<PAGE>

                                                                    EXHIBIT 13.1

PORTIONS OF THE 2003 ANNUAL REPORT TO SHAREHOLDERS INCORPORATED BY REFERENCE
HEREIN.



                                  PEMSTAR Inc.

                               Annual Report 2003

                                     Part II

<PAGE>

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.........................................     20

Consolidated Statements of Operations...............................     21

Consolidated Statement of Shareholders' Equity......................     22

Consolidated Statements of Cash Flows...............................     23

Notes to Consolidated Financial Statements..........................     24

Report of Independent Auditors......................................     37

Quarterly Results of Operations.....................................     38

Market for Pemstar's Common Stock and Related Shareholder Matters...     39

<PAGE>

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.

<TABLE>
<CAPTION>
(In thousands, except per share data)                                               Year Ended March 31,
                                                                2003          2002          2001          2000          1999
                                                            -----------   -----------   -----------   -----------   -----------
<S>                                                         <C>           <C>           <C>           <C>           <C>
Consolidated Statements of Operations Data:
Net sales                                                   $   668,175   $   657,493   $   635,307   $   393,842   $   187,381
Cost of goods sold                                              637,074       627,457       581,278       363,974       172,219
                                                            -----------   -----------   -----------   -----------   -----------
Gross profit                                                     31,101        30,036        54,029        29,868        15,162
Selling, general and administrative expenses                     51,076        53,351        37,366        21,576        10,955
Amortization                                                        129         2,152         1,961         1,281           190
Restructuring costs                                               4,249            --            --            --            --
Goodwill impairment charge                                           --        24,228            --            --            --
                                                            -----------   -----------   -----------   -----------   -----------
Operating (loss) income                                         (24,353)      (49,695)       14,702         7,011         4,017

Other income (expense) - net                                        558           829           967           (74)         (438)
Interest expense                                                 (8,870)       (7,077)       (7,550)       (3,588)         (640)
                                                            -----------   -----------   -----------   -----------   -----------
(Loss) income before income taxes and cumulative
 effect of accounting change                                    (32,665)      (55,943)        8,119         3,349         2,939
Income tax expense (benefit)                                        753        (1,926)        1,436           698         1,273
                                                            -----------   -----------   -----------   -----------   -----------
(Loss) income before cumulative effect of
  accounting change                                             (33,418)      (54,017)        6,683         2,651         1,666
Cumulative effect of accounting change /(1)/                     (5,346)           --            --            --            --
                                                            -----------   -----------   -----------   -----------   -----------
Net (loss) income                                           $   (38,764)  $   (54,017)  $     6,683   $     2,651   $     1,666
                                                            ===========   ===========   ===========   ===========   ===========
(Loss) income before cumulative effect of accounting
 change per common share:
   Basic                                                    $      (.90)  $     (1.56)  $       .29   $       .23   $       .15
   Diluted                                                         (.90)        (1.56)          .25           .15           .12
Net (loss) income per common share:
   Basic                                                    $     (1.04)  $     (1.56)  $       .29   $       .23   $       .15
   Diluted                                                        (1.04)        (1.56)          .25           .15           .12
Weighted average number of common shares outstanding/(2)/:
   Basic                                                         37,133        34,717        23,013        11,503        10,897
   Diluted                                                       37,133        34,717        26,943        17,167        14,143

Other Financial Data:
Depreciation                                                $    20,021   $    18,299   $    12,097   $     7,455   $     3,331
Capital expenditures                                             12,555        37,930        42,542        13,415         8,657

Supplemental Data:
EBITDA/(3)/                                                 $    (3,645)  $    (4,187)  $    29,727   $    15,673   $     7,100
Net cash provided by (used in) operating activities              47,311          (307)      (54,219)      (20,225)           65
Net cash used in investing activities                           (15,593)      (61,203)      (62,684)      (52,611)       (4,989)
Net cash (used in) provided by financing activities              (9,946)       67,164       119,512        74,734         2,556
-------------------------------------------------------------------------------------------------------------------------------
                                                                                      As of March 31,
                                                                2003          2002          2001          2000          1999
                                                            -----------   -----------   -----------   -----------   -----------
Consolidated Balance Sheet Data:
Unrestricted cash and cash equivalents                      $    32,762   $    11,483   $     5,882   $     2,727   $       827
Working capital                                                  98,574       137,335       131,851        49,649        12,783
Total assets                                                    372,062       395,724       349,077       190,451        64,983
Long-term debt and capital lease obligations less
 current maturities                                              68,970        74,462        84,873        55,181         7,090
Total shareholders' equity                                      159,867       193,397       150,712        22,673        16,555
Book value per share                                        $      4.26   $      5.27   $      5.33   $      1.64   $      1.47
Tangible book value per common share /(4)/                  $      3.35   $      4.32   $      4.30   $      0.14   $      1.13
-------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1>
(1)  See Note 1 to the Consolidated Financial Statements under the caption
     "Goodwill", included herein.
<F2>
(2)  For an explanation of the determination of the weighted average number of
     common shares outstanding used in computing net (loss) income per share,
     see Note 1 of the notes to consolidated financial statements.
<F3>
(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 and a similar formula is used by our lenders in
     determining compliance with 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.
<F4>
(4)  Tangible book value is total shareholder equity minus goodwill and other
     intangible assets.
</FN>
</TABLE>

                                       10

<PAGE>

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.

<TABLE>
<CAPTION>
(In thousands)                                                          Year Ended March 31,
EBITDA:                                             2003          2002          2001          2000          1999
                                                -----------   -----------   -----------   -----------   -----------
<S>                                             <C>           <C>           <C>           <C>           <C>
Net (loss) income                               $   (38,764)  $   (54,017)  $     6,683   $     2,651   $     1,666
Interest expense                                      8,870         7,077         7,550         3,588           640
Income tax expense (benefit)                            753        (1,926)        1,436           698         1,273
Depreciation                                         20,021        18,299        12,097         7,455         3,331
Amortization                                            129         2,152         1,961         1,281           190
Goodwill impairment charge                                         24,228            --            --            --
Cumulative effect of accounting change                5,346            --            --            --            --
                                                -----------   -----------   -----------   -----------   -----------
   Net (loss) income before interest
    expense, income taxes, depreciation and
    amortization (EBITDA)                       $    (3,645)  $    (4,187)  $    29,727   $    15,673   $     7,100
                                                ===========   ===========   ===========   ===========   ===========
</TABLE>

                                       11

<PAGE>

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 15 strategic
locations in North America, South America, 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 one of our
major customers. 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 Austin, Texas; Guadalajara,
Mexico; Tianjin, China; 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. 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 while allowing us to offer
        cost-effective manufacturing and engineering capabilities;
     .  access to new 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 includes process test and automation equipment
production and prototype development, accounted for 17.8%, 16.3% and 7.2% of our
total net sales in fiscal 2003, 2002 and 2001, respectively. The purchase of
Pacific Consultants in fiscal 2002 contributed to this growth. Manufacturing
services accounted for 82.2%, 83.7% and 92.8% of our total net sales in fiscal
2003, 2002, and 2001, 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

<PAGE>

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. During fiscal 2003, reduction in production space
was made in response to market conditions. 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,
                                             2003          2002         2001
                                          ----------    ----------   ---------
Net sales ...............................      100.0%        100.0%      100.0%
Cost of goods sold ......................       95.3%         95.4%       91.5%
                                          ----------    ----------   ---------
Gross profit ............................        4.7%          4.6%        8.5%
Selling, general and administrative
 expenses ...............................        7.6%          8.1%        5.9%
Restructuring ...........................         .7%           --%         --%
Amortization ............................         --%           .3%         .3%
Goodwill impairment charge ..............         --%          3.7%         --%
                                          ----------    ----------   ---------
Operating (loss) income .................       (3.6)%        (7.5)%       2.3%
Other income (expense) - net ............         --%           .1%         .2%
Interest expense ........................       (1.3)%        (1.1)%      (1.2)%
                                          ----------    ----------   ---------
(Loss) income before income taxes and
 cumulative effect of accounting change .       (4.9)%        (8.5)%       1.3%
Income tax expense (benefit) ............         .1%          (.3)%        .2%
                                          ----------    ----------   ---------
(Loss) income before cumulative effect
 of accounting change ...................       (5.0)%        (8.2)%       1.1%
Cumulative effect of accounting change ..        (.8)%          --%         --%
                                          ----------    ----------   ---------
Net (loss) income .......................       (5.8)%        (8.2)%       1.1%
                                          ==========    ==========   =========

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 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.

                                       13

<PAGE>

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.

Fiscal Year Ended March 31, 2002 Compared to Fiscal Year Ended March 31, 2001

Net sales - Our net sales for fiscal 2002 increased $22.2 million, or 3.5%, to
$657.5 million from $635.3 million in fiscal 2001. This increase resulted from
the acquisitions of US Assemblies New England, Inc., Pacific Consultants LLC,
and MTS Systems' Chaska operations, which accounted for $35.1 million of
additional revenue in fiscal 2002. After eliminating the effects of
acquisitions, our net sales decreased $12.9 million in fiscal 2002. This sales
decrease is attributable to reduced sales to communications customers offset, in
part, by sales increases with existing and new customers in our computer,
storage, industrial and medical markets. Net sales to communication customers
for fiscal 2002 decreased to 44.5% compared to 53.3% in fiscal 2001. The
Company's five largest customers for fiscal 2002 accounted for approximately 51%
of net sales, two of which exceeded 10% of net sales.

Gross profit - Our gross profit decreased $24 million in fiscal 2002 to $30.0
million, from $54.0 million in fiscal 2001. This decrease was due, in part, to
the sales decline at facilities operated for the full prior fiscal year and
changes in sales mix including reduced sales volume from higher gross profit
communication customers. Expansion of facilities during fiscal 2002 added fixed
costs of $14.3 million for those facilities that were in operation in fiscal
2001. We also incurred inventory write-downs of $5.4 million in the current year
for excess inventory due to reduced customer orders below anticipated levels and
order cancellations. In addition, gross profit decreased due to transitional
operating costs associated with shifting certain manufacturing programs from
higher to lower cost facilities, start-up costs associated with new customers
and severance costs resulting from reductions in workforce.

The gross profit declines were offset by $6.0 million of gross profit from sales
at acquired companies and facilities not in operation for the full fiscal year
2001. The facilities and other infrastructure developed to support higher levels
of net sales will continue to be an operating issue as we enter fiscal 2003 and
is being addressed with restructuring actions to reduce cash expenditures in
fiscal 2003.

                                       14

<PAGE>

Selling, general and administrative expenses - Our selling, general and
administrative expenses increased $16.0 million to $53.4 million (8.1% of net
sales) in fiscal 2002 from $37.4 million (5.9% of net sales) in fiscal 2001. A
significant factor in this increase was the uncertain collection of accounts
receivable from emerging companies and customers in bankruptcy, which accounted
for a charge for accounts receivable of $8.2 million in fiscal 2002. Many of
these customers also contributed to the inventory charges noted above. Other
increases to selling, general, and administrative expenses were primarily
related to additional expenses of acquired businesses of $4.5 million and
increased costs of information technology infrastructure and software of $2.2
million.

Amortization - Amortization of goodwill increased $0.2 million to $2.2 million
in fiscal 2002 from $2.0 million in fiscal 2001, primarily as a result of
amortization of goodwill arising out of our acquisition of US Assemblies New
England, Inc. In addition, fiscal 2002 benefited as a result of no amortization
of goodwill for the Pacific Consultants LLC and MTS Systems' Chaska operation
acquisitions completed after July 1, 2001, as required by the newly issued SFAS
No. 142, "Goodwill and Other Intangible Assets".

In fiscal 2002, we recognized goodwill impairment charges of $24.2 million
related to our acquired facilities in Almelo, The Netherlands, San Jose,
California and Taunton, Massachusetts. These charges are the conclusion from our
analyses of the expected future cash flows in response to the reduced sales
volumes experienced in fiscal 2002 in these locations.

Other income (expense) - Other income, net, was $0.8 million in fiscal 2002
compared to other income, net, of $1.0 million in fiscal 2001. This change in
other income was primarily a result of lower gains on sales of fixed assets
offset by higher currency gains in certain foreign locations.

Interest expense - Interest expense decreased $0.5 million to $7.1 million in
fiscal 2002 from $7.6 million in fiscal 2001. This decrease reflects reduced
overall interest rates on our variable line of credit.

Income tax expense (benefit) - The income tax benefit was $1.9 million in fiscal
2002 compared to a tax expense of $1.4 million in fiscal 2001. The benefit for
fiscal 2002 was created as a result of the current year recognition of the
available refund of previously paid taxes from the carryback of the fiscal 2002
United States tax loss to prior years. This benefit is offset, in part, by
recorded valuation allowances for previously recognized deferred tax assets in
certain tax jurisdictions. The United States carryback benefit was increased by
$3.8 million as a result of the recent tax law changes, which extended the
carryback period for the operating losses to five years. The fiscal 2002
benefits contrast with the fiscal 2001 expense at low rates resulting from
profits located in primarily low tax non-United States jurisdictions.

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 provided by (used in) operating activities for fiscal 2003, 2002, and
2001 was $47.3 million, ($0.3) million and ($54.2) million, respectively. The
net cash provided by operating activities increased significantly due to
decreased levels of inventories and accounts receivable and increased levels of
accounts payables from a focus on the cash cycle. The cash cycle improved from
85 days in fiscal 2002 to 50 days in fiscal 2003 improving our liquidity. In
addition, net cash provided by operating activities increased in fiscal 2003 as
a result of lower operating losses.

Net cash used in investing activities for fiscal 2003, 2002, and 2001 was $15.6
million, $61.2 million, and $62.7 million, respectively. In fiscal 2003, our
cash used in investing activities included $4.4 million used to pay additional
purchase price for Pacific Consultants LLC, due after the first anniversary of
the purchase. The original purchase agreement provides for additional purchase
price, payable in cash or common stock, of up to $40 million if earnings targets
are met for the acquired business in the two years following the close, which
will be recognized as additional goodwill. Capital expenditures were $12.6
million in fiscal 2003 or a decrease of $25.4 million as compared to the prior
fiscal year. Capital expenditures were principally used for upgrades in certain
facilities for manufacturing machinery and equipment and information technology
equipment.

Net cash (used in) provided by financing activities for fiscal 2003, 2002, and
2001 was ($9.9) million, $67.1 million, and $119.5 million respectively. Our
principal use of cash in financing activities in fiscal 2003 included a net
decrease of long-term borrowings of $18.7 million offset by proceeds from the
sale and leaseback of equipment of $1.7 million and our worldwide headquarters
facility in Rochester, MN of $5.8 million.

                                       15

<PAGE>

As of March 31, 2003, we had unrestricted cash of $32.8 million and total
borrowings, including capitalized lease obligations, of approximately $96.7
million. Of these borrowings, we had approximately $34.1 million outstanding
under our IBM Credit Corporation credit facility and $11.8 million outstanding
under our US Bank revolving credit facility. The combined commitment from IBM
Credit and US Bank as of March 31, 2003 was $80 million, however, availability
under the line based on eligibility requirements was $46.9 million.

In May 2002, the Company sold to two investors $5 million face value of 6 1/2%
convertible senior subordinated notes with a conversion price of $2.28 per share
with companion seven year warrants at $2.28 per share to purchase 0.8 million
shares of the Company's common stock. This sale was part of a proposed placement
of up to $50 million of convertible notes with attached warrants to purchase
common stock. In May 2002, the Company granted additional warrants to purchase
1.0 million shares of the Company's common stock at a price of $2.00 to the
investors to complete its initial obligation under the agreement. In July 2002,
the Company issued additional warrants to purchase 0.3 million shares of the
Company's common stock at a price of $1.62 to the investors in connection with
the termination of the arrangement.

In June 2002, the Company obtained a term credit facility with a foreign bank
for borrowing of up to approximately $7.2 million of which $6.0 million was
outstanding at March 31, 2003. In December 2002, the Company increased its
foreign revolving credit facilities, mainly in China, resulting in total
availability of approximately $15.1 million, of which $12.0 million was borrowed
at March 31, 2003.

As of April 25, 2003, Pemstar entered into a new $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 and US Bank. The term of this new facility is three years with
maturity in April 2006. In addition, as of March 28, 2003, the Company entered
into a $12 million sale and leaseback of its main Rochester facility, which
after placement of lease deposits and restricted cash to collateralize
outstanding bonds, resulted in net proceeds of $5.8 million.

All of these credit facilities are secured by substantially all of our assets.
New domestic credit facilities include a covenant to attain minimum net income
before interest expense, income taxes, depreciation and amortization (EBITDA),
for domestic and worldwide operations. 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, 2003.

In addition to our convertible senior subordinated notes and credit facilities,
we had other debt obligations totaling $10.2 million and capital lease
obligations of $18.1 million as of March 31, 2003. See Notes 7 and 11 to our
consolidated financial statements.

As noted above, the domestic revolving credit facilities were replaced
subsequent to year end to provide expanded capacity for funding business growth
and to extend arrangements approaching the expiration of their term. The Company
has historically experienced violations of covenants under its domestic
revolving facilities and has always received waivers for such violations. At
March 31, 2003 the Company was in violation of certain covenants under the
previous credit facilities, however, it entered into its new credit facility
prior to requesting a waiver. These new facilities require the maintenance of
certain minimum cash flow levels. In anticipation of a potential covenant
violation at the end of its first fiscal quarter of 2004, the Company obtained a
waiver from its 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. The Company's operating plan includes
initiatives to reduce specific cash expenditures related to general and
administrative expenses.

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 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 2004. 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.

                                       16

<PAGE>

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,
and has certain contingent commitments related to a business acquisition. The
following table represents contractual cash obligations and other commercial
commitments of the Company as of March 31, 2003:

<TABLE>
<CAPTION>
(Amounts in thousands)                              Due in        Due in        Due in        Due in        Due in          Due
                                       Total      Fiscal 2004   Fiscal 2005   Fiscal 2006   Fiscal 2007   Fiscal 2008    Thereafter
<S>                                 <C>           <C>           <C>           <C>           <C>           <C>           <C>
Long-term debt under credit lines   $    57,870   $    12,019   $        --   $        --   $    45,851   $        --   $        --
Other long-term debt                     20,703        10,427         1,806         1,711         1,512         5,003           244
Capital lease obligations                37,535         6,284         2,766         1,345         1,356         1,383        24,401
Operating leases                         49,834        11,936         9,679         8,175         5,885         5,200         8,959
Unconditional purchase obligations       13,681        13,681            --            --            --            --            --
                                    -----------   -----------   -----------   -----------   -----------   -----------   -----------
Total contractual cash obligations  $   179,623   $    54,347   $    14,251   $    11,231   $    54,604   $    11,586   $    33,604
                                    ===========   ===========   ===========   ===========   ===========   ===========   ===========
</TABLE>

See Notes 2, 7 and 11 to the Consolidated Financial Statements for additional
information regarding these obligations.

<TABLE>
<CAPTION>
                                          ---------------------------------------------------------------------------------
    (Amounts in thousands)                                         Amount of commitment expiration
                             Committed    ---------------------------------------------------------------------------------
                               Total                                                                              Over 5
                              Amounts       1 year        2 years       3 years       4 years       5 years       years
<S>                         <C>           <C>           <C>           <C>           <C>           <C>           <C>
Standby letters of credit   $     6,138   $     5,138   $     1,000   $        --   $        --   $        --   $        --
</TABLE>

See Note 2 to the Consolidated Financial Statements for additional information
regarding contingent commitment related to additional purchase price for Pacific
Consultants LLC.

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, 2003, we had total borrowings of
$61.7 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 $.6
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 2003, sales denominated in Euros totaled $67.8 million, sales
denominated in Singapore dollars totaled $31.9 million and sales denominated in
Chinese renminbi totaled $66.7 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, 2003, 2002 and 2001 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 $1.2 million, $.3 million and $0.4 million,
respectively, for the fiscal years ended March 31, 2003, 2002 and 2001.

At March 31, 2003 and 2002, the amount we consider permanently invested in
foreign subsidiaries and translated into dollars using the year end exchange
rate was $53.1 million and $44.8 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 $4.8 million and $4.1 million,
respectively. Actual amounts may differ.

                                       17

<PAGE>

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.

NEW ACCOUNTING PRONOUNCEMENTS

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which is
effective for fiscal years beginning after June 15, 2002. This statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the
accounting and reporting provisions of Accounting Principles Board (APB) Opinion
No. 30, "Reporting the Results of Operations", for a disposal of a segment of a
business. The adoption of this pronouncement at April 1, 2003 had no material
impact on our consolidated results of operations, financial position or cash
flows.

In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," which addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies EITF No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity Including Certain Costs Incurred in a Restructuring"
(EITF 94-3). The principal difference between SFAS No. 146 and EITF 94-3 relates
to SFAS No. 146's requirements for recognition of a liability for a cost
associated with an exit or disposal activity. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit plan. A
fundamental conclusion reached by FASB in this statement is that an entity's
commitment to a plan, by itself, does not create an obligation that meets the
definition of a liability. Therefore, this statement eliminates the definition
and requirements for recognition of exit costs in EITF 94-3. This statement also
establishes that fair value is the objective for initial measurement of the
liability. The effective date of the new statement is January 1, 2003, with
earlier adoption encouraged. The Company does not believe adoption of this
statement will materially impact the Company's financial position or results of
operations.

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 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 Debt - 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.
However, forecasts are subject

                                       18

<PAGE>

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 - The Company follows SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 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 measures the
impairment utilizing discounted cash flows. The Company adopted SFAS No. 144
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," at April 1, 2003. This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supercedes
SFAS No. 121. This adoption had no material impact on the Company's consolidated
results of operations, financial position or cash flows.

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. During the
year ended March 31, 2003, we recorded $8.6 million of additional valuation
allowances related to our net deferred tax assets as of March 31, 2003, bringing
the total allowance to $35.5 million.

CAUTIONARY STATEMENTS

This report contains certain "forward-looking" statements. These forward-looking
statements may contain statements of intent, belief or current expectations of
Pemstar Inc. and its management. Such forward-looking statements are not
guarantees of future results and involve risks and uncertainties that may cause
actual results to differ materially from the potential results discussed in the
forward-looking statements. In addition to factors discussed above, risks and
uncertainties that may cause such differences include but are not limited to; a
continued decline in economic conditions or a recession; the effects of
September 11, 2001, or future terrorist attacks in the United States and the
engagement of military forces of the United States and its allies in other parts
of the world, as well as any future events in response to these developments,
including rumors or threats of war, actual conflicts or trade disruptions;
changes in demand for electronics manufacturing and design services; changes in
demand by major customers due to cancellations, reductions or delays of orders;
shortages or price fluctuations in component parts; difficulties managing our
expansion and integrating acquired businesses; increased competition and other
risk factors listed from time to time in the Company's Securities and Exchange
Commission filings, including but not limited to Exhibit 99 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 2003. The
foregoing list is not exhaustive and the Company disclaims any obligation to
subsequently revise any forward-looking statements to reflect events or
circumstances after the date of such statements.

                                       19

<PAGE>

CONSOLIDATED BALANCE SHEETS
PEMSTAR Inc.

(In thousands, except per share data)          March 31,       March 31,
                                                 2003            2002
                                             ------------    ------------
Assets
Current assets:
   Cash and cash equivalents                 $     32,762    $     11,483
   Restricted cash                                  4,268           1,423
   Accounts receivable, net                       112,316         122,752
   Recoverable income taxes                           282           3,873
   Inventories, net                                69,279          92,929
   Unbilled services                               10,797          16,356
   Deferred income taxes                               35              45
   Prepaid expenses and other                       7,474           8,507
                                             ------------    ------------
Total current assets                              237,213         257,368
Property, plant and equipment, net                 93,200          99,108
Goodwill, net                                      33,771          34,678
Deferred income taxes                               1,705           1,111
Other assets                                        6,173           3,459
                                             ------------    ------------
Total assets                                 $    372,062    $    395,724
                                             ============    ============
Liabilities and shareholders' equity
 Current liabilities:
   Current maturities of long-term debt      $     22,446    $     13,999
   Current maturities of capital lease
    obligations                                     5,288          10,865
   Accounts payable                                88,083          79,410
   Income taxes payable                               191              21
   Accrued expenses and other                      22,631          15,738
                                             ------------    ------------
Total current liabilities                         138,639         120,033
Long-term debt, less current maturities            56,127          71,340
Capital lease obligations, less
 current maturities                                12,843           3,122
Other liabilities and deferred credits              4,586           7,832
Shareholders' equity:
   Common stock, par value $0.01, 150,000
    shares authorized; shares issued and
    outstanding; 2003 - 37,486 shares;
    2002 - 36,701 shares                              375             367
   Additional paid-in capital                     234,943         232,233
   Accumulated other comprehensive loss               (14)         (2,131)
   Accumulated deficit                            (74,928)        (36,164)
   Loans to shareholders                             (509)           (908)
                                             ------------    ------------
      Total shareholders' equity                  159,867         193,397
                                             ------------    ------------
Total liabilities and shareholders' equity   $    372,062    $    395,724
                                             ============    ============

See notes to consolidated financial statements.

                                       20

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
PEMSTAR Inc.

<TABLE>
<CAPTION>
(In thousands, except per share data)                    Year Ended March 31,
                                                 2003            2002            2001
                                             ------------    ------------    ------------
<S>                                          <C>             <C>             <C>
Net sales                                    $    668,175    $    657,493    $    635,307
Costs of goods sold                               637,074         627,457         581,278
                                             ------------    ------------    ------------
Gross profit                                       31,101          30,036          54,029
Selling, general and administrative
 expenses                                          51,076          53,351          37,366
Restructuring costs                                 4,249              --              --
Amortization                                          129           2,152           1,961
Goodwill impairment charges                            --          24,228              --
                                             ------------    ------------    ------------
Operating (loss) income                           (24,353)        (49,695)         14,702
Other income (expense) - net                          558             829             967
Interest expense                                   (8,870)         (7,077)         (7,550)
                                             ------------    ------------    ------------
(Loss) income before income taxes and
 cumulative effect of accounting change           (32,665)        (55,943)          8,119
Income tax expense (benefit)                          753          (1,926)          1,436
                                             ------------    ------------    ------------
(Loss) income before cumulative effect of
 accounting change                                (33,418)        (54,017)          6,683
Cumulative effect of accounting change             (5,346)             --              --
                                             ------------    ------------    ------------
Net (loss) income                            $    (38,764)   $    (54,017)   $      6,683
                                             ============    ============    ============
Basic (loss) income per common share:
   (Loss) income before cumulative effect
    of accounting change                     $       (.90)   $      (1.56)   $        .29
   Cumulative effect of accounting change            (.14)             --              --
                                             ------------    ------------    ------------
   Net (loss) income                         $      (1.04)   $      (1.56)   $        .29
                                             ============    ============    ============
Diluted (loss) income per common share:
   (Loss) income before cumulative effect
    of accounting change                     $       (.90)   $      (1.56)   $        .25
   Cumulative effect of accounting change            (.14)             --              --
                                             ------------    ------------    ------------
   Net (loss) income                         $      (1.04)   $      (1.56)   $        .25
                                             ============    ============    ============
Shares used in computing net (loss)
 income per common share:
   Basic                                           37,133          34,717          23,013
   Diluted                                         37,133          34,717          26,943
</TABLE>

See notes to consolidated financial statements.

                                       21

<PAGE>

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PEMSTAR Inc.

<TABLE>
<CAPTION>
(In thousands)                                                            Accumulated    Retained
                                                                             Other       Earnings
                                       Common Stock          Additional     Compre-      (Accumu-      Loans to
                                -------------------------     Paid in       hensive        lated         Share-
                                  Shares         Amount       Capital         Loss        Deficit)      holders        Total
                                -----------   -----------   -----------   -----------   -----------   -----------   -----------
<S>                               <C>         <C>           <C>           <C>           <C>           <C>           <C>
Balance, March 31, 2000              13,819   $       138   $    15,395   $      (772)  $    11,170   $    (3,258)  $    22,673
Issuance of common stock in
 employee stock programs                449             4         1,719            --            --          (200)        1,523
Payments on loans to
 shareholders                            --            --            --            --            --         1,194         1,194
Issuance of common stock              9,316            94        93,523            --            --            --        93,617
Conversion of preferred stock         4,710            47        26,502            --            --            --        26,549
Comprehensive income:
   Net income                            --            --            --            --         6,683            --         6,683
   Foreign currency
      translation adjustment             --            --            --        (1,527)           --            --        (1,527)
                                                                                                                    -----------
   Comprehensive income                  --            --            --            --            --            --         5,156
                                -----------   -----------   -----------   -----------   -----------   -----------   -----------
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
                                ===========   ===========   ===========   ===========   ===========   ===========   ===========
</TABLE>

See notes to consolidated financial statements.

                                       22

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
PEMSTAR Inc.
<TABLE>
<CAPTION>

                                                                          Year ended March 31,
  (In thousands)                                                   2003            2002           2001
                                                               ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>
Cash flows from operating activities:
   Net (loss) income                                           $    (38,764)   $    (54,017)   $      6,683
   Adjustments to reconcile net (loss) income to net cash
    provided by (used in) operating activities:
      Depreciation                                                   20,021          18,299          12,097
      Amortization                                                    1,693           3,085           1,961
      Goodwill impairment charge/accounting change                    5,346          24,228              --
      Deferred income taxes                                            (584)          1,059            (146)
      Loss(gain) on sale of property, plant and equipment                48             (49)           (417)
      Restructuring charge for property, plant and equipment          1,038              --              --
      Other deferred credits                                           (844)           (356)           (292)
      Change in operating assets and liabilities:
         Accounts receivable                                         12,885         (12,596)        (41,563)
         Inventories                                                 24,991          24,986         (43,222)
         Recoverable income taxes                                     3,591          (3,873)             --
         Unbilled services                                            5,559          (6,622)         (7,804)
         Prepaid expenses and other                                   1,487          (2,318)         (4,816)
         Accounts payable                                             7,285           7,554          21,149
         Accrued expenses and other                                   3,559             313           2,151
                                                               ------------    ------------    ------------
            Net cash provided by (used in) operating
             activities                                              47,311            (307)        (54,219)
Cash flows used in investing activities:
   Decrease (increase) in restricted cash                             1,296          (1,090)             10
   Business acquisitions, net of cash acquired                       (4,376)        (24,361)        (21,225)
   Proceeds from sale of property, plant and equipment                   42           2,178           1,073
   Purchases of property, plant and equipment                       (12,555)        (37,930)        (42,542)
                                                               ------------    ------------    ------------
            Net cash used in investing activities                   (15,593)        (61,203)        (62,684)
Cash flows from financing activities:
   Bank overdrafts                                                       --         (13,504)          3,242
   Proceeds from common stock sales                                      --          79,384          93,899
   Proceeds from sale of warrants                                       560              --              --
   Proceeds from employee stock sales                                 1,100           5,686           1,241
   Payments on loans to shareholders                                    399           1,464           1,194
   Proceeds from government grants                                      300             550              --
   Proceeds from sale and leaseback                                   7,476             911           4,060
   Principal payments on long-term borrowings                       (54,274)        (60,072)        (94,457)
   Proceeds from long-term borrowings                                35,592          54,156         110,968
   Debt placement costs                                              (1,099)         (1,411)           (635)
                                                               ------------    ------------    ------------
            Net cash (used in) provided by financing
             activities                                              (9,946)         67,164         119,512
Effect of exchange rate changes on cash                                (493)            (53)            546
                                                               ------------    ------------    ------------
            Net increase in cash and cash equivalents                21,279           5,601           3,155
Cash and cash equivalents:
   Beginning of year                                                 11,483           5,882           2,727
                                                               ------------    ------------    ------------
   End of year                                                 $     32,762    $     11,483    $      5,882
                                                               ============    ============    ============
</TABLE>

See notes to consolidated financial statements.

                                       23

<PAGE>

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, its majority-owned subsidiaries and the Company's share
of net earnings or losses of 50 percent or less owned companies accounted for
using the equity method. All material intercompany accounts and transactions are
eliminated in the consolidated financial statements.

Revenue recognition - Revenue from the sales 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 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". 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,
2003 and 2002 of $33,771 and $34,678, respectively, is net of accumulated
amortization of $1,860.

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 the amount of $5,346 on which the Company
recognized no tax benefit.

                                       24

<PAGE>

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) income adjusted to reflect the adoption
of SFAS No. 142 as if it had been effective April 1, 2000 is provided below:

<TABLE>
<CAPTION>
                                                                             Year Ended March 31,
                                                                   2003            2002            2001
                                                               ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>
Reported net (loss) income .................................   $    (38,764)   $    (54,017)   $      6,683
Add:  Adjustment for accounting change /(1)/ ...............          5,346              --              --
      Amortization, net of tax .............................             --           2,152             856
                                                               ------------    ------------    ------------
Adjusted net (loss) income .................................   $    (33,418)   $    (51,865)   $      7,539
                                                               ============    ============    ============
Reported basic (loss) income per common share ..............   $      (1.04)   $      (1.56)   $        .29
Add:  Adjustment for accounting change .....................            .14              --              --
      Amortization, net of tax .............................             --             .07             .04
                                                               ------------    ------------    ------------
Adjusted basic net (loss) income per common share ..........   $       (.90)   $      (1.49)   $        .33
                                                               ============    ============    ============
Reported diluted (loss) income per common share ............   $      (1.04)   $      (1.56)   $        .25
Add:  Adjustment for accounting change .....................            .14              --              --
      Amortization, net of tax .............................             --             .07             .03
                                                               ------------    ------------    ------------
Adjusted diluted net (loss) income per common share ........   $       (.90)   $      (1.49)   $        .28
                                                               ============    ============    ============
----------
<FN>
<F1>
(1)  Reported in fourth fiscal quarter as a change to first fiscal quarter
</FN>
</TABLE>

Long-lived assets - The Company follows SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 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 measures the
impairment utilizing discounted cash flows.

Estimated warranty claim - The Company sells its products with a warranty that
provides for repairs or replacements of any defective workmanship for a
three-month period after the sale. Based upon historical experience, the accrual
for warranty claims is not material at March 31, 2003 and 2002.

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

                                       25

<PAGE>

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 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 $1,011, $1,015 and $489 for the years ended March 31, 2003,
2002, and 2001, 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,
                                        2003           2002           2001
                                    ------------   ------------   ------------
Net (loss) income:
   As reported ...................  $    (38,764)  $    (54,017)  $      6,683
   Additional compensation
    expense, net of tax. .........        (2,625)        (2,819)        (2,476)
                                    ------------   ------------   ------------
   Pro forma .....................  $    (41,389)  $    (56,836)  $      4,207
Basic (loss) earnings per share:
   As reported ...................  $      (1.04)  $      (1.56)  $       0.29
   Pro forma .....................         (1.11)         (1.64)          0.18
Diluted (loss) earnings per share:
   As reported ...................  $      (1.04)  $      (1.56)  $       0.25
   Pro forma .....................         (1.11)         (1.64)          0.16

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
3.83%, 5.42% and 5.70% for 2003, 2002 and 2001, respectively, volatility factor
of expected market price of our common stock of 1.5, 0.8 and 1.4 for 2003, 2002
and 2001, 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 15 and convertible preferred stock as discussed in Note 13).

                                       26

<PAGE>

The following table reflects the components of common shares outstanding in
accordance with SFAS No. 128:

                                              Year ended March 31,
                                        2003           2002           2001
                                    ------------   ------------   ------------
Weighted average common shares
 outstanding - basic ..............       37,133         34,717         23,013
Effect of dilutive securities:
   Preferred stock conversion .....           --             --          1,677
   Stock options ..................           --             --          2,253
                                    ------------   ------------   ------------
Shares used in computing net
 income (loss) per common
 share - diluted ..................       37,133         34,717         26,943
                                    ============   ============   ============

Common stock equivalents and their impact on net loss have been excluded from
the diluted per share calculation for 2003 and 2002, 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 5,978 and 3,465
shares of the Company's common stock as of March 31, 2003 and 2002,
respectively, and ii) 2,193 shares of the Company's common stock issuable upon
conversion of convertible debt as of March 31, 2003.

New Accounting Pronouncements - In October 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", which is effective for fiscal years beginning after June 15,
2002. This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121, and the
accounting and reporting provisions of Accounting Principles Board (APB) Opinion
No. 30, "Reporting the Results of Operations", for a disposal of a segment of a
business. The Company adopted this pronouncement at April 1, 2003. This adoption
had no material impact on the Company's consolidated results of operations,
financial position or cash flows.

At April 1, 2002, the Company adopted the provisions of FASB No. 146,
"Accounting for Exit Costs". This statement addresses financial accounting and
reporting for costs associated with exit activities in relation to business
acquisitions or restructuring of operations. This adoption had no material
impact on the Company's consolidated results of operations, financial position
or cash flows.

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. Turtle
Mountain is an electronics manufacturing service provider for commercial and
military customers. The purchase price of $20,638, including liabilities
assumed, was funded with proceeds of a term loan of $9,500 with the remainder
borrowed 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's financial statements from the date of
acquisition. The excess of the purchase price over the estimated fair value of
the net assets acquired of $9,680 has been recorded as goodwill and was being
amortized over an estimated useful life of 20 years until March 31, 2002 when a
new accounting pronouncement was adopted (See Note 1). 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 provides 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

                                       27

<PAGE>

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 $4,376 in the year
ended March 31, 2003, 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
                                                               ============

The following unaudited pro forma combined summary statement of operations for
the years ended March 31, 2002 and 2001 was prepared in accordance with APB No.
16 and assumes the acquisitions had occurred at the beginning of the periods
presented. 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 ended March 31,
                                                 2002            2001
                                             ------------    ------------
Net sales ................................   $    674,016    $    650,904
Net (loss) income ........................        (53,767)          6,944
Net (loss) income per common
 share - basic ...........................   $      (1.55)   $        .30
Net (loss) income per common
 share - diluted .........................          (1.55)            .26

Note 3.  Accounts Receivable

Accounts receivable consists of the following:
                                                       March 31,
                                                 2003            2002
                                             ------------    ------------
Accounts receivable.......................   $    115,799    $    131,476
Less allowance for doubtful accounts......         (3,483)         (8,724)
                                             ------------    ------------
                                             $    112,316    $    122,752
                                             ============    ============

Note 4.  Inventories

Inventories consist of the following:
                                                       March 31,
                                                 2003            2002
                                             ------------    ------------
Raw materials.............................   $     57,971    $     85,587
Work in process...........................         10,078           8,763
Finished goods............................          6,611           5,255
Less allowance for inventory
 obsolescence.............................         (5,381)         (6,676)
                                             ------------    ------------
                                             $     69,279    $     92,929
                                             ============    ============

                                       28

<PAGE>

Note 5.  Property, Plant and Equipment, Net

Property, plant and equipment consists of the following:
                                                       March 31,
                                                 2003            2002
                                             ------------    ------------
Land .....................................   $      2,587    $      3,027
Buildings and improvements ...............         27,134          27,362
Machinery and equipment ..................         80,243          73,046
Computer hardware and software ...........         27,341          24,091
Construction in progress .................         11,354          10,113
                                             ------------    ------------
                                                  148,659         137,639
Less accumulated depreciation ............        (55,459)        (38,531)
                                             ------------    ------------
                                             $     93,200    $     99,108
                                             ============    ============

Note 6.  Goodwill, Net

Goodwill consists of the following:
                                                       March 31,
                                                 2003            2002
                                             ------------    ------------
Goodwill..................................   $     35,631    $     36,538
Less accumulated amortization.............         (1,860)         (1,860)
                                             ------------    ------------
                                             $     33,771    $     34,678
                                             ============    ============

Note 7.  Financing Arrangements

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                    March 31,
                                                                              2003            2002
                                                                          ------------    ------------
<S>                                                                       <C>             <C>
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
 (7.37% at March 31, 2003 and 6.39% at March 31, 2002).................   $     45,851    $     61,947
Foreign revolving credit facilities, interest rates
 ranging from 4.8% to 5.85% or LIBOR plus a margin of
 150 basis points (5.85% at March 31, 2003 and 5.5% at
 March 31, 2002).......................................................         12,019           3,283
Convertible senior subordinated notes bearing interest
 at 6.5%, due May 1, 2007..............................................          4,541              --
Notes payable bearing interest ranging from 5.3% to
 7.1%, due in monthly payments of principal and interest
 of $297 through April 2004 for domestic notes and a
 balloon payment of $1,812 for a foreign note. The
 notes are secured by equipment........................................          5,308           7,662
Foreign notes payable, interest 5.0% through June 2004
 and prime less 100 basis points thereafter to June
 2007, due in monthly payments of $117 through June
 2007.  The notes are secured by buildings ............................          5,951           6,894
Bonds payable to the City of Rochester with variable
 interest rates ranging from 1.35% to 1.40%, interest
 due monthly.  Annual principal payments ranging from
 $155 to $575 are due through June 2018................................          3,870           4,445
Other..................................................................          1,033           1,108
                                                                          ------------    ------------
                                                                                78,573          85,339
Less current maturities................................................        (22,446)        (13,999)
                                                                          ------------    ------------
                                                                          $     56,127    $     71,340
                                                                          ============    ============
</TABLE>

Payment of the bonds is secured by irrevocable letters of credit in favor of the
trustee in the amount of $3,943 expiring in August 2003. The Company is 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 is variable and is payable monthly until, at the option of the Company
with the consent of US Bank, the rate is fixed (conversion date). In the event
the Company exercises its option to convert the interest rate on the bonds from
a variable

                                       29

<PAGE>

rate to a fixed rate, a remarketing agent, currently FBS Investment Services,
Inc., shall determine the fixed rate in accordance with a remarketing agreement.
Upon exercise of this option, a mandatory tender shall occur on which date the
bonds are called and reissued. Prior to the conversion date, the holders of the
bonds may require the trustee to purchase the bonds at a price equal to the
principal amount thereof plus accrued interest thereon. Upon presentation for
redemption, the remarketing agent will attempt to resell the bonds at a price
that is not less than par. Bond sinking funds and proceeds from the bonds, to
the extent unused, are shown as $325 and $477 in restricted cash and $0 and $198
in other assets at March 31, 2003 and 2002, respectively. 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:

Year ending March 31:
   2004                              $     22,446
   2005                                     1,806
   2006                                     1,711
   2007                                    47,363
   2008                                     5,003
   Thereafter                                 244
                                     ------------
                                     $     78,573
                                     ============

In May 2002, pursuant to a securities purchase agreement, the Company sold to
two investors $5,000 face value of 6 1/2 % 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 common stock. The fair value of the
warrants of $188 was charged to interest expense as a cost of termination of the
agreement.

As of March 31, 2003, the Company had revolving credit facilities with IBM
Credit Corporation and US Bank totaling $80,000 ($65,000 - " Revolver A" and
$15,000 - "Revolver B", respectively) for revolving credit loans and letters of
credit, which expire at December 2003. Under available borrowing base
limitations, calculated as percentage of eligible accounts receivable and
inventory balances, the Company could borrow $46,938 under the agreements at
March 31, 2003. 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 Company
used proceeds to pay off existing domestic revolving credit facilities with IBM
Credit Corporation and US Bank, leaving remaining credit available under the new
agreements at $17,355 at the closing date of April 29, 2003. The revolving
credit facilities are collateralized by substantially all domestic assets and by
investments in foreign subsidiaries.

The Company has letters of credit totaling $6,138 outstanding as of March 31,
2003 under these facilities. Restricted cash balances of $3,943 and $946 relate
to certain letters of credit outstanding at March 31, 2003 and March 31, 2002,
respectively.

The Company also has separate available lines of credit in certain foreign
locations totaling $15,072, due at various dates through May 2003, renewable at
the discretion of the lender. Certain of these lines have been renewed
subsequent to year end, consistent with past experience with these lenders.
These lines were used in part to repay the note payable balloon payment due in
May 2003 and have been expanded subsequent to March 31, 2003, to replace
available credit used for that

                                       30

<PAGE>

payment. Advances under these lines of credit bear interest at fixed and
variable rates ranging from 4.8% to 5.1% at March 31, 2003. The lines of credit
are both unsecured and secured by certain foreign inventories, receivables and
fixed assets.

Note 8. Restructuring Costs

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 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. Restructuring costs remaining to be
paid consist of amounts to satisfy remaining lease term requirements of $537.

Note 9. Other Income (Expense) - Net

The other income and expense consists of the following:
                                               Year Ended March 31,
                                          2003         2002         2001
                                       ----------   ----------   ----------
Foreign currency gains ..............  $      387   $      691   $      507
Minority interest in net loss of
 consolidated subsidiaries ..........          --           --           84
Other income (expense)-net ..........         171          138          376
                                       ----------   ----------   ----------
                                       $      558   $      829   $      967
                                       ==========   ==========   ==========

Note 10. 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 11. Commitments and Contingencies

The Company has various capital and operating leases, which expire on various
dates through 2013. Future minimum payments under both capital leases and
operating leases are as follows:

                                                     Capital        Operating
                                                     Leases          Leases
Year Ending March 31,                              ------------    ------------
   2004 .......................................    $      6,284    $     11,936
   2005 .......................................           2,766           9,679
   2006 .......................................           1,345           8,175
   2007 .......................................           1,356           5,885
   2008 .......................................           1,383           5,200
   Thereafter .................................          24,401           8,959
                                                   ------------    ------------
Total minimum lease payments ...................         37,535    $     49,834
                                                                   ============
Less amount representing interest ..............        (19,404)
                                                   ------------
Present value of minimum lease payment .........         18,131
Less current portion ...........................         (5,288)
                                                   ------------
                                                   $     12,843
                                                   ============

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

                                                          March 31,
                                                    2003            2002
                                                ------------    ------------
Buildings and improvements ..................   $     11,691    $         --
Machinery and equipment .....................          4,655          14,154
Furniture and fixtures ......................             --             649
Computer hardware and software ..............          8,634           8,328
                                                ------------    ------------
                                                      24,980          23,131
Less accumulated depreciation ...............         (6,256)         (6,085)
                                                ------------    ------------
                                                $     18,724    $     17,046
                                                ============    ============

                                       31

<PAGE>

Total rent expense recognized under operating leases for the years ended March
31, 2003, 2002 and 2001 totaled $13,329, $10,039 and $5,175, 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 9). Leaseback rental payments total $969, $1,303, $1,330, $1,356,
$$1,383 and $24,401 for years ended March 31, 2004, 2005, 2006, 2007, 2008 and
thereafter, respectively. Other manufacturing equipment totaling $1,701 was
financed subsequent to recent purchases in sale-leaseback transactions during
the year ended March 31, 2003.

The Company is 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 the Company's 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 the Company in connection with the secondary offering
contained false, material misrepresentations. An Amended Consolidated Complaint
was filed January 9, 2003. On August 23, 2002 and October 2, 2002 two different
individual shareholders also commenced virtually identical shareholder
derivative actions against the Company as nominal defendant and its Board. Those
actions are currently pending in Unites States District Court for the District
of Minnesota. The allegations in the derivative actions are based on many of the
same facts that gave rise to the securities action. The lawsuit alleges that the
Board of the Company breached its fiduciary duties. It is too early to predict
the likelihood of prevailing on the various lawsuits described above. Pemstar
believes the actions are wholly without merit and is vigorously defending
against the claims. The Company has recorded no loss accrual as such amounts are
not deemed estimable.

Note 12. Income Taxes

Income (loss) before income taxes consisted of the following:
                                             Year ended March 31,
                                    2003            2002            2001
                                -------------   ------------    ------------
Domestic ....................   $    (43,342)   $    (57,885)   $      3,403
Foreign .....................         10,677           1,942           4,716
                                ------------    ------------    ------------
                                $    (32,665)   $    (55,943)   $      8,119
                                ============    ============    ============

The provision for income taxes consisted of the following:
                                             Year ended March 31,
                                    2003            2002            2001
                                ------------    ------------    ------------
Current:
   Domestic                     $         76    $     (5,638)   $      2,500
   Foreign                             1,261           2,653            (918)
                                ------------    ------------    ------------
                                       1,337          (2,985)          1,582
Deferred:
   Domestic                               --           2,418          (1,247)
   Foreign                              (584)         (1,359)          1,101
                                ------------    ------------    ------------
                                        (584)          1,059            (146)
                                ------------    ------------    ------------
                                $        753    $     (1,926)   $      1,436
                                ============    ============    ============

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

<TABLE>
<CAPTION>
                                                                         Year ended March 31,
                                                                2003             2002           2001
                                                            ------------    ------------    ------------
<S>                                                         <C>             <C>             <C>
Computed  "expected" tax rate ............................  $    (11,106)   $    (19,021)   $      2,761
Increase (decrease) in income taxes resulting from:
   State taxes, net of credits and federal income tax
    benefit ..............................................        (2,224)         (1,608)            105
   Benefit of foreign sales/extraterritorial income
    exclusion ............................................          (263)           (291)           (244)
   Foreign taxes .........................................        (5,409)         (7,896)         (1,284)
   Valuation allowance ...................................         8,553          26,962              --
   Other .................................................           384             (72)             98
                                                            ------------    ------------    ------------
                                                            $        753    $     (1,926)   $      1,436
                                                            ============    ============    ============
</TABLE>

                                       32

<PAGE>

A summary of deferred tax assets and liabilities is as follows:
                                                           March 31,
                                                       2003            2002
                                                   ------------    ------------
Deferred tax assets:
      Allowance for doubtful accounts ...........  $      1,280    $      2,694
      Allowance for inventory
       obsolescence .............................         1,685           1,667
      Reserve for goodwill impairment ...........         8,846           7,914
      Deferred revenue ..........................           697             886
      Domestic net operating losses .............        22,521           5,476
      State tax credits .........................         1,254           1,142
      Foreign expenses accelerated
       for book purposes ........................         5,011           1,539
      Foreign net operating losses ..............         4,545          11,025
      Other .....................................         1,569             633
                                                   ------------    ------------
   Total deferred tax assets ....................        47,408          32,976
Deferred tax liabilities:
      Accelerated depreciation ..................        (2,244)         (1,477)
      Foreign expenses accelerated
       for tax purposes .........................        (7,648)         (2,878)
      Other .....................................          (261)           (503)
                                                   ------------    ------------
   Total deferred tax liabilities ...............       (35,515)         (4,858)
Valuation allowance:
      Domestic ..................................       (35,348)        (18,432)
      Foreign ...................................          (168)         (8,530)
                                                   ------------    ------------
   Total valuation allowance ....................       (35,515)        (26,962)
                                                   ------------    ------------
Net deferred tax assets                            $      1,740    $      1,156
                                                   ============    ============

No provision has been made for U.S. income taxes related to undistributed
earnings of foreign subsidiaries, which are intended to be permanently
reinvested. The Company has approximately $67,000 of domestic net operating loss
carryforwards, which will expire in 2023. Of this $67,000 carryforward total,
$8,455 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 $9,747 of foreign net operating loss carryforwards that have an
unlimited carryforward period, and foreign net operating loss carryforwards of
$3,241 that will expire from 2011 to 2012. The state tax credit carryforwards of
$1,900 expire at varying dates through 2016.

The foreign tax expense in China was decreased by $725 ($0.02 and $0.02 per
share on a basic and diluted basis, respectively) in fiscal 2003, by $323 ($.01
and $.01 per share on a basic and diluted basis, respectively) in fiscal 2002
and by $480 ($.02 and $.02 per share on a basic and diluted basis, respectively)
in fiscal year 2002 as a result of the benefit of a tax holiday. This holiday
ran at 50% relief of the normal 15% income tax rate through December 31, 2000,
and will continue at the 7.5% rate thereafter 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 $1,082 ($.03 and $.03 per share on a basic and diluted basis,
respectively) and $774 ($.02 and $.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 will continue at full relief of the normal 24.5% income tax rate
through March 31, 2005. During fiscal 2003, current tax expense in Mexico was
reduced through the use of $21,900 of net operating losses carried forward from
prior years. Such loss carryforwards had been fully reserved for at March 31,
2002.

Note 13. Mandatorily Redeemable and Convertible Preferred Stock

The Company has authorized 5,000 shares of $0.01 par value preferred stock. As
of March 31, 2000, 667 shares, of which 570 were outstanding, were designated as
Series A, and 1,000 shares were designated and outstanding as Series B. The
preferred stock was automatically converted into 4,710 shares of common stock at
conversion prices of $5.00 per share for Series A and $6.00 per share for Series
B for upon the completion of the Company's initial public offering in August
2000.

                                       33

<PAGE>

Note 14. 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 of
net sales and long-lived assets by geographic location:

                                                Year Ended March 31,
                                        2003           2002           2001
                                   ------------    ------------    ------------
Net sales:
   Americas ....................   $    475,725    $    478,965    $    529,907
   China .......................         66,835          61,897          41,875
   Asia, other .................         57,810          66,705          31,107
   Europe ......................         67,805          49,926          32,418
                                   ------------    ------------    ------------
                                   $    668,175    $    657,493    $    635,307
                                   ============    ============    ============
Long-lived assets:
   Americas ....................   $     96,457    $     94,590    $     67,018
   China .......................         21,562          19,990          19,659
   Asia, other .................         13,738          20,767          14,210
   Europe ......................          3,092           3,009           5,033
                                   ------------    ------------    ------------
                                   $    134,849    $    138,356    $    105,920
                                   ============    ============    ============

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,
                                     2003         2002          2001
                                   --------     --------      --------

Customer A ......................      23.4%        24.8%         23.0%
Customer B ......................      10.8         14.0          16.0
Customer C ......................        --           --          11.0

As of March 31, 2003 and 2002, receivables from these customers represented 24%
and 29% of total accounts receivable, respectively.

Note 15.  Shareholders' Equity

In August and September of 2000, the Company sold 9,280 shares in an initial
public offering from which the Company received net proceeds of $93,617. In June
2001, the Company sold 6,275 shares in a follow-on public offering from which
the Company received net proceeds of $79,384.

The Company has 1,015 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.

                                       34

<PAGE>

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

<TABLE>
<CAPTION>
                                                                      Year Ended March 31,
                                                 2003                           2002                           2001
                                     ----------------------------   ---------------------------    ----------------------------
                                                       Weighted                       Weighted                       Weighted
                                                       Average                        Average                        Average
                                                       Exercise                       Exercise                       Exercise
                                        Shares          Price          Shares          Price          Shares          Price
                                     ------------    ------------   ------------    ------------   ------------    ------------
<S>                                  <C>             <C>            <C>             <C>            <C>             <C>
Outstanding, beginning of year ....         3,465    $       7.44          4,419    $       5.93          3,845    $       3.91
Granted ...........................         1,298            1.78            704           11.30          1,189           11.44
Exercised/forfeited ...............          (823)           6.98         (1,658)           5.05           (615)           3.96
                                     ------------                   ------------                   ------------
Outstanding, end of year ..........         3,940            5.67          3,465            7.44          4,419            5.93
                                     ============                   ============                   ============
Exercisable, end of year ..........         2,197            6.38          2,074            5.49          3,081            5.08
Weighted average fair value per
 share of options granted during
 the year .........................  $       1.76              --   $       9.38              --   $      10.92              --
</TABLE>

At March 31, 2003, the options outstanding have average remaining contractual
lives and exercise prices as follows:

   Shares              Average Contractual Life            Exercise Price
   ------              ------------------------            --------------
   1,403                      8.7 years                    $   .33 - $4.99
   1,508                      6.6 years                    $  5.00 - 9.99
     966                      7.7 years                    $ 10.00 - 14.99
      63                      8.0 years                    $ 15.00 - 23.31

As of March 31, 2003 and 2002, the Company had loans outstanding to shareholders
in connection with stock sales and the exercise of stock options for the
purchase of 136 shares and 176, respectively. Loans totaling $108 and $401 are
due in November, 2003 and March, 2005, respectively, and bear interest at 2.71%
to 2.72%. The loans are secured by the shares of common stock purchased and full
recourse against the respective shareholder's personal assets.

Note 16.  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, 2003, 2002 and 2001 totaled, $1,486, $1,366 and $1,063, respectively.

The Company sponsors a defined benefit retirement plan program at its
Netherlands facility. As of March 31, 2003, the fair value of the plan assets
and projected benefit obligations were $4,462 and $4,467, respectively. Expenses
associated with this plan totaled $201 and $122 for the years ended March 31,
2003 and 2002, respectively.

Employee Stock Purchase Plan

During 2001, the Company established an employee stock discount purchase plan
that provides for the sale of up to 1,000 shares, as amended during 2002, 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, 2003, 2002 and 2001, 730, 135 and 36 shares of common stock were
issued to employees pursuant to this plan, respectively. The weighted average
fair value of shares sold in 2003, 2002 and 2001, was $1.44, $10.06 and $7.84,
respectively.

                                       35

<PAGE>

Note 17.  Supplemental Cash Flow Information

<TABLE>
<CAPTION>
                                                                          Year Ended March 31,
                                                                   2003            2002         2001
                                                               ------------   ------------   ------------
<S>                                                            <C>            <C>            <C>
Supplemental disclosures for cash flow information:
 Cash payments for:
   Interest ................................................   $      7,283   $      7,234   $      7,344
   Income taxes ............................................          1,492          1,812          1,797
Supplemental schedule of non-cash investing and
 financing activities:
   Property and equipment acquired through capital
    lease agreements .......................................          2,222          5,230         11,166
   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             --             --
</TABLE>

Note 18.  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 $24,353 for the year
ended March 31, 2003, which included $4,249 of restructuring costs. The Company
continues to evaluate its operations to determine the need for further
restructuring in response to market conditions. Although the operating loss for
fiscal 2003 was not unexpected, given the continuing 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. During fiscal 2003, the Company generated
cash from operations, principally from improving its working capital
utilization, as well as, cash from new financing including the sale and
leaseback of certain land, buildings and equipment.

The domestic revolving credit facilities were replaced subsequent to year end to
provide expanded capacity for funding business growth and to extend arrangements
approaching the expiration of their term. The Company has historically
experienced violations of covenants under its domestic revolving facilities and
has always received waivers for such violations. At March 31, 2003 the Company
was in violation of certain covenants under the previous credit facilities,
however, it entered into its new credit facility prior to requesting a waiver.
These new facilities require the maintenance of certain minimum cash flow
levels. In anticipation of a potential covenant violation at the end of its
first fiscal quarter of 2004, the Company obtained a waiver from its 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. The Company's operating plan includes 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 2004 operating plan. The Company expects to meet its financial
projections for the 2004 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.

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, the replacement of its revolving credit facilities it has
obtained, and the new agreements it has reached to provide additional borrowing
capacity, it will meet its fiscal 2004 financial plan; however, there can be no
assurance that such financial plan will be met.

                                       36

<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
PEMSTAR Inc.

We have audited the accompanying consolidated balance sheets of PEMSTAR Inc. as
of March 31, 2003 and 2002, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended March 31, 2003. 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 auditing standards generally accepted
in the 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, 2003 and 2002 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended March 31, 2003,
in conformity with accounting principles generally accepted in the United
States.

As discussed in Notes 1 and 6 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, 2003, except for Note 18,
  as to which the date is July 10, 2003

                                       37

<PAGE>

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
PEMSTAR Inc.

The following table sets forth unaudited quarterly financial information of
PEMSTAR for the quarterly periods in fiscal 2003 and 2002. Historically, we have
experienced some seasonal variation in net sales, with net 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 variation may be offset in part by internal
growth and acquisitions. 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.

<TABLE>
<CAPTION>
Quarter Ended
(In thousands, except per share     Mar.31,     Dec.31,    Sept.30,    June 30,    Mar.31,     Dec.31,     Sept.30,    June 30,
data)                                2003        2002        2002         2002       2002        2001        2001        2001
<S>                               <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Net Sales                         $ 166,848   $ 171,841   $ 176,382   $ 153,104   $ 145,686   $ 171,223   $ 173,380   $ 167,204
Cost of goods sold                  156,944     159,199     168,495     152,436     147,147     170,202     158,343     151,765
                                  ---------   ---------    --------   ---------   ---------   ---------   ---------   ---------
Gross profit                          9,904      12,642       7,887         668      (1,461)      1,021      15,037      15,439
Selling, general and
 administrative expenses             11,097      11,819      13,790      14,370      13,523      19,303      10,395      10,130
Restructuring                          (134)        503         924       2,956          --          --          --          --
Amortization                             27          27          27          48         636         522         516         478
Goodwill impairment charges              --          --          --          --      24,228          --          --          --
                                  ---------   ---------    --------   ---------   ---------   ---------   ---------   ---------
Operating (loss) income              (1,086)        293      (6,854)    (16,706)    (39,848)    (18,804)      4,126       4,831
Other income (expense) - net          1,033        (288)       (164)        (23)       (111)        528         194         217
Interest expense - net               (1,733)     (1,706)     (2,596)     (2,835)     (1,991)     (1,589)     (1,491)     (2,006)
                                  ---------   ---------    --------   ---------   ---------   ---------   ---------   ---------
(Loss) income before income
 taxes and cumulative effect
 of an accounting change             (1,786)     (1,701)     (9,614)    (19,564)    (41,950)    (19,865)      2,829       3,042
Income tax (benefit) expense           (112)        242         351         272       5,018      (7,332)       (143)        530
                                  ---------   ---------    --------   ---------   ---------   ---------   ---------   ---------
(Loss) income before cumulative
 effect of accounting change         (1,674)     (1,943)     (9,965)    (19,836)    (49,968)    (12,533)      2,972       2,512
Cumulative effect of accounting
 change/1/                               --          --          --      (5,346)         --          --          --          --
                                  ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------
Net (loss) income                 $  (1,674)  $  (1,943)  $  (9,965)  $ (25,182)  $ (46,968)  $ (12,533)  $   2,972   $   2,512
                                  =========   =========   =========   =========   =========   =========   =========   =========
(Loss) income before cumulative
 effect of accounting change per
 common share:
   Basic                          $    (.04)  $    (.05)  $    (.27)  $    (.54)  $   (1.28)  $    (.34)  $     .08   $     .08
   Diluted                             (.04)       (.05)       (.27)       (.54)      (1.28)       (.34)        .08         .08
Net (loss) income per common
 share:
   Basic                          $    (.04)  $    (.05)  $    (.27)  $    (.68)  $   (1.28)  $    (.34)  $     .08   $     .08
   Diluted                             (.04)       (.05)       (.27)       (.68)      (1.28)       (.34)        .08         .08
----------
<fn>
<f1>
Note 1 -- Change represents an adjustment to previously reported quarterly
results. See Note 1 to Consolidated Financial Statements herein.
</fn>
</TABLE>

                                       38

<PAGE>

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" since our initial public offering of common stock in August 2000.
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 2002:
   First Quarter ....................   $      15.00    $       6.38
   Second Quarter ...................   $      18.55    $       9.06
   Third Quarter ....................   $      16.48    $       9.94
   Fourth Quarter ...................   $      13.98    $       8.36
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
    (through June 24, 2003) ........   $       4.45    $       2.06

Holders

     As of June 25, 2003, our common stock was held by approximately 1,056
shareholders of record and was quoted at $4.44 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.

                                       39