EXHIBIT 13.1



PORTIONS OF THE 2004 ANNUAL REPORT TO SHAREHOLDERS INCORPORATED BY REFERENCE HEREIN.



PEMSTAR Inc.



2004 Annual Report



Part II



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FINANCIAL REPORT

PEMSTAR Inc.



TABLE OF CONTENTS



|                                                                                      |  |     
|------------------------------------------------------------------------------------- |  | ----
|                                                                                      |  | Page
|                                                                                      | 
|Selected Financial Data                                                               |  | 10  
|                                                                                      | 
|Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12  
|                                                                                      | 
|Consolidated Balance Sheets                                                           |  | 26  
|                                                                                      | 
|Consolidated Statements of Operations                                                 |  | 27  
|                                                                                      | 
|Consolidated Statement of Shareholders Equity                                        |  | 28  
|                                                                                      | 
|Consolidated Statements of Cash Flows                                                 |  | 29  
|                                                                                      | 
|Notes to Consolidated Financial Statements                                            |  | 30  
|                                                                                      | 
|Report of Registered Public Accounting Firm                                           |  | 43  
|                                                                                      | 
|Quarterly Results of Operations (Unaudited)                                           |  | 44  
|                                                                                      | 
|Market for Pemstars Common Stock and Related Shareholder Matters                     |  | 45  



9



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SELECTED FINANCIAL DATA



The following table summarizes financial data regarding our business and should be read together with Managements Discussion and Analysis of Financial
Condition and Results of Operations, our consolidated financial statements and the related notes included in this report.



|                                                                              |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|----------------------------------------------------------------------------- |  | -------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|(In thousands, except per share data)                                         |  | Year Ended March 31, |        
|                                                                              |  | 2004                 |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|Consolidated Statements of Operations Data:                                   |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net sales                                                                     |  | $                    | 669,446 |   |      | $ | 668,175 |      |  | $ | 657,493 |   |  | $    | 635,307 |   |  | $ | 393,842 |  
|Cost of goods sold                                                            |  |                      | 621,630 |   |      |   | 637,074 |      |  |   | 627,457 |   |  |      | 581,278 |   |  |   | 363,974 |  
|                                                                              |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Gross profit                                                                  |  |                      | 47,816  |   |      |   | 31,101  |      |  |   | 30,036  |   |  |      | 54,029  |   |  |   | 29,868  |  
|                                                                              |  |                      |         |   |     
|Selling, general and administrative expenses                                  |  |                      | 52,023  |   |      |   | 51,076  |      |  |   | 53,351  |   |  |      | 37,366  |   |  |   | 21,576  |  
|Amortization                                                                  |  |                      | 107     |   |      |   | 129     |      |  |   | 2,152   |   |  |      | 1,961   |   |  |   | 1,281   |  
|Restructuring costs                                                           |  |                      | 7,961   |   |      |   | 4,249   |      |  |   |        |   |  |      |        |   |  |   |        |  
|Goodwill impairment charges                                                   |  |                      |        |   |      |   |        |      |  |   | 24,228  |   |  |      |        |   |  |   |        |  
|                                                                              |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Operating (loss) income                                                       |  |                      | (12,275 | ) |      |   | (24,353 | )    |  |   | (49,695 | ) |  |      | 14,702  |   |  |   | 7,011   |  
|                                                                              |  |                      |         |   |     
|Other income (expense)  net                                                  |  |                      | 793     |   |      |   | 558     |      |  |   | 829     |   |  |      | 967     |   |  |   | (74     | )
|Interest expense                                                              |  |                      | (7,815  | ) |      |   | (8,870  | )    |  |   | (7,077  | ) |  |      | (7,550  | ) |  |   | (3,588  | )
|                                                                              |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|(Loss) income before income taxes and cumulative effect of accounting change  |  |                      | (19,297 | ) |      |   | (32,665 | )    |  |   | (55,943 | ) |  |      | 8,119   |   |  |   | 3,349   |  
|                                                                              |  |                      |         |   |     
|Income tax expense (benefit)                                                  |  |                      | 503     |   |      |   | 753     |      |  |   | (1,926  | ) |  |      | 1,436   |   |  |   | 698     |  
|                                                                              |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|(Loss) income before cumulative effect of accounting change                   |  |                      | (19,800 | ) |      |   | (33,418 | )    |  |   | (54,017 | ) |  |      | 6,683   |   |  |   | 2,651   |  
|                                                                              |  |                      |         |   |     
|Cumulative effect of accounting change(1)                                     |  |                      |        |   |      |   | (5,346  | )    |  |   |        |   |  |      |        |   |  |   |        |  
|                                                                              |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net (loss) income                                                             |  | $                    | (19,800 | ) |      | $ | (38,764 | )    |  | $ | (54,017 | ) |  | $    | 6,683   |   |  | $ | 2,651   |  
|                                                                              |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|(Loss) income before cumulative effect of accounting change per common share: |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic                                                                         |  | $                    | (.47    | ) |      | $ | (.90    | )    |  | $ | (1.56   | ) |  | $    | .29     |   |  | $ | .23     |  
|Diluted                                                                       |  |                      | (.47    | ) |      |   | (.90    | )    |  |   | (1.56   | ) |  |      | .25     |   |  |   | .15     |  
|Net (loss) income per common share:                                           |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic                                                                         |  | $                    | (.47    | ) |      | $ | (1.04   | )    |  | $ | (1.56   | ) |  | $    | .29     |   |  | $ | .23     |  
|Diluted                                                                       |  |                      | (.47    | ) |      |   | (1.04   | )    |  |   | (1.56   | ) |  |      | .25     |   |  |   | .15     |  
|Weighted average number of common shares outstanding(2):                      |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic                                                                         |  |                      | 42,002  |   |      |   | 37,133  |      |  |   | 34,717  |   |  |      | 23,013  |   |  |   | 11,503  |  
|Diluted                                                                       |  |                      | 42,002  |   |      |   | 37,133  |      |  |   | 34,717  |   |  |      | 26,943  |   |  |   | 17,167  |  
|                                                                              |  |                      |         |   |     
|Other Financial Data:                                                         |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Depreciation                                                                  |  | $                    | 22,082  |   |      | $ | 20,021  |      |  | $ | 18,299  |   |  | $    | 12,097  |   |  | $ | 7,455   |  
|Capital expenditures                                                          |  |                      | 21,745  |   |      |   | 12,555  |      |  |   | 37,930  |   |  |      | 42,542  |   |  |   | 13,415  |  
|                                                                              |  |                      |         |   |     
|Supplemental Data:                                                            |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|EBITDA(3)                                                                     |  | $                    | 10,707  |   |      | $ | (3,645  | )    |  | $ | (4,187  | ) |  | $    | 29,727  |   |  | $ | 15,673  |  
|Net cash (used in) provided by operating activities                           |  |                      | (20,739 | ) |      |   | 47,311  |      |  |   | (307    | ) |  |      | (54,219 | ) |  |   | (20,225 | )
|Net cash used in investing activities                                         |  |                      | (21,500 | ) |      |   | (15,593 | )    |  |   | (61,203 | ) |  |      | (62,684 | ) |  |   | (52,611 | )
|Net cash provided by (used in) financing activities                           |  |                      | 18,883  |   |      |   | (9,946  | )    |  |   | 67,164  |   |  |      | 119,512 |   |  |   | 74,734  |  
|                                                                              | 
|                                                                              |  | As of March 31,      |        
|                                                                              |  | 2004                 |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|Consolidated Balance Sheet Data:                                              |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash and cash equivalents                                                     |  | $                    | 9,792   |   |      | $ | 32,762  |      |  | $ | 11,483  |   |  | $    | 5,882   |   |  | $ | 2,727   |  
|Working capital                                                               |  |                      | 56,247  |   |      |   | 52,723  |      |  |   | 75,388  |   |  |      | 70,651  |   |  |   | 4,649   |  
|Total assets                                                                  |  |                      | 394,855 |   |      |   | 372,062 |      |  |   | 395,724 |   |  |      | 349,077 |   |  |   | 190,451 |  
|Long-term debt and capital lease obligations less current maturities          |  |                      | 20,723  |   |      |   | 23,119  |      |  |   | 12,515  |   |  |      | 23,673  |   |  |   | 10,181  |  
|Total shareholders equity                                                    |  |                      | 163,793 |   |      |   | 159,867 |      |  |   | 193,397 |   |  |      | 150,712 |   |  |   | 22,673  |  
|Book value per common share(4)                                                |  | $                    | 3.63    |   |      | $ | 4.26    |      |  | $ | 5.27    |   |  | $    | 5.33    |   |  | $ | 1.64    |  
|Tangible book value per common share(4)                                       |  | $                    | 2.87    |   |      | $ | 3.35    |      |  | $ | 4.32    |   |  | $    | 4.30    |   |  | $ | 0.14    |  

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|(1) | See Note 1 to the consolidated financial statements under the caption Goodwill, included herein.
|--- | --------------------------------------------------------------------------------------------------

|(2) | For an explanation of the determination of the weighted average number of common shares outstanding used in computing net (loss) income per common share, see Note 1 to the
consolidated financial statements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | EBITDA means net (loss) income before interest expense, income taxes, depreciation and amortization (including any goodwill impairment). EBITDA is presented because we believe it is
an indicator of our ability to incur and service debt. A similar formula is used by our lenders for determining compliance with our financial covenants. However, EBITDA should not be considered as an alternative to cash flow from operating
activities, as a measure of liquidity or as an alternative to net income as a measure of operating results in accordance with generally accepted accounting principles. Other companies may compute EBITDA in a different manner.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Tangible book value is total shareholders equity less goodwill and other intangible assets. Per common share amounts for book value and tangible book value are based on common
shares outstanding at March 31 for the respective years.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10



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SELECTED FINANCIAL DATA (Continued)



The following table reconciles net (loss) income to EBITDA and should be read together with Managements Discussion and Analysis
of Financial Condition and Results of Operations, our consolidated financial statements and the related notes included in this report.



|                                                                                                |  |                      |         |   |      |   |         |      |  |   |         |   |      |   |        |  |   |       
|----------------------------------------------------------------------------------------------- |  | -------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - | ---- | - | ------ |  | - | ------
|(In thousands)                                                                                  |  | Year Ended March 31,
|                                                                                                |  | 2004                 |         |   | 2003 |   |         | 2002 |  |   | 2001    |   | 2000
|EBITDA:                                                                                         |  |                      |         |   |      |   |         |      |  |   |         |   |      |   |        |  |   |       
|                                                                                                |  |                      |         |   |     
|Net (loss) income                                                                               |  | $                    | (19,800 | ) |      | $ | (38,764 | )    |  | $ | (54,017 | ) |      | $ | 6,683  |  | $ | 2,651 
|Interest expense                                                                                |  |                      | 7,815   |   |      |   | 8,870   |      |  |   | 7,077   |   |      |   | 7,550  |  |   | 3,588 
|Income tax expense (benefit)                                                                    |  |                      | 503     |   |      |   | 753     |      |  |   | (1,926  | ) |      |   | 1,436  |  |   | 698   
|Depreciation                                                                                    |  |                      | 22,082  |   |      |   | 20,021  |      |  |   | 18,299  |   |      |   | 12,097 |  |   | 7,455 
|Amortization                                                                                    |  |                      | 107     |   |      |   | 129     |      |  |   | 2,152   |   |      |   | 1,961  |  |   | 1,281 
|Goodwill impairment charge                                                                      |  |                      |        |   |      |   |        |      |  |   | 24,228  |   |      |   |       |  |   |      
|Cumulative effect of accounting change                                                          |  |                      |        |   |      |   | 5,346   |      |  |   |        |   |      |   |       |  |   |      
|                                                                                                |  |                      |         |   |      |   |         |      |  |   |         |   |      |   |        |  |   |       
|Net (loss) income before interest expense, income taxes, depreciation and amortization (EBITDA) |  | $                    | 10,707  |   |      | $ | (3,645  | )    |  | $ | (4,187  | ) |      | $ | 29,727 |  | $ | 15,673
|                                                                                                |  |                      |         |   |      |   |         |      |  |   |         |   |      |   |        |  |   |       



11



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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



PEMSTAR Inc.



You should read the following discussion in conjunction with the Selected Financial Data section of this report and our
consolidated financial statements and notes to those statements included elsewhere in this report. The forward-looking statements in this discussion regarding the electronics manufacturing services industry, our expectations regarding our future
performance, liquidity and capital resources and other non-historical statements in this discussion include numerous risks and uncertainties. Our actual results may differ materially from those contained in any forward-looking statement. See
Cautionary Statements below.



OVERVIEW



We provide a comprehensive range of global engineering, product design, automation and test,
manufacturing and fulfillment services to customers in the communications, computing and data storage, industrial equipment, and medical industries. We provide these services on a global basis through 16 strategic locations in the Americas, Asia and
Europe. These customer solutions support our customers products from initial development and design through manufacturing to worldwide distribution and aftermarket support.



PEMSTAR was founded in January 1994 by a group of eight senior IBM managers who had led the storage product operations at IBMs
Rochester, Minnesota facility. We have maintained a significant relationship with IBM, which remains our largest customer. Since our inception, we have diversified our customer base to include industry leading and emerging original equipment
manufacturers. We have also expanded our geographic presence, enhanced our product and service offerings and increased our volume production capabilities. Our key growth initiatives have been the opening of facilities in Guadalajara, Mexico; Navan,
Ireland; Singapore; Hortolandia, Brazil; Yokohama, Japan; and Bangkok, Thailand and the acquisition of established businesses in Almelo, the Netherlands; San Jose, California; Dunseith, North Dakota; Taunton, Massachusetts; Mountain View,
California; and Chaska, Minnesota. Recently, we have completed expansions in our Austin, Texas and Tianjin, China operations as well as entered into a joint venture start-up agreement in Brasov, Romania as of April, 2004. These growth initiatives
have given us:



| |  | expanded geographic presence in established and emerging markets and strengthened our presence in target industries;
| | - | --------------------------------------------------------------------------------------------------------------------



| |  | enhanced product and service offerings in our chosen geographies, while allowing us to offer cost-effective manufacturing and engineering capabilities;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | access to new customers or additional business from existing customers; and
| | - | ---------------------------------------------------------------------------



| |  | specialized product design, automation and test and manufacturing customer solutions.
| | - | -------------------------------------------------------------------------------------



Our sales are generally derived from master supply and manufacturing agreements, with current demand evidenced by purchase orders, or from
specific purchase orders for discrete projects. We charge our customers separately for engineering and manufacturing services. We recognize revenues from product sales, net of product returns and warranty costs, typically at the time of product
shipment. In limited circumstances, although the product remains in our facilities, we recognize revenue when title to, and risks and rewards of ownership of, the products have contractually passed to the customer. Revenue from services is
recognized as they are performed and collection is reasonably certain. Our sales from engineering services, which include process test and automation equipment and prototype development, accounted for 11.8%, 12.0% and 12.5% of our total net sales in
fiscal 2004, 2003 and 2002, respectively. Manufacturing services, including process test and automation equipment and prototype production, accounted for 88.2%, 88.0% and 87.5% of our total net sales in fiscal 2004, 2003, and 2002, respectively.



Our cost of goods sold includes the cost of components and materials, labor
costs and manufacturing overhead. The procurement of raw materials and components requires us to commit significant working capital to our operations and to manage the purchasing, receiving, inspection and stocking of these items. Our production
volumes are based on purchase orders for the delivery of products. These orders typically do not commit firm production schedules for more than 30 to 90 days in advance. We work to minimize the risk of obsolete inventory by ordering materials and
components only to the extent necessary to satisfy existing customer orders. To the extent our orders of materials and components for specific jobs exceed products ultimately delivered to our customers and they are not held fully responsible for our
excess inventory, due to their financial condition or business relationship considerations, we may incur a charge for inventory obsolescence for the excess inventory. We believe we are largely protected from the risk of inventory price increases,
because we generally can pass these costs through to our customers.



12



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Our operating results are also impacted by the level of capacity utilization of our manufacturing facilities, indirect
manufacturing labor, and selling, general and administrative expenses. During periods of high capacity utilization, our gross margins and operating margins generally improve, while during periods of lower capacity utilization, our gross margins and
operating margins generally decline. Our infrastructure will support substantially higher levels of sales than our current net sales. Reduction in production space during fiscal 2003 and increases in our Austin, Texas and Tianjin, China facilities
during fiscal 2004 were made in response to market conditions in the affected geographies. We continue to evaluate market conditions and capacity needs.



RESULTS OF OPERATIONS



The table below sets forth certain operating data expressed as a percentage of our net sales for the years indicated:



|                                                                    |  |                      |    |  |       |    |  |       |   
|------------------------------------------------------------------- |  | -------------------- | -- |  | ----- | -- |  | ----- | --
|                                                                    |  | Year Ended March 31, |   
|                                                                    |  | 2004                 |    |  | 2003  |    |  | 2002  |   
|Net sales                                                           |  | 100.0                | %  |  | 100.0 | %  |  | 100.0 | % 
|Cost of goods sold                                                  |  | 92.9                 | %  |  | 95.3  | %  |  | 95.4  | % 
|                                                                    |  |                      |    |  |       |    |  |       |   
|Gross profit                                                        |  | 7.1                  | %  |  | 4.7   | %  |  | 4.6   | % 
|Selling, general and administrative expenses                        |  | 7.7                  | %  |  | 7.6   | %  |  | 8.1   | % 
|Restructuring                                                       |  | 1.2                  | %  |  | .7    | %  |  |      | % 
|Amortization                                                        |  |                     | %  |  |      | %  |  | .3    | % 
|Goodwill impairment charge                                          |  |                     | %  |  |      | %  |  | 3.7   | % 
|                                                                    |  |                      |    |  |       |    |  |       |   
|Operating loss                                                      |  | (1.8                 | )% |  | (3.6  | )% |  | (7.5  | )%
|Other income (expense)  net                                        |  | .1                   | %  |  |      | %  |  | .1    | % 
|Interest expense                                                    |  | (1.2                 | )% |  | (1.3  | )% |  | (1.1  | )%
|                                                                    |  |                      |    |  |       |    |  |       |   
|Loss before income taxes and cumulative effect of accounting change |  | (2.9                 | )% |  | (4.9  | )% |  | (8.5  | )%
|Income tax expense (benefit)                                        |  | .1                   | %  |  | .1    | %  |  | (.3   | )%
|                                                                    |  |                      |    |  |       |    |  |       |   
|Loss before cumulative effect of accounting change                  |  | (3.0                 | )% |  | (5.0  | )% |  | (8.2  | )%
|Cumulative effect of accounting change                              |  |                     | %  |  | (.8   | )% |  |      | % 
|                                                                    |  |                      |    |  |       |    |  |       |   
|Net loss                                                            |  | (3.0                 | )% |  | (5.8  | )% |  | (8.2  | )%
|                                                                    |  |                      |    |  |       |    |  |       |   



Fiscal Year Ended March 31, 2004
Compared to Fiscal Year Ended March 31, 2003



Net sales Our
net sales for fiscal 2004 increased $1.3 million, or 0.2%, to $669.4 million from $668.2 million in fiscal 2003. These totals include sales of excess inventory of $8.4 million and $23.8 million for fiscal 2004 and fiscal 2003, respectively.
Excluding inventory sales, fiscal 2004 sales were up by $16.6 million when compared to fiscal 2003. Increased sales resulted from expanded operations with an existing customer, increased orders from existing customers, and winning new business from
new customers primarily in the industrial and computing and data storage sector. This increase was, offset by decreased sales in the communications market due to continued sluggish demand in our optical and infrastructure business and new product
transitions with wireless handset customers. Sales to the medical industry also decreased primarily as a result of customer project life cycles and transitions. Specifically, industrial sales were up $61.9 million, computing and data storage sales
were up $11.5 million, offset by a decrease in sales of $63.6 million in our communications business and $8.6 million in medical. Over the year, we continued to diversify our revenue base within the industries we serve. Industrial equipment industry
net sales increased to 31.7% of sales from 22.5% in fiscal 2003. This large increase is chiefly a result of our expanded Austin, Texas operations which accounted for $33.1 million in fiscal 2004. Net sales to the computer and data storage industry
increased to 36.2% of sales versus 34.5% a year ago and net sales to the medical industry were 4.6% of sales compared to 5.9% in fiscal 2003. Net sales to communication customers for fiscal 2004 decreased as a percentage of total sales to 27.5% of
sales compared to 37.1% in fiscal 2003. Again, this decrease resulted from challenging economic conditions facing the communications industry due to lower demand. The Companys five largest customers for fiscal 2004 accounted for approximately
44% of net sales with IBM accounting for 22.3% of fiscal 2004 sales.



Gross
profit - Our gross profit increased $16.7 million in fiscal 2004 to $47.8 million, or 7.1% of net sales, from $31.1 million, or 4.7% of net sales, in fiscal 2003. This increase was due to a change in sales mix including increased sales and



13



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higher gross profit industrial customers for $10.8 million, increased sales to our computing and data storage customers
adding $9.8 million. These increases were somewhat offset by lower gross margin associated with our decreased communications business accounting for a $0.8 million decrease, and lower sales to higher-margin medical customers, accounting for a
decrease in gross profit of $3.1 million compared to the prior year. Included in these changes in gross profit by market was cost savings from restructuring actions and lower inventory write-downs of $0.8 million in fiscal 2004 compared to $8.1
million for fiscal 2003. During fiscal 2004, we continued our planned restructuring efforts including the reduction of headcount and consolidation of certain facilities to further reduce our cost structure. The facilities and headcount
infrastructure may result in additional under absorbed capacity if sales volumes decrease. We will continue to monitor and take actions in order to balance our cost structure to the anticipated level of net sales.



Selling, general and administrative expenses -Our selling, general and administrative
expenses increased slightly to $52.0 million (7.7% of net sales) in fiscal 2004 from $51.1 million (7.6% of net sales) in fiscal 2003. We incurred charges for accounts receivable of $0.9 million in fiscal 2004 due to uncertainty of collection of
accounts receivable from emerging companies and customers in bankruptcy compared to $2.2 million in fiscal 2003. Other factors affecting the selling, general, and administrative expenses were new expenses associated with the Austin, Texas operations
of $0.5 million, higher information technology (IT) costs from continued worldwide IT implementations of $1.4 million, increased domestic employee benefit costs of $0.4 million, and higher commissions associated with the different sales mix of $0.4
million, partially offset by savings from restructuring efforts.



Restructuring costs  In fiscal 2004, we recognized restructuring costs of $8.0 million related to numerous actions taken to reduce our cost structure compared to $4.2 million in fiscal 2003. The actions include, but are not
limited to, personnel severance costs of $1.0 million, consolidation of certain facilities and lease commitments ($4.6 million for fiscal 2004 actions and $0.9 million of adjustment to fiscal 2003 action provisions), and write-offs of certain assets
of $1.2 million. Savings related to facility consolidations and headcount reductions during fiscal 2004 were $6.3 million. These savings are reflected in the discussion above with respect to gross profit and selling, general and administrative
expenses.



Amortization - Amortization of goodwill and other intangibles
were $0.1 million in fiscal 2004 and 2003. As of April 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. The adoption of this statement resulted in no amortization being
taken in fiscal 2004 or 2003 for new or existing goodwill on the balance sheet, however, it did result in an impairment charge of $5.3 million at the April 1, 2002 transition date for the cumulative effect of a change in accounting principle, which
has been reflected in the fiscal 2003 net loss.



Other income (expense)
- Other income, net, was $0.8 million in fiscal 2004 compared to $0.6 million in fiscal 2003. This change in other income was primarily a result of higher currency exchange gains in certain foreign locations of $0.4 million.



Interest expense - Interest expense decreased $1.1 million to $7.8 million in fiscal
2004 from $8.9 million in fiscal 2003. This decrease largely reflects reduced and fewer bank and waiver fees on our domestic lines of credit of $1.0 million.



Income tax expense (benefit) - The income tax expense was $0.5 million in fiscal 2004 compared to $0.8 million in fiscal 2003. The low effective tax rate for
fiscal 2004 is a result of no tax benefits being recognized on operating losses in the United States, Mexico and Netherlands. Our effective income tax rate in these countries will continue to be low until these operations are profitable. In
addition, we have tax holidays in Singapore, China and Thailand, which caused our effective rate to be low. As these holidays expire, we expect the effective rate to increase



Fiscal Year Ended March 31, 2003 Compared to Fiscal Year Ended March 31, 2002



Net sales Our net sales for fiscal 2003 increased $10.7 million, or 1.6%, to
$668.2 million from $657.5 million in fiscal 2002. This increase resulted from increased sales to existing and new customers in the computer and data storage, medical and industrial industries offset, in part, by decreased sales in our
communications markets. Over the year, we continued to diversify our revenue base within the industries we serve. Net sales to the medical industry grew 75.1% to 5.9% of sales compared to 3.4% in fiscal 2002. Industrial equipment industry net sales
increased 27.1% to 17.5% of sales from 14.0% in fiscal 2002. Net sales to the computer and data storage industry accounted for 39.4% of sales versus 38.1% a year ago. Net sales to communication customers for fiscal 2003 decreased as a percentage of
total sales to 37.2% of sales compared to 44.5% in fiscal 2002. This decrease resulted from challenging economic conditions facing the communications industry. The Companys five largest customers for fiscal 2003 accounted for approximately 47%
of net sales, two of which exceeded 10% of net sales.



Gross profit -
Our gross profit increased $1.1 million in fiscal 2003 to $31.1 million, from $30.0 million in fiscal 2002. This increase was due to cost savings of restructuring actions taken during fiscal 2003 offset, in part, by changes in sales



14



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mix including reduced sales volumes from higher gross profit communication customers. We incurred inventory write-downs
of $8.1 million in fiscal 2003 versus $5.4 million in fiscal 2002 for excess inventory due to customer bankruptcies, reduced customer orders below anticipated levels and order cancellations as the communications market continued its decline early in
our 2003 fiscal year. Over the year, we completed our planned restructuring efforts including the reduction of headcount and consolidation of certain facilities. These actions are realizing cost savings exceeding $3 million per quarter. The
facilities and infrastructure developed to support higher levels of net sales will continue to be an operating issue if sales volumes decrease. We will continue to monitor and take necessary actions in order to balance our cost structure to the
anticipated level of net sales.



Selling, general and administrative
expenses - Our selling, general and administrative expenses decreased $2.3 million to $51.1 million (7.6% of net sales) in fiscal 2003 from $53.4 million (8.1% of net sales) in fiscal 2002. We incurred charges for accounts receivable of $2.2
million in fiscal 2003 due to uncertainty of collection of accounts receivable from emerging companies and customers in bankruptcy compared to $8.2 million in fiscal 2002. An additional significant factor in this decrease was the restructuring
efforts completed in fiscal 2003. These decreases in selling, general, and administrative expenses were partially offset by increased expenses due to the startup of our new operation in Israel in fiscal 2003 and the full year impact of the Chaska
operation, which was acquired in the latter part of fiscal 2002. We also incurred an increased level of legal, audit, insurance and information technology and software expenses in fiscal 2003 compared to fiscal 2002.



Restructuring costs  In fiscal 2003, we recognized restructuring costs of $4.2
million related to numerous actions taken to reduce our cost structure. The actions include, but are not limited to, severance costs, consolidation of certain facilities, and write-offs of certain assets and lease commitments.



Amortization - Amortization of goodwill and other intangibles decreased $2.1 million
to $0.1 million in fiscal 2003 from $2.2 million in fiscal 2002, primarily as a result of our adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. The adoption of this statement
resulted in no amortization being taken in fiscal 2003 for new or existing goodwill on the balance sheet, however, it did result in an impairment charge of $5.3 million at the April 1, 2002 transition date for the cumulative effect of a change in
accounting principle, which has been reflected in the fiscal 2003 net loss.



Other income (expense) - Other income, net, was $0.6 million in fiscal 2003 compared to other income, net, of $0.8 million in fiscal 2002. This change in other income was primarily a result of lower currency exchange gains in certain
foreign locations.



Interest expense - Interest expense increased $1.8
million to $8.9 million in fiscal 2003 from $7.1 million in fiscal 2002. This increase reflects increased interest rates on our variable lines of credit, fees from covenant waiver negotiations and write-offs of loan fees relating to a reduction in
total borrowings available under our domestic credit facility.



Income tax
expense (benefit) - The income tax expense was $.8 million in fiscal 2003 compared to a tax benefit of $1.9 million in fiscal 2002. The low effective tax rate for fiscal 2003 is a result of no tax benefits being recognized on operating losses in
the United States, Mexico and Netherlands, where the effective tax rate will continue until these operations are profitable as well as the low marginal tax rates on profits located in certain of our international operations. The benefit for fiscal
2002 was created as a result of the recognition of the available refund of previously paid taxes from the carryback of a portion of the fiscal 2002 United States tax loss to prior years.



LIQUIDITY AND CAPITAL RESOURCES



We have funded our operations from the proceeds of bank debt, private and public offerings of equity and convertible debt, cash generated from operations and lease
financing of capital equipment. Historically, our principal uses of cash have been to fund our working capital needs, business acquisitions, expanded operations, capital expenditures and debt service requirements. We anticipate these uses will
continue to be our principal uses of cash in the future.



Net cash (used in)
provided by operating activities for fiscal 2004, 2003, and 2002 was ($20.7) million, $47.3 million, and ($0.3) million, respectively. The net cash used in operating activities increased significantly due to increased levels of inventories
accounting for $48.0 million and accounts receivable accounting for $26.4 million. The cash cycle lengthened to 54 days in fiscal 2004 from 50 days in fiscal 2003 primarily due to the inventory needed to support the significant growth in our
industrial business in the second half of fiscal 2004.



Net cash used in
investing activities for fiscal 2004, 2003, and 2002 was $21.5 million, $15.6 million, and $61.2 million, respectively. In fiscal 2004, our cash used in investing activities included $4.2 million used to pay additional purchase



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price for Pacific Consultants LLC, completing payment of all conditional obligations in this agreement. Capital
expenditures were $21.7 million in fiscal 2004 or an increase of $9.2 million as compared to the prior fiscal year. Capital expenditures were principally used for expansion of our China facility accounting for $14.6 million.



Net cash provided by (used in) financing activities for fiscal 2004, 2003, and 2002 was $18.9
million, ($9.9) million, and $67.2 million, respectively. Our principal provider of cash in financing activities in fiscal 2004 was $20.0 million from stock sales, during the second quarter of fiscal 2004, when PEMSTAR completed an offering of 7.5
million shares of its common stock.



As of March 31, 2004, we had unrestricted
cash of $9.8 million and total borrowings, including capitalized lease obligations, of approximately $91.1 million. Of these borrowings, we had approximately $36.9 million outstanding under our domestic credit facilities, $29.3 million outstanding
under our ICBC (Industrial & Commercial Bank of China) credit facility and $1.5 million under our Thai Farmers bank facility. Liquidity, which is defined as cash plus available domestic borrowing capacity, stood at $41.9 million.



As of April 25, 2003, Pemstar entered into a three-year, $90 million revolving credit
facility to replace its facility with IBM Credit and US Bank. This new facility is with Congress Financial Corporation (a subsidiary of Wachovia Bank, N.A.), Fleet Capital, GMAC, and US Bank. This new bank agreement provided a larger facility with
generally more favorable terms.



All of these credit facilities are secured by
substantially all of our assets. Domestic credit facilities include a covenant to attain minimum earnings before interest expense, income taxes, depreciation and amortization (EBITDA), for domestic and worldwide operations. These covenants do not
apply however, if we maintain at least $13.0 million in available domestic borrowings capacity. As of March 31, 2004, we had $32.1 million of available domestic borrowing capacity. We are required under certain foreign credit facilities to meet
various financial covenants, including minimum location net worth, maximum debt to equity ratios, and minimum location net income, all of which we were in compliance with at March 31, 2004.



In addition to our credit facilities, we had other debt obligations totaling $9.8 million and
capital lease obligations of $13.6 million as of March 31, 2004. See Notes 6 and 10 to our consolidated financial statements.



Our continued viability depends on our ability to generate sufficient cash from operations or obtain additional sources of funds for working capital. Our ability to
maintain sufficient liquidity depends, in part, on our achieving anticipated revenue targets and intended expense reductions from our restructuring activities. We believe, as a result of the restructuring actions we have taken in fiscal 2003 and
2004 to reduce cash expenditures, the efforts we continue to make to increase revenues from continuing customers, as well as efforts to generate new customers in various industry sectors, the sale and leaseback financing, and our new revolving
credit facilities, which provides additional borrowing capacity, that we have sufficient cash flow to meet our needs for fiscal 2005. We may not achieve these targets or realize the intended expense reductions. If our operating goals are not met, we
may be required to secure additional waivers of any resulting covenant violations under existing lending facilities, secure additional financing from lenders or sell additional securities.



We regularly review acquisition and additional facilities expansion or joint venture
opportunities, as well as major new program opportunities with new or existing customers, any of which may require us to sell additional equity or secure additional financing in order to fund the requirement. The sale of additional equity could
result in additional dilution to our shareholders. We cannot be assured that financing arrangements will be available in amounts or on terms acceptable to us.



CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS



The Company is obligated to make future payments under various contracts, such as debt agreements, lease agreements, and unconditional purchase obligations. The following
table represents contractual cash obligations and other commercial commitments of the Company as of March 31, 2004:



|                                   |  |       |         |                    |   |                    |  |                    |        |                    |   |                    |  |                |        |  |   |        |  |   |       
|---------------------------------- |  | ----- | ------- | ------------------ | - | ------------------ |  | ------------------ | ------ | ------------------ | - | ------------------ |  | -------------- | ------ |  | - | ------ |  | - | ------
|(Amounts inthousands)              |  | Total |         | Due in Fiscal 2005 |   | Due in Fiscal 2006 |  | Due in Fiscal 2007 |        | Due in Fiscal 2008 |   | Due in Fiscal 2009 |  | Due Thereafter
|Revolving credit facilities        |  | $     | 66,674  |                    | $ | 66,674             |  | $                  |       |                    | $ |                   |  | $              |       |  | $ |       |  | $ |      
|Other long-term debt               |  |       | 10,800  |                    |   | 1,944              |  |                    | 1,640  |                    |   | 1,840              |  |                | 5,132  |  |   | 61     |  |   | 183   
|Capital lease obligations          |  |       | 31,813  |                    |   | 3,157              |  |                    | 1,505  |                    |   | 1,361              |  |                | 1,389  |  |   | 7,343  |  |   | 17,058
|Operating leases                   |  |       | 43,759  |                    |   | 9,504              |  |                    | 8,344  |                    |   | 6,949              |  |                | 6,006  |  |   | 5,824  |  |   | 7,132 
|Unconditional purchase obligations |  |       | 32,074  |                    |   | 32,074             |  |                    |       |                    |   |                   |  |                |       |  |   |       |  |   |      
|                                   |  |       |         |                    |   |                    |  |                    |        |                    |   |                    |  |                |        |  |   |        |  |   |       
|Total contractual cash obligations |  | $     | 185,120 |                    | $ | 113,353            |  | $                  | 11,489 |                    | $ | 10,150             |  | $              | 12,527 |  | $ | 13,228 |  | $ | 24,373
|                                   |  |       |         |                    |   |                    |  |                    |        |                    |   |                    |  |                |        |  |   |        |  |   |       



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Domestic revolving credit facilities of $36,872, included above will not require repayment on a current basis, provided
that credit facility covenants continue to be met or minimum excess borrowing capacity is maintained. See Notes 6 and 10 to the Consolidated Financial Statements for additional information regarding these obligations.



|                          |  |                        |       |                                 |   |         |  |         |   |         |   |             |  |   |   |  |   |   |  |   |  
|------------------------- |  | ---------------------- | ----- | ------------------------------- | - | ------- |  | ------- | - | ------- | - | ----------- |  | - | - |  | - | - |  | - | -
|(Amounts in thousands)    |  | Committed TotalAmounts |       | Amount of commitment expiration
|                          |  | 1 year                 |       | 2 years                         |   | 3 years |  | 4 years |   | 5 years |   | Over 5years
|Standby letters of credit |  | $                      | 2,900 |                                 | $ | 2,900   |  | $       |  |         | $ |            |  | $ |  |  | $ |  |  | $ | 



QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISKS



Interest Rate Risk



Our exposure to interest rate risk arises principally from the variable rates associated
with our borrowings. On March 31, 2004, we had total borrowings of $66.7 million bearing variable interest rates. An adverse change of one percent in the interest rate of all borrowings, which bear interest at variable rates, would cause us to incur
a change in interest expense of approximately $0.7 million on an annual basis.



Foreign Currency Exchange Risk



Fluctuations in the rate of
exchange between the U.S. dollar and the currencies of countries other than the U.S. in which we conduct business could adversely affect our financial results. Except for sales in the Netherlands, Singapore and China, our sales are principally
denominated in U.S. dollars. As a result, we have relatively limited exposure to foreign currency exchange risk on our sales. For fiscal 2004, sales denominated in Euros totaled $57.2 million, sales denominated in Singapore dollars totaled $42.5
million and sales denominated in Chinese Renminbi totaled $87.1 million. Costs related to these sales are largely denominated in their respective currencies, thereby limiting our transaction risk exposures. However, for sales not denominated in U.S.
dollars, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases, and if we
price our products and services in the foreign currency, we will receive less in U.S. dollars than we did before the rate increase went into effect. If we price our products and services in U.S. dollars and competitors price their products in local
currency, an increase in the relative strength of the U.S. dollar could result in our prices being uncompetitive in a market where business is transacted in the local currency.



The reported results of our foreign operations will be influenced during their translation into U.S. dollars by currency movements against
the U.S. dollar. The result of a uniform 10% strengthening in the value of the U.S. dollar from March 31, 2004, 2003 and 2002 levels relative to each of the currencies in which our revenues and expenses are denominated would have resulted in a
decrease in operating income of approximately $1.3 million, $1.2 million and $0.3 million, respectively, for the fiscal years ended March 31, 2004, 2003 and 2002.



At March 31, 2004 and 2003, the amount we consider permanently invested in foreign subsidiaries and translated into dollars using the year
end exchange rate was $66.8 million and $53.1 million, respectively, and the potential loss in fair value resulting from a hypothetical 10% strengthening in the value of the U.S. dollar currency exchange rate amounts to $6.1 million and $4.8
million, respectively. Actual amounts may differ.



We currently do not hedge
our exposure to foreign currency exchange rate fluctuations; however, we may hedge such exposures in the future.



Impact of Inflation



We believe that our results of operations are not dependent upon moderate changes in the inflation rate.



CRITICAL ACCOUNTING POLICIES



Managements Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
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. On an on-going basis, management evaluates its estimates and adjustments,
including those related to returns, bad debts, inventories, intangible assets, income taxes, restructuring costs, retirement benefits, and contingencies and litigation. Management bases its



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estimates and judgments on historical experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.



Management believes the following critical
accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.



Bad Debts - The Company has a diverse customer base. The creditworthiness of customers is evaluated before sales are approved. The Company records an allowance for
doubtful accounts based on past history, current economic conditions and the composition of its accounts receivable aging, and in some instances, makes allowances for specific customers based on several factors, such as the creditworthiness of those
customers and payment history. Actual write-offs may differ from the allowances for doubtful accounts, and this difference may have a material effect on the Companys financial position and results of operations.



Inventories- We value our inventories on a first-in, first-out basis at the
lower of cost or estimated market value. Given the volatility of the markets in which the Company operates, the Company makes adjustments to its value of inventories based on estimates of potentially excess and obsolete inventory after considering
customer forecasted demand, forecasted average selling price and its ability to sell excess inventory quantities back to its customers within contract terms. However, forecasts are subject to revisions, cancellations, and rescheduling. Actual demand
will inevitably differ from such anticipated demand, and such differences may have a material effect on the Companys financial position and results of operations, if additional write-offs are required.



Goodwill and Intangible Impairment-During the year ended March 31, 2002, we
recorded $24.2 million in impairment losses related to goodwill and other intangible assets under accounting principles effective at that time. Effective April 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. Under this standard, goodwill and other intangible assets with indefinite lives are no longer amortized. This standard requires, at a minimum, that we perform an annual assessment of the carrying
value of these assets. If the carrying value of goodwill and intangible assets exceeds its fair value, an impairment loss will be recognized. During the year ended March 31, 2003, we recorded a $5.3 million impairment loss as the transition date
cumulative effect of a change in accounting principle. See Note 1 to the Consolidated Financial Statements, included herein. In assessing the recoverability of our goodwill and other intangible assets we must make assumptions regarding estimated
future cash flows and other factors to determine the fair value of the respective assets. These cash flow estimates take into account current customer volumes and the expectation of new or renewal projects, historic gross margins, historic working
capital parameters and planned capital expenditures. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded.



Long-lived assets  We review our long-lived assets for impairment whenever
events or changes in circumstances indicate that our carrying value of long-lived may not be recoverable. Long-lived assets are considered not recoverable when the carrying amount of a long-lived asset (asset group) exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). If we determine that a long-lived asset (asset group) is not recoverable, an impairment loss is recorded equal to the excess of the carrying
amount of the long-lived asset (asset group) over the long-lived assets (asset groups) fair value. Fair value is the amount at which the long-lived asset (asset group) could be bought or sold in a current transaction between a willing
buyer and seller, other than in a forced or liquidation sale.



Income
Taxes-In determining the carrying value of our net deferred tax assets, we must assess the likelihood of sufficient future taxable income in related tax jurisdictions, based on estimates and assumptions to realize the benefit of these
assets. If these estimates and related assumptions change in the future, we may be required to record additional valuation allowances against our deferred tax assets, resulting in additional income tax expense in our consolidated statement of
operations. Management evaluates quarterly whether the deferred tax assets may be realized and assesses the need for additional valuation allowances or reduction of existing allowances quarterly. We recorded $10.3 million and $8.6 million of
additional valuation allowances in the years ended March 31, 2004 and 2003, respectively, related to our net deferred tax assets, bringing the total allowance to $45.7 million as of March 31, 2004



CAUTIONARY STATEMENTS



This report contains forward-looking statements within the meaning of federal securities laws that may include statements regarding intent,
belief or current expectations of Pemstar Inc. and our management. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements to encourage companies to provide prospective information
without fear of litigation so long as those statements are identified as forward-looking and are



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accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ
materially from those projected in the statement. We desire to take advantage of these safe harbor provisions. Accordingly, we hereby identify the following important factors which could cause our actual results to differ materially from
any such results which may be projected, forecast, estimated or budgeted by us in forward-looking statements made by us from time to time in reports, proxy statements, registration statements and other written communications, or in oral
forward-looking statements made from time to time by our officers and agents. The following list is not exhaustive and we disclaim any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date
of such statements.



Risks Relating to Our Business and Industry



Reductions in demand and other factors have caused net losses.



The continuing reduction in capital spending by
businesses for new technologies, the remaining effects of the recent recession and the market disruptions caused by the September 2001 terrorist attacks in the United States and threats of hostilities in the Middle East and Asia have reduced demand
in many of the technology markets we serve. As a result of these market conditions, we experienced a significant reduction in demand for our services during fiscal 2002, continuing through fiscal 2003, which caused us to have net losses of $38.8
million in fiscal 2003. The losses continued into fiscal 2004, totaling $19.8 million by year end. Although the majority of these losses occurred in the first half of our year, there is on-going uncertainty in the demand for our services, which may
rapidly and significantly fluctuate. A return to the recession, outbreak of hostilities or any other event leading to excess capacity or a continued or increased downturn in the markets we serve would likely negatively affect our net sales. In
addition, the communications, computing and data storage, industrial and medical equipment markets of the electronics manufacturing services industry are characterized by intense competition, relatively short product life-cycles and significant
fluctuations in product demand. These markets are also subject to rapid technological change and product obsolescence. If any of these factors or other factors reduce demand for specific products or components that we design or manufacture for our
customers, our net sales would likely be negatively affected. Due to these market conditions and factors, we may experience net losses in future periods.



We depend on a small number of customers for a significant portion of our net sales and the loss of any of our major customers would harm us.



We depend on a relatively small number of customers for a significant
portion of our net sales. Our two largest customers in fiscal 2004 were IBM and Motorola, which represented approximately 30% of our total net sales. In addition, our ten largest customers in fiscal 2004 accounted for approximately 62% of our net
sales. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our net sales. Because our major customers represent such a large part of our business, the loss of any of our major customers could
negatively impact our business.



Our major customers may not
continue to purchase products and services from us at current levels or at all. In the past, we have lost customers due to the acquisition of our customers, product discontinuation and customers shifting production of products to internal
facilities. We may lose customers in the future for similar reasons. We may not be able to expand our customer base to make up any sales shortfalls if we lose a major customer. Our attempts to diversify our customer base and reduce our reliance on
particular customers may not be successful.



Our business has been adversely
affected by reductions or delays in customer orders.



We
do not typically obtain firm long-term purchase orders or commitments from our customers. We work closely with our customers to develop forecasts for future orders, but these forecasts are not binding. Customers may cancel their orders, change
production quantities from forecast volumes or delay production for a number of reasons beyond our control. Any material delay, cancellation or reduction of orders from our largest customers could cause our net sales to decline significantly and
could result in us holding excess inventories of components and materials. In fiscal 2004, these and similar factors caused us to recognize charges for inventory reserves and adjustments of $.8 million. We may be required to recognize similar
charges in future periods.



Many of our costs and operating
expenses are relatively fixed. As a result, a reduction in customer demand can decrease our gross profit and adversely affect our business, financial condition and results of operations.



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If we are unable to satisfy the financial covenants under our credit facility, our availability may be limited or we
may have to obtain alternative sources of financing.



We
have historically experienced violations of covenants under our revolving credit facilities and have been required to seek waivers for such violations. In anticipation of a potential covenant violation at the end of the first quarter of fiscal 2004,
we obtained a waiver from our lenders providing relief for the potential violation, as well as amending future covenant requirements to reflect expected operating results for the balance of fiscal 2004. Compliance with these covenants in our credit
facility is dependent upon us achieving certain revenue and expense targets in our fiscal 2004 operating plan. If we do not comply with these covenants or if we default on our payment obligations under other debt obligations, our availability under
our credit facility could be reduced or our lenders could declare a default under the credit facility. In the event of a default or a substantial reduction of availability, we would be required to obtain alternative financing, which could be more
expensive than our current arrangement, be dilutive to existing shareholders and divert managements time and attention. Moreover, we cannot assure that we would be able to obtain alternative financing on favorable terms and on a timely basis,
if at all. Our failure to meet any of our covenants under our credit facility could significantly harm our liquidity and financial position.



We require additional sources of funds for working capital.



Our continued viability depends on our ability to generate additional cash from operations or obtain additional sources of funds for working capital. Our
ability to maintain sufficient liquidity depends, in part, on our achieving anticipated revenue targets and intended expense reductions from our restructuring activities. We may not achieve these targets or realize the intended expense reductions.
If our operating goals are not met, we will be required to secure additional financing from lenders or sell additional securities. We may not be able to obtain additional capital when we want or need it, and capital may not be available on
satisfactory terms. If we issue additional equity securities or convertible debt to raise capital, it may be dilutive to your ownership interest. In addition, any additional capital may have terms and conditions that adversely affect our business,
such as financial or operating covenants.



We have been unable to collect
all our accounts receivable.



Falling demand for the
products of our technology customers and liquidity difficulties for these companies have forced us to reach accommodations with a portion of our customers and have limited our ability to collect fully our accounts receivable from these customers in
fiscal 2002 and 2003. In addition, several significant customers have filed for bankruptcy protection, which limits our recovery of accounts receivable from these customers. In fiscal 2004, these and similar factors caused us to recognize charges
for accounts receivable adjustments of $.8 million. We may be required to recognize similar charges in future periods.



Our acquisition strategy may not succeed.



As part of our business strategy, we have acquired other companies, assets or product lines that complement or expand our existing business. These
acquisitions have not been entirely successful, and in the fourth quarter of fiscal 2002, we incurred approximately $24.2 million of goodwill impairment charges related to facilities acquired by us in the past three years. As a result of
implementing new accounting pronouncements in fiscal 2003, we recorded an additional goodwill impairment charge of $5.3 million. Although we anticipate seeking further acquisition opportunities, we cannot assure you that we will be able to identify
suitable acquisition candidates or finance and complete transactions that we select. We may incorrectly judge the value or worth of an acquired company or business. In addition, its key personnel may decide not to work for us. We may also have
difficulty in integrating acquired businesses, products, services and technologies into our operations. These difficulties could disrupt our ongoing business, distract our management and workforce, increase our expenses and adversely affect our
operating results. Furthermore, we may incur significant debt or be required to issue equity securities to pay for future acquisitions or investments. The issuance of equity securities could be dilutive to our shareholders. Failure to execute our
acquisition strategy may adversely affect our business, financial condition and results of operations.



During periods of significant growth we may have trouble managing our expanded operations.



Rapid growth can place a significant strain on our management, financial resources and on our information, operations and financial systems. We face risks
associated with coordinating multinational operations and reporting systems, diverse technologies and multiple products and services. In addition, our growth has increased our expenses and working capital requirements. If we are unable to manage our
growth effectively, it may have an adverse effect on our business, financial condition and results of operations. We cannot assure you that we will manage our growth effectively



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Our financial condition could suffer if we fail to successfully defend pending lawsuits.



We are currently a defendant, along with several current and former officers and directors,
in a consolidated putative class action captioned: In re PEMSTAR Securities Litigation. We and our Board are also defendants in a consolidated shareholder derivative action that is based on many of the same facts that gave rise to the securities
class action. For further information about the nature of these actions see Item 3 in our Annual Report on Form 10-K for the year ended March 31, 2004. We believe the securities action is wholly without merit and we have moved to dismiss the
derivative action based on the plaintiffs failure to make a demand that the Board consider the merits of the claims in that action. Although we are vigorously defending against both of these claims, these actions are in their early stages and
we cannot predict their outcomes. If we are not able to successfully defend these actions, our business and financial condition could suffer.



Increased competition may result in decreased demand or prices for our services.



The electronics manufacturing services industry is highly competitive and characterized by low margins. We compete against
numerous U.S. and foreign service providers with global operations, as well as those who operate on a local or regional basis. In addition, current and prospective customers continually evaluate the merits of manufacturing products internally.
Consolidation in the electronics manufacturing services industry results in a continually changing competitive landscape. The consolidation trend in the industry also results in larger and more geographically diverse competitors who have significant
combined resources with which to compete against us. Some of our competitors have substantially greater managerial, manufacturing, engineering, technical, financial, systems, sales and marketing resources than we do. These competitors may:



| |  | Respond more quickly to new or emerging technologies;
| | - | -----------------------------------------------------



| |  | Have greater name recognition, critical mass and geographic and market presence;
| | - | --------------------------------------------------------------------------------



| |  | Be better able to take advantage of acquisition opportunities;
| | - | --------------------------------------------------------------



| |  | Adapt more quickly to changes in customer requirements; and
| | - | -----------------------------------------------------------



| |  | Devote greater resources to the development, promotion and sale of their services.
| | - | ----------------------------------------------------------------------------------



We also may be operating at a cost disadvantage as compared to competitors who have greater direct buying power from
component suppliers, distributors and raw material suppliers or who have lower cost structures. Increased competition from existing or potential competitors could result in price reductions, reduced margins or loss of market share.



We anticipate that our net sales and operating results will fluctuate which could affect
the price of our common stock.



Our net sales and
operating results have fluctuated and may continue to fluctuate significantly from quarter to quarter. A substantial portion of our net sales in any given quarter may depend on obtaining and fulfilling orders for assemblies to be manufactured and
shipped in the same quarter in which those orders are received. Further, a significant portion of our net sales in a given quarter may depend on assemblies configured, completed, packaged and shipped in the final weeks of such quarter. Our operating
results may fluctuate in the future as a result of many factors, including:



| |  | Variations in customer orders relative to our manufacturing capacity;
| | - | ---------------------------------------------------------------------



| |  | Variations in the timing of shipment of products to customers;
| | - | --------------------------------------------------------------



| |  | Our ability to recognize revenue with respect to products held for customers;
| | - | -----------------------------------------------------------------------------



| |  | Introduction and market acceptance of our customers new products;
| | - | ------------------------------------------------------------------



| |  | Changes in competitive and economic conditions generally or in our customers markets;
| | - | --------------------------------------------------------------------------------------



| |  | Effectiveness of our manufacturing processes, including controlling costs;
| | - | --------------------------------------------------------------------------



21



---

| |  | Changes in cost and availability of components or skilled labor; and
| | - | --------------------------------------------------------------------



| |  | The timing and price we pay for acquisitions and related acquisition costs.
| | - | ---------------------------------------------------------------------------



Our operating expenses are based on anticipated revenue levels and a high percentage of our operating expenses are relatively fixed in the short term. As
a result, any unanticipated shortfall in revenue in a quarter would likely adversely affect our operating results for that quarter. Also, changes in our product assembly mix may cause our margins to fluctuate, which could negatively impact our
results of operations for that period. Results in any period should not be considered indicative of the results to be expected in any future period. It is possible that in one or more future periods our results of operations will fail to meet the
expectations of securities analysts or investors, and the price of our common stock could decline significantly.



Our predictions of future operating results may not be achieved.



From time to time in earnings releases and otherwise, we may publish forecasts or other forward-looking statements, or comment on the estimates of
financial analysts, regarding our future results, including estimated revenues or net earnings. Any forecast of, or comment on, our future performance reflects various assumptions. These assumptions are subject to significant uncertainties, and as a
matter of course, any number of them may prove to be incorrect. Further, the achievement of any forecast depends on numerous risks and other factors (including those described in this discussion), many of which are beyond our control. As a result,
we cannot assure you that our performance will be consistent with any management forecasts or comments or that the variation from such forecasts or comments will not be material and adverse. You are cautioned not to base your entire analysis of our
business and prospects upon isolated predictions, but instead are encouraged to utilize our entire publicly available mix of historical and forward-looking information, as well as other available information affecting us and our services, when
evaluating our prospective results of operations.



Shortages or price
fluctuations in component parts specified by our customers could delay product shipments and adversely affect our profitability.



Many of the products we manufacture require one or more components that we order from sole-source suppliers. Supply shortages for a particular component
can delay production of all products using that component or cause cost increases in the services we provide. In the past, some of the materials we use, such as capacitors and memory and logic devices, have been subject to industry-wide shortages.
As a result, suppliers have been forced to allocate available quantities among their customers and we have not been able to obtain all of the materials desired. Our inability to obtain these needed materials could slow production or assembly, delay
shipments to our customers, increase costs and reduce operating income. In certain circumstances, we may bear the risk of periodic component price increases. Accordingly, some component price increases could increase costs and reduce our operating
income.



In addition, if we fail to manage our inventory
effectively, we may bear the risk of fluctuations in materials costs, scrap and excess inventory, all of which adversely affect our business, financial condition and results of operations. We are required to forecast our future inventory needs based
upon the anticipated demand of our customers. Inaccuracies in making these forecasts or estimates could result in a shortage or an excess of materials. A shortage of materials could lengthen production schedules and increase costs. An excess of
materials may increase the costs of maintaining inventory and may increase the risk of inventory obsolescence, both of which may increase expenses and decrease our profit margins and operating income.



If we are unable to respond to rapidly changing technologies and process developments, we
may not be able to compete effectively.



The market for
our products and services is characterized by rapidly changing technologies and continuing process developments. The future success of our business will depend in large part upon our ability to maintain and enhance our technological capabilities, to
develop and market products and services that meet changing customer needs and to successfully anticipate or respond to technological changes on a cost-effective and timely basis. Our core technologies could in the future encounter competition from
new or revised technologies that render existing technology less competitive or obsolete or that reduce the demand for our services. We cannot assure you that we will effectively respond to the technological requirements of the changing market. If
we determine that new technologies and equipment are required to remain competitive, the development, acquisition and implementation of these technologies may require us to make significant capital investments. We cannot assure you that we will be
able to obtain capital for these purposes in the future or that investments in new technologies will result in commercially viable technological processes. The loss of revenue and earnings to us from these changing technologies and process
developments could adversely affect us.



22



---

Operating in foreign countries exposes us to increased risks, which could adversely affect our results of operations.



We currently have foreign operations in Brazil, China,
Ireland, Israel, Japan, Mexico, the Netherlands, Romania, Singapore and Thailand. We may in the future expand into other international regions. We have limited experience in managing geographically dispersed operations and in operating in foreign
countries. We also purchase a significant number of components manufactured in foreign countries. Because of the scope of our international operations, we are subject to the following risks, which could adversely impact our results of operations:



| |  | Economic or political instability;
| | - | ----------------------------------



| |  | Transportation delays and interruptions;
| | - | ----------------------------------------



| |  | Foreign currency exchange rate fluctuations;
| | - | --------------------------------------------



| |  | Increased employee turnover and labor unrest;
| | - | ---------------------------------------------



| |  | Longer payment cycles;
| | - | ----------------------



| |  | Greater difficulty in collecting accounts receivable;
| | - | -----------------------------------------------------



| |  | Incompatibility of systems and equipment used in foreign operations;
| | - | --------------------------------------------------------------------



| |  | Difficulties in staffing and managing foreign personnel and diverse cultures; and
| | - | ---------------------------------------------------------------------------------



| |  | Less developed infrastructures.
| | - | -------------------------------



In addition, changes in policies by the United States or foreign governments could negatively affect our operating results due to increased duties,
increased regulatory requirements, higher taxation, currency conversion limitations, restrictions on the transfer of funds, the imposition of or increase in tariffs and limitations on imports or exports. Also, we could be negatively affected if our
host countries revise their policies away from encouraging foreign investment or foreign trade, including tax holidays.



We may be unable to protect our intellectual property, or we may be deemed to be infringing the intellectual property rights of others, either of which would
negatively affect our ability to compete and our results.



We rely on our proprietary technology, and we expect that future technological advances made by us will be critical to remain competitive. Therefore, we believe that the protection of our intellectual property rights is, and will continue
to be, important to the success of our business. We rely on a combination of patent, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Despite the steps we have taken to protect our
intellectual property, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. We cannot be certain that patents we have or that may be issued as a result of our pending patent applications will protect or
benefit us or give us adequate protection from competing technologies. We also cannot be certain that others will not develop our unpatented proprietary technology or effective competing technologies on their own.



From time to time, third parties including our customers and competitors, may
assert patent, copyright and other intellectual property rights to technologies that are important to us. In this regard, in August 2002, we were named as defendant in one of a number of actions currently being pursued by the Lemelson Foundation
Partnership based on alleged infringements of patent rights it claims in certain imaging analysis technology. The litigation has been stayed pending the resolution of other litigation, to which we are not a party, asserting the invalidity and/or
unenforceability of certain Lemelson patents. Patents held by other companies, including Lemelson, may be determined to be valid, and some of our products may ultimately be determined to infringe the patents or other intellectual property of other
companies. The results of any litigation are inherently uncertain. In the event of an adverse result in any litigation with respect to intellectual property rights relevant to our products, we could be required to obtain licenses to the infringing
technology, to pay substantial damages under applicable law, to cease the manufacture, use and sale of infringing products or to expend significant resources to develop non-infringing technology. Licenses may not be available from third parties,
either on commercially reasonable terms or at all. In addition, litigation frequently involves substantial expenditures and can require significant management attention, even if we ultimately prevail. Accordingly, any infringement claim or
litigation against us could significantly harm our business, operating results and financial condition.



23



---

Our inability to expand our Web-based supply chain management system could negatively impact our future
competitiveness.



Our future success depends in part on
our ability to rapidly respond to changing customer needs by scaling operations to meet customers requirements, shift capacity in response to product demand fluctuations, procure materials at advantageous prices, manage inventory and
effectively distribute products to our customers. In order to continue to meet these customer requirements, we have developed a Web-based supply chain management system that enables us to collaborate with our customers on product content and to
process engineering changes. We are currently implementing an enhanced version of our existing system, which will include real-time communications between our customers across all of our facilities. Our inability to expand this Web-based system, or
delays or defects in such expansion could negatively impact our ability to manage our supply chain in an efficient and timely manner to meet customer demands, which could adversely affect our competitive position and negatively affect our ability to
be competitive in the electronics manufacturing services industry.



Our
business could suffer if we lose the services of, or fail to attract, key personnel.



Our future success largely depends on the skills and efforts of our executive management and our engineering, manufacturing and sales employees. We do not have employment contracts or non-competition agreements with
any of our executive management or other key employees. The loss of services of any of our executives or other key personnel could negatively affect our business. Our continued growth will also require us to attract, motivate, train and retain
additional skilled and experienced managerial, engineering, manufacturing and sales personnel. We face intense competition for such personnel. We may not be able to attract, motivate and retain personnel with the skills and experience needed to
successfully manage our business and operations.



We are subject to a
variety of environmental laws, which expose us to potential financial liability.



Our operations are regulated under a number of federal, state, provincial, local and foreign environmental laws and regulations, which govern, among other things, the discharge of hazardous materials into the air and
water as well as the handling, storage and disposal of such materials. Compliance with these environmental laws is a significant consideration for us because we use metals and other hazardous materials in our manufacturing processes. We may be
liable under environmental laws for the cost of cleaning up properties we own or operate if they are or become contaminated by the release of hazardous materials, regardless of whether we caused the release. In addition, we, along with any other
person who arranges for the disposal of our wastes, may be liable for costs associated with an investigation and remediation of sites at which we have arranged for the disposal of hazardous wastes, if such sites become contaminated, even if we fully
comply with applicable environmental laws. In the event of contamination or violation of environmental laws, we could be held liable for damages including fines, penalties and the costs of remedial actions and could also be subject to revocation of
our discharge permits. Any such penalties or revocations could require us to cease or limit production at one or more of our facilities, thereby harming our business.



Risks Relating to Our Common Stock



The market price of our common stock could fluctuate in response to quarterly operating results and other factors.



The market price of our common stock has fluctuated significantly in the
past and may fluctuate significantly in the future in response to quarterly operating results and other factors, including many over which we have no control and that may not be directly related to us. The stock market has from time to time
experienced extreme price and volume fluctuations, which have often been unrelated or disproportionate to the operating performance of particular companies. Fluctuations or decreases in the trading price of our common stock may adversely affect your
ability to trade your shares and you may lose all or part of your investment. In addition, these fluctuations could adversely affect our ability to raise capital through future equity financings.



Future sales of our common stock may cause our stock price to decline and may cause
dilution to our existing shareholders.



As of May 31, 2004, our directors,
executive officers and largest shareholder beneficially owned an aggregate of 6,952,387 shares, or 13.3%, of our common stock. In addition, substantially all of our outstanding shares of common stock are freely tradable without restriction or
further registration. Sales of substantial amounts of common stock by our shareholders or even the potential for such sales, may cause the market price of our common stock to decline and could impair our ability to raise capital through the sale of
our equity securities.



24



---

As noted above, we may need additional funding, which may be raised through issuances of equity
securities and securities convertible into equity securities, to provide us with the capital to reach our objectives. We also have the right to issue, at the discretion of our board of directors, shares upon such terms and conditions and at such
prices as our board of directors may establish. In addition, we may in the future issue preferred stock that might have priority over our common stock as to distributions and liquidation proceeds. Such offerings would dilute the ownership interest
of existing shareholders and could cause a dilution of the net tangible book value of such shares.



Provisions in our charter documents and Minnesota law may delay or prevent an unsolicited takeover effort to acquire our company, which could inhibit your ability to receive an acquisition premium for your shares.



Provisions of our amended articles of incorporation and
our amended and restated bylaws and provisions of Minnesota law may delay or prevent an unsolicited takeover effort to acquire our company on terms that you may consider to be favorable. These provisions include the following:



| |  | No cumulative voting by shareholders for directors;
| | - | ---------------------------------------------------



| |  | A classified board of directors with three-year staggered terms
| | - | ---------------------------------------------------------------



| |  | The ability of our board to set the size of the board of directors, to create new directorships and to fill vacancies
| | - | ---------------------------------------------------------------------------------------------------------------------



| |  | The ability of our board, without shareholder approval, to issue preferred stock, which may have rights and preferences that are superior to our common stock;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The ability of our board to amend the bylaws;
| | - | ---------------------------------------------



| |  | A shareholder rights plan, which discourages the unauthorized acquisition of 15% or more of our common stock or an unauthorized exchange or tender offer;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Restrictions under Minnesota law on mergers or other business combinations between us and any holder of 10% or more of our outstanding common stock; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A requirement that at least two-thirds of our shareholders and at least two-thirds of our directors approve certain amendments of our articles of incorporation.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



25



---

CONSOLIDATED BALANCE SHEETS

PEMSTAR Inc.



|                                                                                                                                    |  |               |         |   |                |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | -------------- | - | ------- | -
|(In thousands, except per share data)                                                                                               |  | March 31,2004 |         |   | March 31, 2003 |  
|Assets                                                                                                                              |  |               |         |   |                |   |         |  
|Current assets:                                                                                                                     |  |               |         |   |                |   |         |  
|Cash and cash equivalents                                                                                                           |  | $             | 9,792   |   |                | $ | 32,762  |  
|Restricted cash                                                                                                                     |  |               | 4       |   |                |   | 4,268   |  
|Accounts receivable, net                                                                                                            |  |               | 127,583 |   |                |   | 112,316 |  
|Recoverable income taxes                                                                                                            |  |               | 1,122   |   |                |   | 282     |  
|Inventories, net                                                                                                                    |  |               | 94,482  |   |                |   | 69,279  |  
|Unbilled services                                                                                                                   |  |               | 11,547  |   |                |   | 10,797  |  
|Deferred income taxes                                                                                                               |  |               | 63      |   |                |   | 35      |  
|Prepaid expenses and other                                                                                                          |  |               | 14,609  |   |                |   | 7,474   |  
|                                                                                                                                    |  |               |         |   |                |   |         |  
|Total current assets                                                                                                                |  |               | 259,202 |   |                |   | 237,213 |  
|                                                                                                                                    |  |              
|Property, plant and equipment, net                                                                                                  |  |               | 93,121  |   |                |   | 93,200  |  
|                                                                                                                                    |  |              
|Goodwill, net                                                                                                                       |  |               | 33,878  |   |                |   | 33,771  |  
|Deferred income taxes                                                                                                               |  |               | 2,177   |   |                |   | 1,705   |  
|Other assets                                                                                                                        |  |               | 6,477   |   |                |   | 6,173   |  
|                                                                                                                                    |  |               |         |   |                |   |         |  
|Total assets                                                                                                                        |  | $             | 394,855 |   |                | $ | 372,062 |  
|                                                                                                                                    |  |               |         |   |                |   |         |  
|Liabilities and shareholders equity                                                                                                |  |               |         |   |                |   |         |  
|Current liabilities:                                                                                                                |  |               |         |   |                |   |         |  
|Cash overdraft                                                                                                                      |  | $             | 7,296   |   |                | $ |        |  
|Revolving credit facilities and current maturities of long-term debt                                                                |  |               | 68,618  |   |                |   | 68,297  |  
|Current maturities of capital lease obligations                                                                                     |  |               | 1,769   |   |                |   | 5,288   |  
|Accounts payable                                                                                                                    |  |               | 101,694 |   |                |   | 88,083  |  
|Income taxes payable                                                                                                                |  |               | 631     |   |                |   | 191     |  
|Accrued expenses and other                                                                                                          |  |               | 22,947  |   |                |   | 22,631  |  
|                                                                                                                                    |  |               |         |   |                |   |         |  
|Total current liabilities                                                                                                           |  |               | 202,955 |   |                |   | 184,490 |  
|                                                                                                                                    |  |              
|Long-term debt, less current maturities                                                                                             |  |               | 8,856   |   |                |   | 10,276  |  
|Capital lease obligations, less current maturities                                                                                  |  |               | 11,867  |   |                |   | 12,843  |  
|Other liabilities and deferred credits                                                                                              |  |               | 7,384   |   |                |   | 4,586   |  
|                                                                                                                                    |  |              
|Shareholders equity:                                                                                                               |  |               |         |   |                |   |         |  
|Common stock, par value $0.01, 150,000 shares authorized; shares issued and outstanding; 2004 - 45,136 shares; 2003  37,486
shares |  |               | 451     |   |                |   | 375     |  
|Additional paid-in capital                                                                                                          |  |               | 255,153 |   |                |   | 234,943 |  
|Accumulated other comprehensive income (loss)                                                                                       |  |               | 3,081   |   |                |   | (14     | )
|Accumulated deficit                                                                                                                 |  |               | (94,728 | ) |                |   | (74,928 | )
|Loans to shareholders                                                                                                               |  |               | (164    | ) |                |   | (509    | )
|                                                                                                                                    |  |               |         |   |                |   |         |  
|Total shareholders equity                                                                                                          |  |               | 163,793 |   |                |   | 159,867 |  
|                                                                                                                                    |  |               |         |   |                |   |         |  
|Total liabilities and shareholders equity                                                                                          |  | $             | 394,855 |   |                | $ | 372,062 |  
|                                                                                                                                    |  |               |         |   |                |   |         |  



See notes to consolidated financial
statements.



26



---

CONSOLIDATED STATEMENTS OF OPERATIONS

|PEMSTAR | Inc.
|------- | ----



|                                                                    |  |                      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------- |  | -------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|(In thousands, except per share data)                               |  | Year Ended March 31, |        
|                                                                    |  | 2004                 |         |   | 2003 |   |         | 2002 | 
|Net sales                                                           |  | $                    | 669,446 |   |      | $ | 668,175 |      |  | $ | 657,493 |  
|Costs of goods sold                                                 |  |                      | 621,630 |   |      |   | 637,074 |      |  |   | 627,457 |  
|                                                                    |  |                      |         |   |      |   |         |      |  |   |         |  
|Gross profit                                                        |  |                      | 47,816  |   |      |   | 31,101  |      |  |   | 30,036  |  
|                                                                    |  |                      |        
|Selling, general and administrative expenses                        |  |                      | 52,023  |   |      |   | 51,076  |      |  |   | 53,351  |  
|Restructuring costs                                                 |  |                      | 7,961   |   |      |   | 4,249   |      |  |   |        |  
|Amortization                                                        |  |                      | 107     |   |      |   | 129     |      |  |   | 2,152   |  
|Goodwill impairment charges                                         |  |                      |        |   |      |   |        |      |  |   | 24,228  |  
|                                                                    |  |                      |         |   |      |   |         |      |  |   |         |  
|Operating loss                                                      |  |                      | (12,275 | ) |      |   | (24,353 | )    |  |   | (49,695 | )
|                                                                    |  |                      |        
|Other income (expense)  net                                        |  |                      | 793     |   |      |   | 558     |      |  |   | 829     |  
|Interest expense                                                    |  |                      | (7,815  | ) |      |   | (8,870  | )    |  |   | (7,077  | )
|                                                                    |  |                      |         |   |      |   |         |      |  |   |         |  
|Loss before income taxes and cumulative effect of accounting change |  |                      | (19,297 | ) |      |   | (32,665 | )    |  |   | (55,943 | )
|                                                                    |  |                      |        
|Income tax expense (benefit)                                        |  |                      | 503     |   |      |   | 753     |      |  |   | (1,926  | )
|                                                                    |  |                      |         |   |      |   |         |      |  |   |         |  
|Loss before cumulative effect of accounting change                  |  |                      | (19,800 | ) |      |   | (33,418 | )    |  |   | (54,017 | )
|                                                                    |  |                      |        
|Cumulative effect of accounting change                              |  |                      |        |   |      |   | (5,346  | )    |  |   |        |  
|                                                                    |  |                      |         |   |      |   |         |      |  |   |         |  
|Net loss                                                            |  | $                    | (19,800 | ) |      | $ | (38,764 | )    |  | $ | (54,017 | )
|                                                                    |  |                      |         |   |      |   |         |      |  |   |         |  
|Basic and diluted loss per common share:                            |  |                      |         |   |      |   |         |      |  |   |         |  
|Loss before cumulative effect of accounting change                  |  | $                    | (.47    | ) |      | $ | (.90    | )    |  | $ | (1.56   | )
|Cumulative effect of accounting change                              |  |                      |        |   |      |   | (.14    | )    |  |   |        |  
|                                                                    |  |                      |         |   |      |   |         |      |  |   |         |  
|Net loss                                                            |  | $                    | (.47    | ) |      | $ | (1.04   | )    |  | $ | (1.56   | )
|                                                                    |  |                      |         |   |      |   |         |      |  |   |         |  
|Average shares used in computing net loss per common share:         |  |                      |         |   |      |   |         |      |  |   |         |  
|Basic and diluted                                                   |  |                      | 42,002  |   |      |   | 37,133  |      |  |   | 34,717  |  



See
notes to consolidated financial statements.



27



---

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

PEMSTAR Inc.



|                                                                  |        |              |   |                          |   |     |                                            |   |         |                                      |  |   |                      |   |  |       |         |   |  |   |        |   |  |   |         |  
|----------------------------------------------------------------- | ------ | ------------ | - | ------------------------ | - | --- | ------------------------------------------ | - | ------- | ------------------------------------ |  | - | -------------------- | - |  | ----- | ------- | - |  | - | ------ | - |  | - | ------- | -
|(In thousands)                                                    |        | Common Stock |   | AdditionalPaid-InCapital |   |     | AccumulatedOtherComprehensiveIncome (Loss) |   |         | RetainedEarnings(AccumulatedDeficit) |  |   | Loans toShareholders |   |  | Total |        
|                                                                  | Shares |              |   | Amount                   |   |     |                                            |   |        
|Balance, March 31, 2001                                           |        | 28,294       |   |                          | $ | 283 |                                            | $ | 137,139 |                                      |  | $ | (2,299               | ) |  | $     | 17,853  |   |  | $ | (2,264 | ) |  | $ | 150,712 |  
|Issuance of common stock in employee stock programs               |        | 1,271        |   |                          |   | 12  |                                            |   | 5,782   |                                      |  |   |                     |   |  |       |        |   |  |   | (108   | ) |  |   | 5,686   |  
|Payments on loans to shareholders                                 |        |             |   |                          |   |    |                                            |   |        |                                      |  |   |                     |   |  |       |        |   |  |   | 1,464  |   |  |   | 1,464   |  
|Issuance of common stock                                          |        | 6,275        |   |                          |   | 63  |                                            |   | 79,321  |                                      |  |   |                     |   |  |       |        |   |  |   |       |   |  |   | 79,384  |  
|Issuance of common stock in connection with business acquisitions |        | 861          |   |                          |   | 9   |                                            |   | 9,991   |                                      |  |   |                     |   |  |       |        |   |  |   |       |   |  |   | 10,000  |  
|Comprehensive (loss) income:                                      |        |              |   |                          |   |     |                                            |   |         |                                      |  |   |                      |   |  |       |         |   |  |   |        |   |  |   |         |  
|Net loss                                                          |        |             |   |                          |   |    |                                            |   |        |                                      |  |   |                     |   |  |       | (54,017 | ) |  |   |       |   |  |   | (54,017 | )
|Foreign currency translation adjustment                           |        |             |   |                          |   |    |                                            |   |        |                                      |  |   | 168                  |   |  |       |        |   |  |   |       |   |  |   | 168     |  
|                                                                  |        |              |   |                          |   |     |                                            |   |         |                                      |  |   |                      |   |  |       |         |   |  |   |        |   |  |   |         |  
|Comprehensive loss                                                |        |             |   |                          |   |    |                                            |   |        |                                      |  |   |                     |   |  |       |        |   |  |   |       |   |  |   | (53,849 | )
|                                                                  |        |              |   |                          |   |     |                                            |   |         |                                      |  |   |                      |   |  |       |         |   |  |   |        |   |  |   |         |  
|Balance, March 31, 2002                                           |        | 36,701       |   |                          |   | 367 |                                            |   | 232,233 |                                      |  |   | (2,131               | ) |  |       | (36,164 | ) |  |   | (908   | ) |  |   | 193,397 |  
|Issuance of common stock in employee stock programs               |        | 785          |   |                          |   | 8   |                                            |   | 1,092   |                                      |  |   |                     |   |  |       |        |   |  |   |       |   |  |   | 1,100   |  
|Payments on loans to shareholders                                 |        |             |   |                          |   |    |                                            |   |        |                                      |  |   |                     |   |  |       |        |   |  |   | 399    |   |  |   | 399     |  
|Issuance of warrants                                              |        |             |   |                          |   |    |                                            |   | 1,618   |                                      |  |   |                     |   |  |       |        |   |  |   |       |   |  |   | 1,618   |  
|Comprehensive (loss) income:                                      |        |              |   |                          |   |     |                                            |   |         |                                      |  |   |                      |   |  |       |         |   |  |   |        |   |  |   |         |  
|Net loss                                                          |        |             |   |                          |   |    |                                            |   |        |                                      |  |   |                     |   |  |       | (38,764 | ) |  |   |       |   |  |   | (38,764 | )
|Foreign currency translation adjustment                           |        |             |   |                          |   |    |                                            |   |        |                                      |  |   | 2,117                |   |  |       |        |   |  |   |       |   |  |   | 2,117   |  
|                                                                  |        |              |   |                          |   |     |                                            |   |         |                                      |  |   |                      |   |  |       |         |   |  |   |        |   |  |   |         |  
|Comprehensive loss                                                |        |             |   |                          |   |    |                                            |   |        |                                      |  |   |                     |   |  |       |        |   |  |   |       |   |  |   | (36,647 | )
|                                                                  |        |              |   |                          |   |     |                                            |   |         |                                      |  |   |                      |   |  |       |         |   |  |   |        |   |  |   |         |  
|Balance, March 31, 2003                                           |        | 37,486       |   |                          |   | 375 |                                            |   | 234,943 |                                      |  |   | (14                  | ) |  |       | (74,928 | ) |  |   | (509   | ) |  |   | 159,867 |  
|Issuance of common stock in employee stock programs               |        | 191          |   |                          |   | 1   |                                            |   | 365     |                                      |  |   |                     |   |  |       |        |   |  |   |       |   |  |   | 366     |  
|Payments on loans to shareholders                                 |        | (16          | ) |                          |   |    |                                            |   | (61     | )                                    |  |   |                     |   |  |       |        |   |  |   | 345    |   |  |   | 284     |  
|Issuance of common stock                                          |        | 7,475        |   |                          |   | 75  |                                            |   | 19,906  |                                      |  |   |                     |   |  |       |        |   |  |   |       |   |  |   | 19,981  |  
|Comprehensive loss:                                               |        |              |   |                          |   |     |                                            |   |         |                                      |  |   |                      |   |  |       |         |   |  |   |        |   |  |   |         |  
|Net loss                                                          |        |             |   |                          |   |    |                                            |   |        |                                      |  |   |                     |   |  |       | (19,800 | ) |  |   |       |   |  |   | (19,800 | )
|Foreign currency translation adjustment                           |        |             |   |                          |   |    |                                            |   |        |                                      |  |   | 3,095                |   |  |       |        |   |  |   |       |   |  |   | 3,095   |  
|                                                                  |        |              |   |                          |   |     |                                            |   |         |                                      |  |   |                      |   |  |       |         |   |  |   |        |   |  |   |         |  
|                                                                  |        |              |   |                          |   |     |                                            |   |         |                                      |  |   |                      |   |  |       |         |   |  |   |        |   |  |   |         |  
|Comprehensive loss                                                |        |             |   |                          |   |    |                                            |   |        |                                      |  |   |                     |   |  |       |        |   |  |   |       |   |  |   | (16,705 | )
|                                                                  |        |              |   |                          |   |     |                                            |   |         |                                      |  |   |                      |   |  |       |         |   |  |   |        |   |  |   |         |  
|Balance, March 31, 2004                                           |        | 45,136       |   |                          | $ | 451 |                                            | $ | 255,153 |                                      |  | $ | 3,081                |   |  | $     | (94,728 | ) |  | $ | (164   | ) |  | $ | 163,793 |  
|                                                                  |        |              |   |                          |   |     |                                            |   |         |                                      |  |   |                      |   |  |       |         |   |  |   |        |   |  |   |         |  



See
notes to consolidated financial statements.



28



---

CONSOLIDATED STATEMENTS OF CASH FLOWS

PEMSTAR Inc.



|                                                                                          |  |                      |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------- |  | -------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                          |  | Year ended March 31, |        
|(In thousands)                                                                            |  | 2004                 |         |   | 2003 |   |         | 2002 | 
|Cash flows from operating activities:                                                     |  |                      |         |   |      |   |         |      |  |   |         |  
|Net loss                                                                                  |  | $                    | (19,800 | ) |      | $ | (38,764 | )    |  | $ | (54,017 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                      |         |   |      |   |         |      |  |   |         |  
|Depreciation                                                                              |  |                      | 22,082  |   |      |   | 20,021  |      |  |   | 18,299  |  
|Amortization                                                                              |  |                      | 1,426   |   |      |   | 1,693   |      |  |   | 3,085   |  
|Goodwill impairment charge/accounting change                                              |  |                      |        |   |      |   | 5,346   |      |  |   | 24,228  |  
|Deferred income taxes                                                                     |  |                      | (500    | ) |      |   | (584    | )    |  |   | 1,059   |  
|Non-cash restructuring charges and other                                                  |  |                      | 1,201   |   |      |   | 1,086   |      |  |   | (49     | )
|Other deferred credits                                                                    |  |                      | (907    | ) |      |   | (844    | )    |  |   | (356    | )
|Change in operating assets and liabilities:                                               |  |                      |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                                       |  |                      | (13,506 | ) |      |   | 12,885  |      |  |   | (12,596 | )
|Inventories                                                                               |  |                      | (23,056 | ) |      |   | 24,991  |      |  |   | 24,986  |  
|Recoverable income taxes                                                                  |  |                      | (840    | ) |      |   | 3,591   |      |  |   | (3,873  | )
|Unbilled services                                                                         |  |                      | (750    | ) |      |   | 5,559   |      |  |   | (6,622  | )
|Prepaid expenses and other                                                                |  |                      | (6,695  | ) |      |   | 1,487   |      |  |   | (2,318  | )
|Accounts payable                                                                          |  |                      | 12,273  |   |      |   | 7,285   |      |  |   | 7,554   |  
|Accrued expenses and other                                                                |  |                      | 8,333   |   |      |   | 3,559   |      |  |   | 313     |  
|                                                                                          |  |                      |         |   |      |   |         |      |  |   |         |  
|Net cash (used in) provided by operating activities                                       |  |                      | (20,739 | ) |      |   | 47,311  |      |  |   | (307    | )
|                                                                                          |  |                      |        
|Cash flows used in investing activities:                                                  |  |                      |         |   |      |   |         |      |  |   |         |  
|Decrease (increase) in restricted cash                                                    |  |                      | 4,264   |   |      |   | 1,296   |      |  |   | (1,090  | )
|Business acquisitions, net of cash acquired                                               |  |                      | (4,223  | ) |      |   | (4,376  | )    |  |   | (24,361 | )
|Proceeds from sale of property, plant and equipment                                       |  |                      | 204     |   |      |   | 42      |      |  |   | 2,178   |  
|Purchases of property, plant and equipment                                                |  |                      | (21,745 | ) |      |   | (12,555 | )    |  |   | (37,930 | )
|                                                                                          |  |                      |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                     |  |                      | (21,500 | ) |      |   | (15,593 | )    |  |   | (61,203 | )
|                                                                                          |  |                      |        
|Cash flows from (used in) financing activities:                                           |  |                      |         |   |      |   |         |      |  |   |         |  
|Bank overdrafts                                                                           |  |                      | 7,296   |   |      |   |        |      |  |   | (13,504 | )
|Proceeds from common stock sales                                                          |  |                      | 19,981  |   |      |   |        |      |  |   | 79,384  |  
|Proceeds from sale of warrants                                                            |  |                      |        |   |      |   | 560     |      |  |   |        |  
|Proceeds from employee stock sales                                                        |  |                      | 366     |   |      |   | 1,100   |      |  |   | 5,686   |  
|Payments on loans to shareholders                                                         |  |                      | 284     |   |      |   | 399     |      |  |   | 1,464   |  
|Proceeds from government grants                                                           |  |                      |        |   |      |   | 300     |      |  |   | 550     |  
|Proceeds from sale and leaseback                                                          |  |                      |        |   |      |   | 7,476   |      |  |   | 911     |  
|Principal payments on borrowings                                                          |  |                      | (62,150 | ) |      |   | (54,274 | )    |  |   | (60,072 | )
|Proceeds from borrowings                                                                  |  |                      | 54,787  |   |      |   | 35,592  |      |  |   | 54,156  |  
|Debt placement costs                                                                      |  |                      | (1,681  | ) |      |   | (1,099  | )    |  |   | (1,411  | )
|                                                                                          |  |                      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) financing activities                                       |  |                      | 18,883  |   |      |   | (9,946  | )    |  |   | 67,164  |  
|                                                                                          |  |                      |        
|Effect of exchange rate changes on cash                                                   |  |                      | 386     |   |      |   | (493    | )    |  |   | (53     | )
|                                                                                          |  |                      |         |   |      |   |         |      |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                                      |  |                      | (22,970 | ) |      |   | 21,279  |      |  |   | 5,601   |  
|Cash and cash equivalents:                                                                |  |                      |         |   |      |   |         |      |  |   |         |  
|Beginning of year                                                                         |  |                      | 32,762  |   |      |   | 11,483  |      |  |   | 5,882   |  
|                                                                                          |  |                      |         |   |      |   |         |      |  |   |         |  
|End of year                                                                               |  | $                    | 9,792   |   |      | $ | 32,762  |      |  | $ | 11,483  |  
|                                                                                          |  |                      |         |   |      |   |         |      |  |   |         |  



See
notes to consolidated financial statements.



29



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PEMSTAR Inc.

(In thousands, except per share data)



Note 1. Nature of Business and Significant Accounting Policies



Business PEMSTAR Inc. (the Company) is a
leading provider of electronics manufacturing services to original equipment manufacturers in the communications, computing and data storage, industrial and medical equipment sectors. The Company provides its services to customers on a global basis
through manufacturing facilities located in North America, Asia, Europe and South America.



Principles of consolidation The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions are eliminated
in the consolidated financial statements.



Revenue recognition Revenue from the sale of products is recognized when the product is shipped to the customer. In limited circumstances, although the physical product remains on the Companys premises at the request of the customer, when title and risks and
rewards of ownership have contractually passed to the customer, revenue is recognized in accordance with the guidance of Staff Accounting Bulletin No. 101. Revenue from sale of products includes sales of excess inventories to customers under
contract provisions of $8,426, $23,774, and $25,402 for its years ended March 31, 2004, 2003 and 2002, respectively. Revenue from design, development and engineering services is recognized when the services are performed and collectibility is
reasonably certain. Such services provided under fixed price contracts are accounted for using the percentage of completion method as outlined in SOP 81-1, Accounting for Performance of Contract-Type and Certain Production-Type Contracts
using hours of services for measurement of the extent of progress towards completion. Revenue recognized in excess of billed amounts under fixed price contracts or unbilled engineering services is classified as unbilled services in the balance
sheet.



Cash and cash equivalents The Company considers all
highly liquid debt securities purchased with a maturity of three months or less to be cash equivalents. Cash equivalents are recorded at cost, which approximates market value.



Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market and include freight-in,
materials, labor and manufacturing overhead costs.



Property, plant and
equipment Property, plant and equipment is stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives:



|                               |  |                
|------------------------------ |  | ---------------
|                               |  | Number of Years
|                              
|Buildings and improvements     |  | 4 to 40        
|Machinery and equipment        |  | 4 to 7         
|Furniture and fixtures         |  | 2 to 10        
|Computer hardware and software |  | 4              



Amortization of assets acquired under
capital leases is included with depreciation expense.



Goodwill
Effective April 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized. This standard also requires, at a
minimum, an annual assessment of the carrying value of goodwill and other intangibles with indefinite useful lives. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized. Intangible
assets with finite lives are amortized over their estimated useful lives. Prior to 2003, goodwill and indefinite-lived intangible assets were amortized over periods not exceeding 40 years. Goodwill at March 31, 2004 and 2003 of $33,878 and $33,771,
respectively, is net of accumulated amortization of $854 and $852, respectively.



SFAS No. 142 required the Company to complete an impairment review of its goodwill assets. As a result of the Companys completion of its transitional impairment test using a discounted cash flow model as required by SFAS No. 142, it
determined that goodwill pertaining to one of its acquisitions was impaired. As such, the Company recorded as a cumulative effect of a change in accounting principle a write-off of goodwill in fiscal 2003 in the amount of $5,346 on which the Company
recognized no tax benefit.



30



---

During 2002, the Company evaluated its goodwill under SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of. As a result of this evaluation, the Company recorded a goodwill impairment charge of $24,228.



As reconciliation of reported net loss adjusted to reflect the adoption of SFAS No. 142 as if it had been effective April 1, 2001 is provided below:



|                                           |  |                      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------ |  | -------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                           |  | Year Ended March 31, |        
|                                           |  | 2004                 |         |   | 2003 |   |         | 2002 | 
|Reported net loss                          |  | $                    | (19,800 | ) |      | $ | (38,764 | )    |  | $ | (54,017 | )
|Add: Adjustment for accounting change      |  |                      |        |   |      |   | 5,346   |      |  |   |        |  
|Amortization, net of tax                   |  |                      |        |   |      |   |        |      |  |   | 2,152   |  
|                                           |  |                      |         |   |      |   |         |      |  |   |         |  
|Adjusted net loss                          |  | $                    | (19,800 | ) |      | $ | (33,418 | )    |  | $ | (51,865 | )
|                                           |  |                      |         |   |      |   |         |      |  |   |         |  
|Reported basic loss per common share       |  | $                    | (.47    | ) |      | $ | (1.04   | )    |  | $ | (1.56   | )
|Add: Adjustment for accounting change      |  |                      |        |   |      |   | .14     |      |  |   |        |  
|Amortization, net of tax                   |  |                      |        |   |      |   |        |      |  |   | .07     |  
|                                           |  |                      |         |   |      |   |         |      |  |   |         |  
|Adjusted basic net loss per common share   |  | $                    | (.47    | ) |      | $ | (.90    | )    |  | $ | (1.49   | )
|                                           |  |                      |         |   |      |   |         |      |  |   |         |  
|Reported diluted loss per common share     |  | $                    | (.47    | ) |      | $ | (1.04   | )    |  | $ | (1.56   | )
|Add: Adjustment for accounting change      |  |                      |        |   |      |   | .14     |      |  |   |        |  
|Amortization, net of tax                   |  |                      |        |   |      |   |        |      |  |   | .07     |  
|                                           |  |                      |         |   |      |   |         |      |  |   |         |  
|Adjusted diluted net loss per common share |  | $                    | (.47    | ) |      | $ | (.90    | )    |  | $ | (1.49   | )
|                                           |  |                      |         |   |      |   |         |      |  |   |         |  



Long-lived assets The
Company follows SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets, including goodwill, be reviewed for impairment whenever events or circumstances indicate the
carrying amount of an asset may not be recoverable. The Company evaluates potential impairment by comparing the carrying amount of the assets with the estimated undiscounted cash flows associated with them. If impairment exists, the Company records
an impairment charge equal to the excess amount of the carrying value over the fair value.



Estimated warranty claim The Company sells its products with a warranty that provides for repairs or replacements of any defective workmanship for a one-year period after the sale. Based upon historical
experience, the accrual for warranty claims is not material at March 31, 2004 and 2003.



Foreign currency For subsidiaries where the U.S. dollar is the functional currency, all foreign currency asset and liability amounts are remeasured into U.S. dollars at end-of-period exchange rates, except for inventories,
prepaid expenses, property, plant and equipment, and intangible assets, which are remeasured at historical rates. Foreign currency income and expenses are remeasured at average exchange rates in effect during the year, except for expenses related to
balance sheet amounts remeasured at historical exchange rates. Exchange gains and losses arising from remeasurement of foreign currency-denominated monetary assets and liabilities are included in income in the period in which they occur.



For subsidiaries where the local currency is the functional currency, assets and
liabilities denominated in local currencies are translated into U.S. dollars at end of period exchange rates, and the resultant translation adjustments are reported, net of their related tax effects, as a component of accumulated other comprehensive
income (loss) in stockholders equity. Assets and liabilities denominated in other than the local currency are remeasured into the local currency prior to translation into U.S. dollars, and the resultant exchange gains or losses are included in
income in the period in which they occur. Income and expenses are translated into U.S. dollars at average exchange rates in effect during the period.



Comprehensive income (loss) reflects the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. For
the Company, comprehensive income (loss) represents net income (loss) adjusted for foreign currency translation adjustments.



Shipping and handling fees The Company classifies costs associated with shipping and handling fees as a component of cost of goods sold. Customer billings
related to shipping and handling fees are reported as net sales.



Income
taxes The Company accounts for income taxes following the provisions of SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires that deferred income taxes be recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable



31



---

earnings. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely
than not to be realized. The effect of changes in tax rates is recognized in the period in which the rate change occurs.



Research and development Research and development costs are expensed when incurred and totaled $529, $1,011 and $1,015 for the years ended March 31, 2004,
2003, and 2002, respectively.



Use of estimates The preparation
of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could
differ from those estimates.



Given the volatility of the markets in which the
Company operates, the Company makes adjustments to its value of inventories based on estimates of potentially excess and obsolete inventory after considering customer forecasted demand and forecasted average selling price. However, forecasts are
subject to revisions, cancellations, and rescheduling. Actual demand will inevitably differ from such anticipated demand, and such differences may have a material effect on the Companys financial position and results of operations.



The Company has a diverse customer base. The creditworthiness of customers is evaluated
before sales are approved. The Company records an allowance for doubtful accounts based on past history, current economic conditions and the composition of its accounts receivable aging, and in some instances, makes allowances for specific customers
based on several factors, such as the creditworthiness of those customers and payment history. Actual write-offs may differ from the allowances for doubtful accounts, and this difference may have a material effect on the Companys financial
position and results of operations.



Stock-based compensation The
Company has adopted the pro-forma disclosure only requirements of SFAS No. 123, Accounting for Stock-Based Compensation, and accordingly, accounts for stock options issued to employees using the intrinsic value method of Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. Compensation expense is recorded on the date stock options are granted only if the current fair market value of the underlying stock exceeds the
exercise price of the option. Accordingly, no compensation cost has been recognized for grants under these stock option plans since the exercise price equaled the fair market value of the stock on the date of grant. Had compensation cost for stock
option grants been based on the grant date fair values of awards (the method described in SFAS No. 123), reported net (loss) income would have been changed to the pro forma amounts reported below.



|                                            |  |                      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------- |  | -------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                            |  | Year Ended March 31, |        
|                                            |  | 2004                 |         |   | 2003 |   |         | 2002 | 
|Net loss:                                   |  |                      |         |   |      |   |         |      |  |   |         |  
|As reported                                 |  | $                    | (19,800 | ) |      | $ | (38,764 | )    |  | $ | (54,017 | )
|Additional compensation expense, net of tax |  |                      | (2,117  | ) |      |   | (2,625  | )    |  |   | (2,819  | )
|                                            |  |                      |         |   |      |   |         |      |  |   |         |  
|Pro forma                                   |  | $                    | (21,917 | ) |      | $ | (41,389 | )    |  | $ | (56,836 | )
|Basic and diluted loss per share:           |  |                      |         |   |      |   |         |      |  |   |         |  
|As reported                                 |  | $                    | (.47    | ) |      | $ | (1.04   | )    |  | $ | (1.56   | )
|Pro forma                                   |  |                      | (.52    | ) |      |   | (1.11   | )    |  |   | (1.64   | )



The fair value of each option grant
has been estimated at the grant date using a Black-Scholes option pricing model with the following weighted average assumptions: dividend rate of 0% for all years; risk-free interest rates of 3.86%, 3.83% and 5.42% for 2004, 2003 and 2002,
respectively, volatility factor of expected market price of our common stock of 0.7, 1.5 and 0.8 for 2004, 2003 and 2002, respectively, and expected lives of ten years.



Net (loss) income per common share The Company follows the provisions of SFAS No. 128, Earnings per Share. Basic
net (loss) income per share is computed based upon the weighted average number of common shares issued and outstanding during each year. Diluted net (loss) income per share amounts assume conversion, exercise or issuance of all potential common
stock instruments (stock options as discussed in Note 13).



Common stock
equivalents and their impact on net loss have been excluded from the diluted per share calculation for all years presented, since the Company incurred net losses and the inclusion of common stock equivalents would have had an anti-dilutive impact.
Potentially dilutive securities, which have been excluded, consist of i) unexercised stock options and warrants to purchase 5,977 and 5,978 shares of the Companys common stock as of March 31, 2004 and 2003, respectively, and ii) 2,193 shares
of the Companys common stock issuable upon conversion of convertible debt as of March 31, 2004 and 2003, respectively.



32



---

Reclassification Certain prior year amounts have been reclassified to conform with the current year
presentation. These reclassifications had no impact on previously reported net (loss) income or shareholders equity.



Note 2. Acquisitions



In August 2000, the Company acquired Turtle Mountain Corporation, an electronics manufacturing service provider for commercial and military customers. In September 2001, in connection with the terms of the purchase
agreement, the Company was required to pay additional contingent consideration, which had the effect of increasing the purchase price and goodwill by $750.



In May 2001, the Company acquired certain assets and assumed certain liabilities of U.S. Assemblies New England, Inc., which operates through an 85,000 square foot
facility located in Taunton, Massachusetts. The purchase price of $14,522, including $1,646 of assumed indebtedness was funded under the Companys operating line of credit. The transaction was accounted for as a purchase. Accordingly, the net
assets and operating results have been included in the Company financial statements from the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired of $11,913 was recorded as goodwill prior to
the remaining unamortized balance of $11,367 being written off in March 2002 as a result of the Companys analysis of impairment.



In September 2001, the Company purchased the membership interests and business of Pacific Consultants LLC (a provider of electromechanical design and test consulting
services). The initial purchase price was approximately $20,642, including common stock valued at $10,000, cash and costs of $6,792, and cash or common stock of $3,850 payable up to two years from the date of the acquisition. The purchase agreement
provided for additional adjustment of the purchase price, payable in cash or common stock, up to an additional $40,000, if earnings targets are met for the acquired business in the two years following the close. The transaction was accounted for as
a purchase. Accordingly, the net assets and operating results have been included in the Companys financial statements from the date of acquisition. The excess of the purchase price over the estimated fair value of net assets acquired was
recorded as goodwill and has not been amortized in accordance with SFAS No. 142. Goodwill of $17,356 was recorded at March 31, 2002 and increased by $253 and $4,376 in the years ended March 31, 2004 and 2003, respectively, for payments made in
connection with purchase agreement adjustment of purchase price contract provisions.



In November 2001, the Company purchased certain assets from MTS Systems Corporation including equipment located in Chaska, Minnesota. The purchase price of $3,647 was funded under the Companys operating line of credit. The transaction
was recorded as a purchase. Accordingly, the net assets and operating results have been included in the Companys financial statements from the date of acquisition. The excess of purchase price over the fair value of net assets acquired of
$1,257 was recorded as goodwill and has not been amortized in accordance with SFAS No. 142.



The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition for acquisitions since adoption of SFAS No. 141, which includes the Pacific Consultants LLP
and MTS Systems Corporation transactions.



|                                              |  |   |        |  
|--------------------------------------------- |  | - | ------ | -
|Current assets                                |  | $ | 6,585  |  
|Property, plant and equipment                 |  |   | 1,178  |  
|Intangible assets not subject to amortization |  |   | 100    |  
|Goodwill                                      |  |   | 18,613 |  
|Current liabilities                           |  |   | (2,235 | )
|Noncurrent liabilities                        |  |   | (494   | )
|                                              |  |   |        |  
|Net assets acquired                           |  | $ | 23,747 |  
|                                              |  |   |        |  



33



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The following unaudited pro forma combined summary statement of operations for the year ended March 31, 2002 was prepared
in accordance with APB No. 16 and assumes the acquisition had occurred at the beginning of the year. The following pro forma data reflect adjustments for interest expense, amortization of goodwill, where applicable, and depreciation of fixed assets.
The unaudited pro forma financial information is provided for informational purposes only and does not purport to be indicative of the future results of the Company.



Unaudited Pro Forma Consolidated Statements of Operations



|                                              |  |                          |         |  
|--------------------------------------------- |  | ------------------------ | ------- | -
|                                              |  | Year endedMarch 31, 2002 |        
|Net sales                                     |  | $                        | 674,016 |  
|Net loss                                      |  |                          | (53,767 | )
|                                              | 
|Net loss per common share  basic and diluted |  | $                        | (1.55   | )



Note 3. Accounts Receivable



Accounts receivable consists of the following:



|                                     |  |           |         |   |      |   |         |  
|------------------------------------ |  | --------- | ------- | - | ---- | - | ------- | -
|                                     |  | March 31, |        
|                                     |  | 2004      |         |   | 2003 |  
|Accounts receivable                  |  | $         | 130,761 |   |      | $ | 115,799 |  
|Less allowance for doubtful accounts |  |           | (3,178  | ) |      |   | (3,483  | )
|                                     |  |           |         |   |      |   |         |  
|                                     |  | $         | 127,583 |   |      | $ | 112,316 |  
|                                     |  |           |         |   |      |   |         |  



Note 4. Inventories



Inventories consist of the following:



|                                          |  |           |        |   |      |   |        |  
|----------------------------------------- |  | --------- | ------ | - | ---- | - | ------ | -
|                                          |  | March 31, |       
|                                          |  | 2004      |        |   | 2003 |  
|Raw materials                             |  | $         | 74,797 |   |      | $ | 57,971 |  
|Work in process                           |  |           | 12,562 |   |      |   | 10,078 |  
|Finished goods                            |  |           | 10,529 |   |      |   | 6,611  |  
|Less allowance for inventory obsolescence |  |           | (3,406 | ) |      |   | (5,381 | )
|                                          |  |           |        |   |      |   |        |  
|                                          |  | $         | 94,482 |   |      | $ | 69,279 |  
|                                          |  |           |        |   |      |   |        |  



Note 5. Property, Plant and
Equipment, Net



Property, plant and equipment consists of the following:



|                               |  |           |         |   |      |   |         |  
|------------------------------ |  | --------- | ------- | - | ---- | - | ------- | -
|                               |  | March 31, |        
|                               |  | 2004      |         |   | 2003 |  
|Land                           |  | $         | 2,683   |   |      | $ | 2,587   |  
|Buildings and improvements     |  |           | 30,568  |   |      |   | 27,134  |  
|Machinery and equipment        |  |           | 83,639  |   |      |   | 80,243  |  
|Computer hardware and software |  |           | 35,809  |   |      |   | 27,341  |  
|Construction in progress       |  |           | 14,626  |   |      |   | 11,354  |  
|                               |  |           |         |   |      |   |         |  
|                               |  |           | 167,325 |   |      |   | 148,659 |  
|Less accumulated depreciation  |  |           | (74,204 | ) |      |   | (55,459 | )
|                               |  |           |         |   |      |   |         |  
|                               |  | $         | 93,121  |   |      | $ | 93,200  |  
|                               |  |           |         |   |      |   |         |  



34



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Note 6. Financing Arrangements



Long-term debt consists of the following:



|                                                                                                                                                                                                                      |  |           |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                                                                      |  | March 31, |        
|                                                                                                                                                                                                                      |  | 2004      |         |   | 2003 |  
|Domestic revolving credit facilities, interest at prime plus a margin ranging up to 350 basis points or LIBOR plus a margin ranging from 175
to 350 basis points (4.9% at March 31, 2004 and 7.37% at March 31, 2003) |  | $         | 36,872  |   |      | $ | 45,851  |  
|Foreign revolving credit facilities, interest rates ranging from 2.0% to 5.0% or SIBOR plus a margin of 175 basis points (2.9% at March 31,
2004 and 5.85% at March 31, 2003)                                         |  |           | 29,802  |   |      |   | 12,019  |  
|Convertible senior subordinated notes bearing interest at 6.5%, due May 1, 2007                                                                                                                                       |  |           | 4,638   |   |      |   | 4,541   |  
|Notes payable bearing interest ranging from 7.1% to 7.4%, due in monthly payments of principal and interest of $297 through April 2004 for
domestic notes. The notes are secured by equipment                         |  |           | 295     |   |      |   | 5,308   |  
|Foreign notes payable, interest 5.0% through June 2004 and prime less 100 basis points thereafter to June 2007, due in monthly payments of
$127 through June 2007. The notes are secured by buildings                 |  |           | 4,968   |   |      |   | 5,951   |  
|Bonds payable to the City of Rochester                                                                                                                                                                                |  |           |        |   |      |   | 3,870   |  
|Other                                                                                                                                                                                                                 |  |           | 899     |   |      |   | 1,033   |  
|                                                                                                                                                                                                                      |  |           |         |   |      |   |         |  
|                                                                                                                                                                                                                      |  |           | 77,474  |   |      |   | 78,573  |  
|Less current maturities                                                                                                                                                                                               |  |           | (68,618 | ) |      |   | (68,297 | )
|                                                                                                                                                                                                                      |  |           |         |   |      |   |         |  
|                                                                                                                                                                                                                      |  | $         | 8,856   |   |      | $ | 10,276  |  
|                                                                                                                                                                                                                      |  |           |         |   |      |   |         |  



In April 2003, the Company entered
into new revolving credit facilities with Congress Financial Corporation and Fleet Capital Corporation, which, as amended to include US Bank, provide up to $90,000 of revolving credit loans and letters of credit and expire in April 2006. The
facilities, which are limited to the lesser of the facilities amount or the available borrowing base, calculated as a percentage of eligible accounts receivable and inventory balances, bear interest at prime or Eurodollar rate plus a margin from 75
to 150 basis points, and 275 to 350 basis points, respectively, depending on excess available borrowing capacity within the facilities. The Company is obligated to pay a monthly fee of 1/2% on the unused portion of the facilities. The revolving
credit facilities are collateralized by substantially all domestic assets and by investments in foreign subsidiaries. Due to the characteristics of the domestic revolving credit facilities, in accordance with current accounting pronouncements, the
Company has classified the amount outstanding as a current liability. Despite the balance sheet classification, the Company intends to manage the domestic revolving credit facilities as long-term debt with a final maturity in April 2006.



The Company has letters of credit totaling $2,900 outstanding as of March 31, 2004 under
these facilities. Restricted cash balances of $3,943 relate to certain letters of credit outstanding at March 31, 2003.



The Company also has separate available lines of credit in certain foreign locations totaling $29,802, due at various dates through September 2004, renewable at the
discretion of the lenders. Certain of these lines have been renewed subsequent to year end, consistent with past experience with these lenders. Advances under these lines of credit bear interest at fixed and variable rates ranging from 2.0% to 5.0%
at March 31, 2004. The lines of credit are unsecured, but have historically been both unsecured and secured by certain foreign inventories, receivables and fixed assets.



In May 2002, pursuant to a securities purchase agreement, the Company sold to two investors $5,000 face value of 61/2% convertible senior subordinated notes with a conversion price of $2.28 per share together with a seven year
warrant which provided for the purchase of 788 shares of the Companys common stock at an exercise price of $2.28 per share. The initial carrying value of the notes was reduced by $532 for the fair value of the common stock warrant issued to
the two investors. The discount to the note is being amortized over the seven-year life of the note.



As consideration for entering into the transaction, in lieu of cash, the Company issued additional warrants to the two investors to purchase 1,000 shares of the Companys common stock at an exercise price of
$2.00 per share. The fair value of the warrants of $898 was capitalized as financing fees and is being amortized over the seven year life of the notes.



In July 2002, the Company entered into an amendment and termination agreement eliminating the remaining obligation to sell notes and related warrants pursuant to the
securities purchase agreement. The Company issued additional warrants in consideration for the amendment and termination agreement providing for the purchase of 250 shares of the Companys



35



---

common stock. The fair value of the warrants of $188 was charged to interest expense as a cost of termination of the
agreement.



Payment of the bonds was secured by irrevocable letters of credit
in favor of the trustee in the amount of $3,943 which expired in August 2003. The Company was required to maintain letters of credit sufficient to pay all outstanding principal and interest under the bonds. Restricted cash at March 31, 2003 includes
$3,943 of cash pledged to back these irrevocable letters of credit, replacing the previous mortgage on the Rochester headquarters and manufacturing facilities. Interest on the bonds was variable and was payable monthly until, at the option of the
Company with the consent of US Bank, the rate was fixed (conversion date). Bond sinking funds and proceeds from the bonds, to the extent unused, are shown as $325 in restricted cash at March 31, 2003. In April 2003, notice of redemption was made
with redemption occurring in May 2003. All related restricted cash amounts and debt have been classified as current assets and liabilities.



Aggregate maturities of long-term debt are as follows for the years ending March 31:



|           |  |   |       
|---------- |  | - | ------
|2005       |  | $ | 68,618
|2006       |  |   | 1,640 
|2007       |  |   | 1,840 
|2008       |  |   | 5,132 
|2009       |  |   | 61    
|Thereafter |  |   | 183   
|           |  |   |       
|           |  | $ | 77,474
|           |  |   |       



Note 7. Restructuring and
Impairment Charges



A rollforward of restructuring provisions is as
follows:



|                                               |  |                   |        |   |                                      |   |        |                  |  |   |        |   |  |   |        |  
|---------------------------------------------- |  | ----------------- | ------ | - | ------------------------------------ | - | ------ | ---------------- |  | - | ------ | - |  | - | ------ | -
|                                               |  | Asset Write-Downs |        |   | EmployeeTerminationandSeveranceCosts |   |        | FutureLeaseCosts |  |   | Total  |  
|Fiscal 2003:                                   |  |                   |        |   |                                      |   |        |                  |  |   |        |   |  |   |        |  
|Fiscal 2003 restructuring charges              |  | $                 | 773    |   |                                      | $ | 2,439  |                  |  | $ | 1,037  |   |  | $ | 4,249  |  
|Cash payments                                  |  |                   |       |   |                                      |   | (2,209 | )                |  |   | (500   | ) |  |   | (2,709 | )
|Non-cash charges                               |  |                   | (773   | ) |                                      |   |       |                  |  |   |       |   |  |   | (773   | )
|Foreign currency translation adjustment        |  |                   |       |   |                                      |   | 112    |                  |  |   |       |   |  |   | 112    |  
|                                               |  |                   |        |   |                                      |   |        |                  |  |   |        |   |  |   |        |  
|Reserve balance at March 31, 2003              |  |                   |       |   |                                      |   | 342    |                  |  |   | 537    |   |  |   | 879    |  
|Fiscal 2004:                                   |  |                   |        |   |                                      |   |        |                  |  |   |        |   |  |   |        |  
|Fiscal 2004 restructuring charges              |  |                   | 1,224  |   |                                      |   | 1,066  |                  |  |   | 4,608  |   |  |   | 6,898  |  
|Additions to fiscal 2003 restructuring charges |  |                   |       |   |                                      |   |       |                  |  |   | 1,063  |   |  |   | 1,063  |  
|Cash payments                                  |  |                   |       |   |                                      |   | (1,318 | )                |  |   | (2,274 | ) |  |   | (3,592 | )
|Non-cash charges                               |  |                   | (1,224 | ) |                                      |   |       |                  |  |   |       |   |  |   | (1,224 | )
|Foreign currency translation adjustment        |  |                   |       |   |                                      |   | 53     |                  |  |   |       |   |  |   | 53     |  
|                                               |  |                   |        |   |                                      |   |        |                  |  |   |        |   |  |   |        |  
|Reserve balances at March 31, 2004             |  | $                 |       |   |                                      | $ | 143    |                  |  | $ | 3,934  |   |  | $ | 4,077  |  
|                                               |  |                   |        |   |                                      |   |        |                  |  |   |        |   |  |   |        |  



During fiscal 2004, the Company
recorded charges of $7,961 for restructuring related costs as a result of a Company initiative based upon a strategic review of the Companys primary products and business aimed at optimizing and aligning its manufacturing capacity with
customer demand, while positioning the Company for stronger operating results. The charges consisted of asset write-downs of $1,224 for machinery and equipment; $1,066 for employee termination and severance costs related to approximately 100
salaried and hourly employees located primarily at three domestic operating sites; and $5,671 for adjustment of expected future lease costs, associated with the closing of one California facility in fiscal 2003 and one additional California facility
in fiscal 2004. The fiscal 2004 restructuring actions taken pertain to operations for those businesses and locations experiencing negligible or negative growth due to continued market declines in the Communications and Optical business sectors.
Certain machinery and equipment were written down to their estimated fair values as a direct result of the continued decline in the optical business sector, which has resulted in excess capacity and under-utilized machinery and equipment.



During fiscal 2003, the Company incurred restructuring costs of $4,249. Of
this, $1,810, related to the decision to consolidate separate manufacturing facilities in San Jose, California, into a single facility, consisting of lease continuation



36



---

costs of $1,037 and accelerated amortization of leasehold improvements of $773. Additionally, $2,439 of severance costs
were incurred, primarily in The Netherlands and in the United States locations, responding to reductions in local business requirements.



As of March 31, 2004, approximately $4,135 and $2,166 of cash payments had been made against the accrual associated with the fiscal 2003 and 2004 charges, respectively.



Note 8. Other Income (Expense)  Net



The other income (expense) - net consists of the following:



|                           |  |                      |     |      |   |      |  |   |    
|-------------------------- |  | -------------------- | --- | ---- | - | ---- |  | - | ---
|                           |  | Year Ended March 31,
|                           |  | 2004                 |     | 2003 |   | 2002
|Foreign currency gains     |  | $                    | 631 |      | $ | 387  |  | $ | 691
|Other income (expense)-net |  |                      | 162 |      |   | 171  |  |   | 138
|                           |  |                      |     |      |   |      |  |   |    
|                           |  | $                    | 793 |      | $ | 558  |  | $ | 829
|                           |  |                      |     |      |   |      |  |   |    



Note 9. Fair Value of Financial
Instruments



The carrying values of cash and cash equivalents, and
accounts receivable and payable approximate fair value due to the short-term maturity of these instruments. The carrying amount of the Companys revolving line of credit and long-term notes approximate fair value because the majority of the
amounts outstanding accrue interest at variable rates.



Note 10. Commitments
and Contingencies



The Company has various capital and operating leases,
which expire on various dates through 2023. Future minimum payments under both capital leases and operating leases are as follows:



|                                       |  |               |         |   |                 |   |       
|-------------------------------------- |  | ------------- | ------- | - | --------------- | - | ------
|                                       |  | CapitalLeases |         |   | OperatingLeases
|Year Ending March 31,                  |  |               |         |   |                 |   |       
|2005                                   |  | $             | 3,157   |   |                 | $ | 9,504 
|2006                                   |  |               | 1,505   |   |                 |   | 8,344 
|2007                                   |  |               | 1,361   |   |                 |   | 6,949 
|2008                                   |  |               | 1,389   |   |                 |   | 6,006 
|2009                                   |  |               | 7,343   |   |                 |   | 5,824 
|Thereafter                             |  |               | 17,058  |   |                 |   | 7,132 
|                                       |  |               |         |   |                 |   |       
|Total minimum lease payments           |  |               | 31,813  |   |                 | $ | 43,759
|                                       |  |               |         |   |                 |   |       
|Less amount representing interest      |  |               | (18,177 | ) |                 |   |       
|                                       |  |               |         |   |                 |   |       
|Present value of minimum lease payment |  |               | 13,636  |   |                 |   |       
|Less current portion                   |  |               | (1,769  | ) |                 |   |       
|                                       |  |               |         |   |                 |   |       
|                                       |  | $             | 11,867  |   |                 |   |       
|                                       |  |               |         |   |                 |   |       



Property, plant and equipment includes
the following amounts for capitalized leases:



|                               |  |           |        |   |      |   |        |  
|------------------------------ |  | --------- | ------ | - | ---- | - | ------ | -
|                               |  | March 31, |       
|                               |  | 2004      |        |   | 2003 |  
|Buildings and improvements     |  | $         | 12,000 |   |      | $ | 11,691 |  
|Machinery and equipment        |  |           | 808    |   |      |   | 4,655  |  
|Computer hardware and software |  |           | 8,390  |   |      |   | 8,634  |  
|                               |  |           |        |   |      |   |        |  
|                               |  |           | 21,198 |   |      |   | 24,980 |  
|Less accumulated depreciation  |  |           | (3,512 | ) |      |   | (6,256 | )
|                               |  |           |        |   |      |   |        |  
|                               |  | $         | 17,686 |   |      | $ | 18,724 |  
|                               |  |           |        |   |      |   |        |  



Total rent expense recognized under
operating leases for the years ended March 31, 2004, 2003 and 2002 totaled $12,305, $13,329 and $10,039, respectively.



In March 2003, the Company sold land and buildings housing its Rochester, Minnesota, location in a transaction valued at $12,000, which is treated as a financing
transaction, because of the continuing use of the property. Proceeds totaled $5,775, after deducting $309 of transaction costs, $1,917 of security deposits and $3,943 of restricted cash placed with US Bank to replace collateral for letters of credit
backing the related City of Rochester Bonds outstanding (see Note 6).



37



---

Leaseback rental payments total $1,303, $1,330, $1,356, $1,383, $1,411 and $22,990 for years ended March 31, 2005, 2006,
2007, 2008, 2009 and thereafter, respectively. Other manufacturing equipment, which had been recently purchased, totaling $1,701 was financed in sale-leaseback transactions during the year ended March 31, 2003.



We are currently a defendant, along with several current and former officers
and directors, in a consolidated putative class action captioned in re PEMSTAR Securities Litigation, alleging violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 12 of the Securities Act
of 1933. The lawsuit is a consolidation of several lawsuits, the first of which was commenced in United States District Court for the District of Minnesota on July 24, 2002. The plaintiffs, several individual shareholders, allege, in essence, that
the defendants defrauded our shareholders by making optimistic statements during a time when they should have known that business prospects were less promising and allege that the registration statement filed by us in connection with a secondary
offering contained false, material misrepresentations. An Amended Consolidated Complaint was filed January 9, 2003. The securities class action is pending and discovery is ongoing. On August 23, 2002 and October 2, 2002 two different individual
shareholders also commenced virtually identical shareholder derivative actions against us as nominal defendant and our Board. Those actions have been consolidated and are currently pending in United States District Court for the District of
Minnesota, Third Judicial District, County of Olmsted. The allegations in the consolidated derivative action are based on many of the same facts that gave rise to the securities action. The derivative action alleges that our Board breached its
fiduciary duties by allegedly allowing the violations of the securities to occur.



It is too early to predict the likelihood of prevailing on the various lawsuits described above. We believe the securities action is wholly without merit and we have moved to dismiss the derivative action based on the
plaintiffs failure to make a demand that the Board consider the merits of the claims in that action. We are vigorously defending against both of these claims.



Note 11. Income Taxes



(Loss) income before income taxes consisted of the following:



|         |  |                      |         |   |      |   |         |      |  |   |         |  
|-------- |  | -------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|         |  | Year ended March 31, |        
|         |  | 2004                 |         |   | 2003 |   |         | 2002 | 
|Domestic |  | $                    | (25,944 | ) |      | $ | (43,342 | )    |  | $ | (57,885 | )
|Foreign  |  |                      | 6,647   |   |      |   | 10,677  |      |  |   | 1,942   |  
|         |  |                      |         |   |      |   |         |      |  |   |         |  
|         |  | $                    | (19,297 | ) |      | $ | (32,665 | )    |  | $ | (55,943 | )
|         |  |                      |         |   |      |   |         |      |  |   |         |  



The provision for income tax expense
(benefit) consisted of the following:



|          |  |                      |       |   |      |   |       |      |  |   |        |  
|--------- |  | -------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|          |  | Year ended March 31, |      
|          |  | 2004                 |       |   | 2003 |   |       | 2002 | 
|Current:  |  |                      |       |   |      |   |       |      |  |   |        |  
|Domestic  |  | $                    | (24   | ) |      | $ | 76    |      |  | $ | (5,638 | )
|Foreign   |  |                      | 1,027 |   |      |   | 1,261 |      |  |   | 2,653  |  
|          |  |                      |       |   |      |   |       |      |  |   |        |  
|          |  |                      | 1,003 |   |      |   | 1,337 |      |  |   | (2,985 | )
|          |  |                      |      
|Deferred: |  |                      |       |   |      |   |       |      |  |   |        |  
|Domestic  |  |                      |      |   |      |   |      |      |  |   | 2,418  |  
|Foreign   |  |                      | (500  | ) |      |   | (584  | )    |  |   | (1,359 | )
|          |  |                      |       |   |      |   |       |      |  |   |        |  
|          |  |                      | (500  | ) |      |   | (584  | )    |  |   | 1,059  |  
|          |  |                      |       |   |      |   |       |      |  |   |        |  
|          |  | $                    | 503   |   |      | $ | 753   |      |  | $ | (1,926 | )
|          |  |                      |       |   |      |   |       |      |  |   |        |  



A reconciliation of the provision for
income taxes at the statutory rates to the reported income tax provision is as follows:



|                                                           |  |                      |        |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                           |  | Year ended March 31, |       
|                                                           |  | 2004                 |        |   | 2003 |   |         | 2002 | 
|Computed expected tax rate                               |  | $                    | (6,561 | ) |      | $ | (11,106 | )    |  | $ | (19,021 | )
|Increase (decrease) in income taxes resulting from:        |  |                      |        |   |      |   |         |      |  |   |         |  
|State taxes, net of credits and federal income tax benefit |  |                      | (1,069 | ) |      |   | (2,224  | )    |  |   | (1,608  | )
|Benefit of foreign sales/extraterritorial income exclusion |  |                      | (155   | ) |      |   | (263    | )    |  |   | (291    | )
|Foreign taxes                                              |  |                      | (1,669 | ) |      |   | 5,409   |      |  |   | (7,896  | )
|Valuation allowance                                        |  |                      | 10,228 |   |      |   | 8,554   |      |  |   | 26,962  |  
|Other                                                      |  |                      | (271   | ) |      |   | 383     |      |  |   | (72     | )
|                                                           |  |                      |        |   |      |   |         |      |  |   |         |  
|                                                           |  | $                    | 503    |   |      | $ | 753     |      |  | $ | (1,926  | )
|                                                           |  |                      |        |   |      |   |         |      |  |   |         |  



38



---

A summary of deferred tax assets and liabilities is as follows:



|                                               |  |           |         |   |      |   |         |  
|---------------------------------------------- |  | --------- | ------- | - | ---- | - | ------- | -
|                                               |  | March 31, |        
|                                               |  | 2004      |         |   | 2003 |  
|Deferred tax assets:                           |  |           |         |   |      |   |         |  
|Allowance for doubtful accounts                |  | $         | 948     |   |      | $ | 1,280   |  
|Allowance for inventory obsolescence           |  |           | 876     |   |      |   | 1,685   |  
|Reserve for goodwill impairment                |  |           | 7,800   |   |      |   | 8,846   |  
|Deferred revenue                               |  |           | 629     |   |      |   | 697     |  
|Domestic net operating losses                  |  |           | 32,893  |   |      |   | 22,521  |  
|State tax credits                              |  |           | 1,097   |   |      |   | 1,254   |  
|Foreign expenses accelerated for book purposes |  |           | 2,560   |   |      |   | 5,011   |  
|Foreign net operating losses                   |  |           | 6,049   |   |      |   | 4,545   |  
|Other                                          |  |           | 2,850   |   |      |   | 1,569   |  
|                                               |  |           |         |   |      |   |         |  
|Total deferred tax assets                      |  |           | 55,702  |   |      |   | 47,408  |  
|Deferred tax liabilities:                      |  |           |         |   |      |   |         |  
|Accelerated depreciation                       |  |           | (1,796  | ) |      |   | (2,244  | )
|Foreign expenses accelerated for tax purposes  |  |           | (5,636  | ) |      |   | (7,648  | )
|Other                                          |  |           | (286    | ) |      |   | (260    | )
|                                               |  |           |         |   |      |   |         |  
|Total deferred tax liabilities                 |  |           | (7,718  | ) |      |   | (10,152 | )
|                                               |  |           |         |   |      |   |         |  
|                                               |  |           | 47,984  |   |      |   | 37,256  |  
|                                               |  |          
|Valuation allowance:                           |  |           |         |   |      |   |         |  
|Domestic                                       |  |           | (45,012 | ) |      |   | (35,348 | )
|Foreign                                        |  |           | (732    | ) |      |   | (168    | )
|                                               |  |           |         |   |      |   |         |  
|Total valuation allowance                      |  |           | (45,744 | ) |      |   | (35,516 | )
|                                               |  |           |         |   |      |   |         |  
|Net deferred tax assets                        |  | $         | 2,240   |   |      | $ | 1,740   |  
|                                               |  |           |         |   |      |   |         |  



No provision has been made for U.S.
income taxes related to undistributed earnings of foreign subsidiaries. The Company has approximately $93,900 of domestic net operating loss carryforwards, which will expire from 2022 to 2023. Of this $93,900 carryforward total, $8,700 will result
in tax benefits that will not reduce tax expense on current earnings, but rather will increase additional paid-in-capital. The Company has approximately $10,600 of foreign net operating loss carryforwards that have an unlimited carryforward period,
and foreign net operating loss carryforwards of approximately $7,100 that will expire from 2011 to 2013. The state tax credit carryforwards of $1,662 expire at varying dates through 2017.



The foreign tax expense in China was decreased $139 ($0.00 per share on a basic and diluted basis) in fiscal 2004, by $725 ($0.02 per share
on a basic and diluted basis) in fiscal 2003 and, by $323 ($0.01 per share on a basic and diluted basis) in fiscal 2002 as a result of the benefit of a tax holiday. This holiday ran at 50% relief of the normal 15% income tax rate, or 7.5%, through
December 31, 2003. Beginning on January 1, 2004, China began a new tax holiday and will use a 10% tax rate through December 31, 2006. The foreign tax expense in Singapore was decreased by $1,040 ($0.05 per share on a basic and diluted basis) in
fiscal 2004, by $1,082 ($0.03 per share on a basic and diluted basis) and $774 ($0.02 and $0.02 per share on a basic and diluted basis, respectively) in fiscal 2002, as the result of the benefit of a tax holiday. This holiday from the normal 24.5%
income tax rate ended March 31, 2004. During fiscal 2004 and 2003, current tax expense in Mexico reflects minimum taxes payable.



Note 12. Geographic and Concentration of Credit Risk Information



The Company derives its revenue from one reportable segment, electronic manufacturing services. The Company classifies sales geographically based upon country from which
the final product is delivered. The following is a summary



39



---

of net sales and long-lived assets by geographic location:



|                   |  |                      |         |      |   |         |  |   |        
|------------------ |  | -------------------- | ------- | ---- | - | ------- |  | - | -------
|                   |  | Year Ended March 31,
|                   |  | 2004                 |         | 2003 |   | 2002   
|Net sales:         |  |                      |         |      |   |         |  |   |        
|United States      |  | $                    | 443,495 |      | $ | 427,628 |  | $ | 436,300
|Americas, other    |  |                      | 4,734   |      |   | 48,097  |  |   | 42,665 
|China              |  |                      | 87,133  |      |   | 66,835  |  |   | 61,897 
|Asia, other        |  |                      | 72,772  |      |   | 57,810  |  |   | 66,705 
|Europe             |  |                      | 61,312  |      |   | 67,805  |  |   | 49,926 
|                   |  |                      |         |      |   |         |  |   |        
|                   |  | $                    | 669,446 |      | $ | 668,175 |  | $ | 657,493
|                   |  |                      |         |      |   |         |  |   |        
|Long-lived assets: |  |                      |         |      |   |         |  |   |        
|United States      |  | $                    | 83,829  |      | $ | 92,003  |  | $ | 89,969 
|Americas, other    |  |                      | 4,444   |      |   | 4,454   |  |   | 4,621  
|China              |  |                      | 32,243  |      |   | 21,562  |  |   | 19,990 
|Asia, other        |  |                      | 12,929  |      |   | 13,738  |  |   | 20,767 
|Europe             |  |                      | 3,209   |      |   | 3,092   |  |   | 3,009  
|                   |  |                      |         |      |   |         |  |   |        
|                   |  | $                    | 135,654 |      | $ | 134,849 |  | $ | 138,356
|                   |  |                      |         |      |   |         |  |   |        



As a result of changes to customer
contractual relationships in the year ended March 31, 2004, net sales of $35,205 in 2004 shown as from the United States relate to production previously classified as Americas, other under the prior contractual relationships.



Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of trade receivables. Sales of the Companys products are concentrated among specific customers in the same industry. The Company generally does not require collateral. The Company considers concentrations of credit risk in
establishing the allowance for doubtful accounts and believes the recorded amount is adequate.



Customers that accounted for more that 10% of consolidated net sales are as follows:



|           |  |                      |   |  |      |   |  |      |  
|---------- |  | -------------------- | - |  | ---- | - |  | ---- | -
|           |  | Year Ended March 31, |  
|           |  | 2004                 |   |  | 2003 |   |  | 2002 |  
|Customer A |  | 22.3                 | % |  | 23.4 | % |  | 24.8 | %
|Customer B |  |                     |   |  | 10.8 |   |  | 14.0 |  



As of March 31, 2004 and 2003,
receivables from these customers represented 23% and 24% of total accounts receivable, respectively.



Note 13. Shareholders Equity



The
Company has authorized 5,000 shares of $0.01 par value preferred stock.



In
June 2001, the Company sold 6,275 shares in a public offering from which the Company received net proceeds of $79,384. In August and September 2003, the Company sold 7,475 shares in a follow on public offering from which the Company received net
proceeds of $19,981.



The Company has 1,234 shares of common
stock available for grant or sale to board members and employees under incentive stock option and purchase plans approved by shareholders. Options are generally granted at prices equal to the fair market value on the dates of grant. All options are
exercisable over a ten-year period.



40



---

Following is a summary of stock option activity for the fiscal years ended March 31:



|                                                                         |  |                      |       |      |                              |      |        |  |   |                              |   |        |   |      |                              |   |        |   |  |   |      
|------------------------------------------------------------------------ |  | -------------------- | ----- | ---- | ---------------------------- | ---- | ------ |  | - | ---------------------------- | - | ------ | - | ---- | ---------------------------- | - | ------ | - |  | - | -----
|                                                                         |  | Year Ended March 31,
|                                                                         |  | 2004                 |       | 2003 |                              | 2002
|                                                                         |  | Shares               |       |      | WeightedAverageExercisePrice |      | Shares |  |   | WeightedAverageExercisePrice |   | Shares |   |      | WeightedAverageExercisePrice
|Outstanding, beginning of year                                           |  |                      | 3,940 |      |                              | $    | 5.67   |  |   | 3,465                        |   |        | $ | 7.44 |                              |   | 4,419  |   |  | $ | 5.93 
|Granted                                                                  |  |                      | 812   |      |                              |      | 2.90   |  |   | 1,298                        |   |        |   | 1.78 |                              |   | 704    |   |  |   | 11.30
|Exercised/forfeited                                                      |  |                      | (814  | )    |                              |      | 5.63   |  |   | (823                         | ) |        |   | 6.98 |                              |   | (1,658 | ) |  |   | 5.05 
|                                                                         |  |                      |       |      |                              |      |        |  |   |                              |   |        |   |      |                              |   |        |   |  |   |      
|Outstanding, end of year                                                 |  |                      | 3,938 |      |                              |      | 5.11   |  |   | 3,940                        |   |        |   | 5.67 |                              |   | 3,465  |   |  |   | 7.44 
|                                                                         |  |                      |       |      |                              |      |        |  |   |                              |   |        |   |      |                              |   |        |   |  |   |      
|Exercisable, end of year                                                 |  |                      | 2,465 |      |                              |      | 6.34   |  |   | 2,197                        |   |        |   | 6.38 |                              |   | 2,074  |   |  |   | 5.49 
|Weighted average fair value per share of options granted during the year |  | $                    | 2.49  |      |                              |      |       |  | $ | 1.76                         |   |        |   |     |                              | $ | 9.38   |   |  |   |     



At March 31, 2004, the options
outstanding have average remaining contractual lives and exercise prices as follows:



|       |  |                          |  |                
|------ |  | ------------------------ |  | ---------------
|Shares |  | Average Contractual Life |  | Exercise Price 
|1,919  |  | 8.27 years               |  | $ 0.00  4.99  
|1,160  |  | 5.59 years               |  | $ 5.00  9.99  
|811    |  | 6.70 years               |  | $ 10.00  14.99
|48     |  | 7.04 years               |  | $ 15.00  23.31



As of March 31, 2004 and 2003, the
Company had loans outstanding to shareholders in connection with stock sales and the exercise of stock options for the purchase of 45 shares and 136, respectively. Loans totaling $164 are due in March, 2005 and bear interest at 2.72%. The loans are
secured by the shares of common stock purchased and full recourse against the respective shareholders personal assets.



Note 14. Employee Benefit Plans



Retirement Plans



The Company sponsors various employee retirement savings plans that allow qualified employees to provide for their retirement on a tax-deferred basis. In accordance with the terms of the retirement savings plans, the
Company is required to match certain of the participants contributions and, at its discretion, may provide employer contributions based on the Companys performance and other factors. Employer contributions for the years ended March 31,
2004, 2003 and 2002 totaled $1,262, $1,486 and $1,366, respectively.



The
Company sponsors a defined benefit retirement plan program at its Netherlands facility. As of March 31, 2004, the fair value of the plan assets and projected benefit obligations were $5,369 and $5,317, respectively. Expenses associated with this
plan totaled $165 and $201 for the years ended March 31, 2004 and 2003, respectively.



Employee Stock Purchase Plan



During 2001, the Company
established an employee stock discount purchase plan that provides for the sale of up to 1,500 shares, as amended during 2002 and 2003, of the Companys stock at discounted purchase prices, subject to certain limitations. The cost per share
under this plan is 85 percent of the market value of the Companys common stock at the date of purchase, as defined. During the years ended March 31, 2004, 2003 and 2002, 98, 730 and 135 shares of common stock were issued to employees pursuant
to this plan, respectively. The weighted average fair value of shares sold in 2004, 2003 and 2002, was $2.50, $1.44 and $10.06, respectively.



41



---

Note 15. Supplemental Cash Flow Information



|                                                                                                                                           |  |                      |       |      |   |       |  |   |       
|------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------- | ----- | ---- | - | ----- |  | - | ------
|                                                                                                                                           |  | Year Ended March 31,
|                                                                                                                                           |  | 2004                 |       | 2003 |   | 2002 
|Supplemental disclosures for cash flow information:                                                                                        |  |                      |       |      |   |       |  |   |       
|Cash payments for:                                                                                                                         |  |                      |       |      |   |       |  |   |       
|Interest                                                                                                                                   |  | $                    | 6,891 |      | $ | 7,283 |  | $ | 7,234 
|Income taxes                                                                                                                               |  |                      | 1,492 |      |   | 1,492 |  |   | 1,812 
|Supplemental schedule of non-cash investing and financing activities:                                                                      |  |                      |       |      |   |       |  |   |       
|Property and equipment acquired through capital lease agreements                                                                           |  |                      | 811   |      |   | 2,222 |  |   | 5,230 
|Common stock issued to acquire Pacific Consultants LLC                                                                                     |  |                      |      |      |   |      |  |   | 10,000
|Common stock warrants for financing fees                                                                                                   |  |                      |      |      |   | 1,056 |  |   |      
|Restricted cash held from sale/leaseback proceeds to replace mortgage as collateral on outstanding letters of credit collateralizing
bonds |  |                      |      |      |   | 3,943 |  |   |      
|Lease deposits held from sale/leaseback proceeds                                                                                           |  |                      |      |      |   | 1,917 |  |   |      
|Deferred financing costs held from sale/leaseback proceeds                                                                                 |  |                      |      |      |   | 309   |  |   |      



Note 16. Cash Requirements



The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred an operating loss of approximately $12,275 for the year
ended March 31, 2004, which included $7,961 of restructuring costs. The Company continually evaluates its operations to determine the need for further restructuring in response to market conditions. Although the operating loss for fiscal 2004 was
not unexpected, given the prior year losses and the residual effects of the downturn in the economy after September 11, 2001, and the resultant impact on several large customers of the Company in certain industry sectors has been significant, the
Companys ability to continue to fund its operations and to grow the business depends on its ability to generate additional cash from operations or obtain additional sources of funds for working capital



The domestic revolving credit facilities were replaced during fiscal 2004 to provide expanded
capacity for funding business growth and to extend arrangements approaching the expiration of their term. In the event that the Company does not maintain sufficient liquidity, measured by amounts available to borrow for the current collateral base
less amounts actually borrowed, these facilities require the maintenance of certain minimum cash flow levels. The Companys operating plan includes an expectation of maintaining this liquidity, as well as initiatives to reduce specific cash
expenditures related to general and administrative expenses.



Compliance by the
Company with certain covenants in its new credit facility is dependent upon the Company achieving certain revenue and expense targets in its fiscal 2005 operating plan. The Company expects to meet its financial projections for the 2005 fiscal year.
The Company also believes that, if necessary, it would be able to secure additional financing from its lenders or sell additional Company equity securities; however, there can be no assurance that such funding can be obtained or that future credit
facility violations will be waived.



During fiscal 2004, the Company has
obtained significant funding locally for its foreign operations and has obtained commitments for further increases to suit business requirements. As such, it has become substantially less reliant on domestic lines of credit for needs outside of
domestic operations.



Management believes that, as a result of the
restructuring actions it has taken to reduce cash expenditures, the efforts it continues to make to increase revenues from continuing customers and to generate new customers in various industry sectors and the new agreements it has reached to
provide additional borrowing capacity, it will meet its fiscal 2005 financial plan.



42



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Shareholders

PEMSTAR Inc.



We have audited the accompanying consolidated balance sheets of PEMSTAR Inc. as of March 31, 2004 and 2003, and the related consolidated statements of operations, shareholders equity, and cash flows for each of
the three years in the period ended March 31, 2004. 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 the standards of the Public Company Accounting
Oversight Board (United States). 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PEMSTAR Inc. at March 31, 2004 and 2003 and the consolidated results of their operations and their
cash flows for each of the three years in the period ended March 31, 2004, in conformity with United States generally accepted accounting principles.



As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other
Intangible Assets, in 2003.



Ernst
& Young LLP



Minneapolis, Minnesota

May 7, 2004



43



---

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)



PEMSTAR Inc.



The following table sets forth unaudited quarterly financial information of PEMSTAR for the quarterly periods in fiscal 2004 and 2003. Historically, we have experienced
some seasonal variation in net sales, with net sales, excluding inventory sales, typically being highest in the quarter ended December 31 and lowest in the quarter ended March 31. This seasonal variation reflects the order patterns of our largest
customers, who typically order a higher proportion of their annual production in their final fiscal quarter. This seasonal variation has been offset recently by internal growth, acquisitions, general economic conditions, end of life projects and
customer disengagements. This information has been derived from our monthly consolidated financial statements which are unaudited, but, in the opinion of management, fairly represent our financial performance. This information should be read in
conjunction with the consolidated financial statements and the related notes contained elsewhere in this report. The operating results for any previous quarter are not necessarily indicative of results for any future period.



|                                                                                |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | ------------- |  | - | ------------ | - |  | ------------ | ------- | - | ------------ | - | ------- | ------------- |  | - | ------------ | - |  | - | ------- | - |  | - | ------- | -
|Quarter Ended (In thousands,
except per share data)                             |  | Mar. 31,2004 |         |   | Dec. 31,2003 |   |         | Sept. 30,2003 |  |   | June 30,2003 |   |  | Mar. 31,2003 |         |   | Dec. 31,2002 |   |         | Sept. 30,2002 |  |   | June 30,2002 |  
|Net sales                                                                       |  | $            | 186,050 |   |              | $ | 187,346 |               |  | $ | 150,550      |   |  | $            | 145,500 |   |              | $ | 166,848 |               |  | $ | 171,841      |   |  | $ | 176,382 |   |  | $ | 153,104 |  
|Cost of goods sold                                                              |  |              | 170,442 |   |              |   | 173,605 |               |  |   | 138,665      |   |  |              | 138,918 |   |              |   | 156,944 |               |  |   | 159,199      |   |  |   | 168,495 |   |  |   | 152,436 |  
|                                                                                |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|Gross profit                                                                    |  |              | 15,608  |   |              |   | 13,741  |               |  |   | 11,885       |   |  |              | 6,582   |   |              |   | 9,904   |               |  |   | 12,642       |   |  |   | 7,887   |   |  |   | 668     |  
|                                                                                |  |              |         |   |              |   |         |              
|Selling, general and administrative expenses                                    |  |              | 15,128  |   |              |   | 12,630  |               |  |   | 12,012       |   |  |              | 12,253  |   |              |   | 11,097  |               |  |   | 11,819       |   |  |   | 13,790  |   |  |   | 14,370  |  
|Restructuring                                                                   |  |              | 295     |   |              |   | (546    | )             |  |   | 4,757        |   |  |              | 3,455   |   |              |   | (134    | )             |  |   | 503          |   |  |   | 924     |   |  |   | 2,956   |  
|Amortization                                                                    |  |              | 27      |   |              |   | 26      |               |  |   | 27           |   |  |              | 27      |   |              |   | 27      |               |  |   | 27           |   |  |   | 27      |   |  |   | 48      |  
|                                                                                |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|Operating income (loss)                                                         |  |              | 158     |   |              |   | 1,631   |               |  |   | (4,911       | ) |  |              | (9,153  | ) |              |   | (1,086  | )             |  |   | 293          |   |  |   | (6,854  | ) |  |   | (16,706 | )
|                                                                                |  |              |         |   |              |   |         |              
|Other income (expense)  net                                                    |  |              | (91     | ) |              |   | 187     |               |  |   | 411          |   |  |              | 286     |   |              |   | 1,033   |               |  |   | (288         | ) |  |   | (164    | ) |  |   | (23     | )
|Interest expense - net                                                          |  |              | (1,893  | ) |              |   | (1,772  | )             |  |   | (2,111       | ) |  |              | (2,039  | ) |              |   | (1,733  | )             |  |   | (1,706       | ) |  |   | (2,596  | ) |  |   | (2,835  | )
|                                                                                |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|(Loss) income before income taxes and cumulative effect of an accounting change |  |              | (1,826  | ) |              |   | 46      |               |  |   | (6,611       | ) |  |              | (10,906 | ) |              |   | (1,786  | )             |  |   | (1,701       | ) |  |   | (9,614  | ) |  |   | (19,564 | )
|                                                                                |  |              |         |   |              |   |         |              
|Income tax expense (benefit)                                                    |  |              | 203     |   |              |   | 22      |               |  |   | 198          |   |  |              | 80      |   |              |   | (112    | )             |  |   | 242          |   |  |   | 351     |   |  |   | 272     |  
|                                                                                |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|(Loss) income before cumulative effect of accounting change                     |  |              | (2,029  | ) |              |   | 24      |               |  |   | (6,809       | ) |  |              | (10,986 | ) |              |   | (1,674  | )             |  |   | (1,943       | ) |  |   | (9,965  | ) |  |   | (19,836 | )
|Cumulative effect of accounting change1                                         |  |              |        |   |              |   |        |               |  |   |             |   |  |              |        |   |              |   |        |               |  |   |             |   |  |   |        |   |  |   | (5,346  | )
|                                                                                |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|Net (loss) income                                                               |  | $            | (2,029  | ) |              | $ | 24      |               |  | $ | (6,809       | ) |  | $            | (10,986 | ) |              | $ | (1,674  | )             |  | $ | (1,943       | ) |  | $ | (9,965  | ) |  | $ | (25,182 | )
|                                                                                |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|Basic and diluted (loss) income per common share:                               |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|(Loss) income before cumulative effect of accounting change                     |  | $            | (.04    | ) |              | $ | .00     |               |  | $ | (.17         | ) |  | $            | (.29    | ) |              | $ | (.04    | )             |  | $ | (.05         | ) |  | $ | (.27    | ) |  | $ | (.54    | )
|Net (loss) income                                                               |  | $            | (.04    | ) |              | $ | .00     |               |  | $ | (.17         | ) |  | $            | (.29    | ) |              | $ | (.04    | )             |  | $ | (.05         | ) |  | $ | (.27    | ) |  | $ | (.68    | )

---

Note 1Change represents an adjustment to
previously reported quarterly results. See Note 1 to Consolidated Financial Statements herein.



44



---

MARKET FOR PEMSTARS COMMON STOCK AND RELATED SHAREHOLDER MATTERS

PEMSTAR Inc.



|Market | Information
|------ | -----------



Our common stock has been quoted on the NASDAQ national market under the symbol PMTR. The following table sets forth, for the periods
indicated, the high and low sales prices per share of our common stock, as reported on the NASDAQ national market.



|                                     |  |      |      |     |   |     
|------------------------------------ |  | ---- | ---- | --- | - | ----
|                                     |  | High |      | Low
|Fiscal 2003:                         |  |      |      |     |   |     
|First Quarter                        |  | $    | 9.68 |     | $ | 1.13
|Second Quarter                       |  | $    | 1.80 |     | $ | .77 
|Third Quarter                        |  | $    | 2.47 |     | $ | .80 
|Fourth Quarter                       |  | $    | 3.90 |     | $ | 2.05
|                                     |  |     
|Fiscal 2004:                         |  |      |      |     |   |     
|First Quarter                        |  | $    | 4.50 |     | $ | 2.06
|Second Quarter                       |  | $    | 4.34 |     | $ | 2.40
|Third Quarter                        |  | $    | 4.21 |     | $ | 3.00
|Fourth Quarter                       |  | $    | 5.37 |     | $ | 3.25
|                                     |  |     
|Fiscal 2005:                         |  |      |      |     |   |     
|First Quarter (through June 7, 2004) |  | $    | 4.00 |     | $ | 2.39



Holders



As of June 7, 2004, our common stock was held by approximately 1,335
shareholders of record and was quoted at $2.48 per share.



Dividends



We have never declared or paid any dividends on our
capital stock and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings to fund the development and growth of our business. Our credit facility contains certain covenants, which prohibit
us from paying any cash dividends without prior consent of the lenders.



45