, and decrease in losses on the prepayment of debt, offset, in part, by the aforementioned acquisition indemnification, restructuring, and integration charges.

The company recorded a net loss of $610.5 million for 2002, compared with $73.8 million in the year-earlier period. Included in the results for 2002 are the aforementioned net loss associated with discontinued operations, loss on the prepayment of debt, cumulative effect of change in accounting principle, and severance charge. Included in the results for 2001 were the restructuring costs and other charges of $145.1 million (net of related taxes), integration charge of $5.7 million (net of related taxes), and net income associated with discontinued operations of $1.8 million (net of related taxes). The increase in the net loss was a result of the aforementioned charges and the significant reduction in sales offset, in part, by the decrease in operating expenses and interest expense.

Net loss in 2001 was $73.8 million compared with net income of $357.9 million, in 2000. Included in the results for 2001 were the aforementioned restructuring and integration charges, and income from discontinued operations. Included in the results for 2000 was the net income associated with discontinued operations of $6.0 million (net of related taxes). The company recorded losses from continuing operations of $75.6 million in 2001 compared with income from continuing operations of $351.9 million in 2000. The decrease in the income from continuing operations was due to lower gross profit, as a result of lower sales, and higher levels of interest expense.