<PAGE>



                                                                    Exhibit 13.1




                                  PEMSTAR Inc.

                               Annual Report 2002

                                    Part II


<PAGE>


FINANCIAL REPORT
PEMSTAR Inc.


                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
Selected Financial Data .................................................... 13
Management's Discussion and Analysis of Financial Condition and
  Results of Operations .................................................... 14
Consolidated Balance Sheets ................................................ 21
Consolidated Statements of Operations ...................................... 22
Consolidated Statements of Shareholders' Equity ............................ 23
Consolidated Statements of Cash Flows ...................................... 24
Notes to Consolidated Financial Statements ................................. 25
Report of Independent Auditors ............................................. 38
Quarterly Results of Operations ............................................ 39


                                       12

<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>
                                                                    Year Ended March 31,
(In thousands, except per share data)
                                                 2002         2001          2000         1999         1998
                                               ---------    ---------    ---------    ---------    ---------
<S>                                            <C>          <C>          <C>          <C>          <C>
Consolidated Statements of Operations Data:
Net sales                                      $ 657,493    $ 635,307    $ 393,842    $ 187,381    $ 165,049
Cost of goods sold                               627,457      581,278      363,974      172,219      147,962
                                               ---------    ---------    ---------    ---------    ---------
Gross profit                                      30,036       54,029       29,868       15,162       17,087

Selling, general and administrative expenses      53,351       37,366       21,576       10,955        8,328
Amortization                                       2,152        1,961        1,281          190           54
Goodwill impairment charge                        24,228           --           --           --           --
                                               ---------    ---------    ---------    ---------    ---------
Operating income (loss)                          (49,695)      14,702        7,011        4,017        8,705

Other income (expense) - net                         829          967          (74)        (438)         455
Interest expense                                  (7,077)      (7,550)      (3,588)        (640)        (746)
                                               ---------    ---------    ---------    ---------    ---------
Income (loss) before income taxes                (55,943)       8,119        3,349        2,939        8,414

Income tax expense (benefit)                      (1,926)       1,436          698        1,273        3,097
                                               ---------    ---------    ---------    ---------    ---------
Net income (loss)                              $ (54,017)   $   6,683    $   2,651    $   1,666    $   5,317
                                               =========    =========    =========    =========    =========

Net income (loss) per share:
      Basic                                    $   (1.56)   $     .29    $     .23    $     .15    $     .55
      Diluted                                      (1.56)         .25          .15          .12          .49
Weighted average number of common shares
  outstanding(1):
      Basic                                       34,717       23,013       11,503       10,897        9,653
      Diluted                                     34,717       26,943       17,167       14,143       10,874

Other Financial Data:
     Depreciation                              $  18,299    $  12,097    $   7,455    $   3,331    $   1,929
     Capital expenditures                         37,882       42,542       13,415        8,657        8,393

Supplemental Data:
EBITDA(2)                                      $  (4,187)   $  29,727    $  15,673    $   7,100    $  11,143
Net cash (used in) provided by operating
     activities                                     (307)     (54,219)     (20,225)          65       (1,374)
Net cash used in investing activities            (61,203)     (62,684)     (52,611)      (4,989)     (10,126)
Net cash provided by financing activities         67,164      119,512       74,734        2,556       14,661
------------------------------------------------------------------------------------------------------------
                                                                       As of March 31,
                                                 2002         2001          2000         1999         1998
                                               ---------    ---------    ---------    ---------    ---------
Consolidated Balance Sheet Data:
Unrestricted cash and cash equivalents         $  11,483    $   5,882    $   2,727    $     827    $   3,195
Working capital                                  137,335      131,851       49,649       12,783       12,873
Total assets                                     395,724      349,077      190,451       64,983       61,121
Long-term debt and capital lease obligations
  less current maturities                         74,462       84,873       55,181        7,090        6,340
Total shareholders' equity                       193,397      150,712       22,673       16,555       19,544
Book value per share                           $    5.27    $    5.33    $    1.64    $    1.47    $    1.88
Tangible book value per share(3)               $    4.32    $    4.30    $    0.14    $    1.13    $    1.88
------------------------------------------------------------------------------------------------------------
</TABLE>
(1)  For an explanation of the determination of the weighted average number of
     common shares outstanding used in computing net income per share, see Note
     1 of the notes to consolidated financial statements.
(2)  EBITDA means earnings before net interest expense, income taxes,
     depreciation and amortization. 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.
(3)  Tangible book value is total shareholder equity minus goodwill.

                                       13

<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 statements.

OVERVIEW

We are a provider of electronics manufacturing services to original equipment
manufacturers in the communications, computing, data storage, industrial,
medical equipment and defense markets. We provide these manufacturers with a
comprehensive range of engineering, manufacturing and fulfillment services on a
global basis through 19 facilities strategically located in North America, South
America, Asia and Europe. Our comprehensive service offerings 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 new 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:

     o    expanded geographic presence in established and emerging markets and
          strengthened our presence in target markets;
     o    enhanced product and service offerings while allowing us to offer
          cost-effective manufacturing and engineering capabilities;
     o    access to new customers; and
     o    specialized test and process equipment design, manufacturing and
          service capabilities.

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, represent an increasingly significant
proportion of net sales, accounting for 16.3%, 7.2% and 5.6% of our total net
sales in fiscal 2002, 2001 and 2000, respectively. The purchase of Pacific
Consultants in fiscal 2002 contributed to this growth. Manufacturing services
accounted for 83.7%, 92.8% and 94.4% of our total net sales in fiscal 2002,
2001, and 2000, 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

                                       14

<PAGE>

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.

Our operating results are also impacted by the level of capacity utilization of
our manufacturing facilities, non-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.
We have expanded production facilities, which became available in fiscal 2002,
and have incurred, substantial selling, general and administrative expenses to
develop a worldwide sales infrastructure and to implement industry-leading
customer and materials management information technology systems. As a result,
we have developed an infrastructure that will support substantially higher
levels of sales than our current net sales.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                        Year Ended March 31,
                                                     2002        2001      2000
                                                     -----       -----     -----
      <S>                                            <C>         <C>       <C>
      Net sales ..................................   100.0 %     100.0 %   100.0 %
      Cost of goods sold .........................    95.4 %      91.5 %    92.4 %
                                                     -----       -----     -----
      Gross profit ...............................     4.6 %       8.5 %     7.6 %

      Selling, general and administrative expenses     8.1 %       5.9 %     5.5 %
      Amortization ...............................      .3 %        .3 %      .3 %
      Goodwill impairment charge .................     3.7 %         - %       - %
                                                     -----       -----     -----
      Operating income (loss) ....................    (7.5)%       2.3 %     1.8 %

      Other income (expense) - net ...............      .1 %        .2 %     (.0)%
      Interest expense ...........................    (1.1)%      (1.2)%     (.9)%
                                                     -----       -----     -----
      Income (loss) before income taxes ..........    (8.5)%       1.3 %      .9 %

      Income tax expense (benefit) ...............     (.3)%        .2 %      .2 %
                                                     -----       -----     -----
      Net (loss) income ..........................    (8.2)%       1.1 %      .7 %
                                                     =====       =====     =====
</TABLE>

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 less sales 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.


                                       15

<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, was $0.8 million in fiscal 2002 compared
to other income 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 (benefit) expense - 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.

Fiscal Year Ended March 31, 2001 Compared to Fiscal Year Ended March 31, 2000

Net sales - Our net sales increased $241.5 million, or 61.3%, to $635.3 million
in fiscal 2001 from $393.8 million in fiscal 2000. This increase resulted from
both internal growth and the acquisition of Turtle Mountain. In fiscal 2001, our
internal growth, which excludes net sales increases from operations acquired in
the preceding 12 months, accounted for $203.7 million, or 84.3%, of total
year-to-year growth and was driven by new projects with existing and new
customers in North America and Asia. Our acquisition of Turtle Mountain
accounted for $37.8 million, or 15.7%, of total year-to-year growth.

Gross profit - Our gross profit increased $24.1 million to $54.0 million in
fiscal 2001 from $29.9 million in fiscal 2000. This increase in gross profit
reflects the year-to-year growth in net sales. This higher gross profit in
fiscal 2001 was primarily due to higher sales volumes from existing and new
customers in both domestic and certain international locations and the
acquisition of Turtle Mountain. Gross profit increased to 8.5% of net sales in
fiscal 2001 from 7.6% in fiscal 2000 due to increased utilization of our
facilities.

Selling, general and administrative expenses - Our selling, general and
administrative expenses increased $15.8 million to $37.4 million in fiscal 2001
from $21.6 million in fiscal 2000. As a percentage of net sales, our selling,
general and administrative expenses increased to 5.9% in fiscal 2001 from 5.5%
in fiscal 2000. These increases were primarily due to $5.6 million for
additional sales and administrative compensation, $4.2 million of overhead
expenses for existing and new facilities, $1.0 million of expenses from acquired
businesses and $1.0 million of additions to information technology
infrastructure.

Amortization - Amortization increased $0.7 million to $2.0 million in fiscal
2001 from $1.3 million in fiscal 2000, primarily as a result of amortization of
goodwill arising out of our acquisition of Turtle Mountain.


                                       16

<PAGE>

Other income (expense) - In fiscal 2001, we had other income of $1.0 million as
compared to other expense of $0.1 million in fiscal 2000. This change in other
income was primarily a result of currency gains in certain foreign locations and
gains from sales of fixed assets.

Interest expense - Our interest expense increased $4.0 million to $7.6 million
in fiscal 2001 from $3.6 million in fiscal 2000. This increase reflects
increased borrowings required to fund the Turtle Mountain acquisition and
opening of new facilities as well as increased working capital requirements
driven by growth in business with new and existing customers.

Income tax expense - In fiscal 2001, our effective tax rate decreased to 17.7%
from 20.8% in fiscal 2000. This decrease resulted from the mix of domestic
versus international income from operations and the benefit of our foreign sales
corporation. In general, our international operations are being taxed at a lower
rate than our domestic operations due to tax holidays and incentives.

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. Our principal uses of cash have been to
finance working capital, acquisitions, expanded operations, capital expenditures
and debt service requirements. We anticipate these uses will continue to be our
principal uses of cash in the future.

Net cash used in operating activities for fiscal 2002, 2001, and 2000 was $0.3
million, $54.2 million and $20.2 million, respectively. Net cash used in
operating activities decreased in fiscal 2002 primarily as a result of decreased
working capital needs to fund accounts receivable and inventory due to the
slower sales growth in fiscal 2002.

Net cash used in investing activities for fiscal 2002, 2001, and 2000 was $61.2
million, $62.7 million, and $52.6 million, respectively. In fiscal 2002, our
cash used in investing activities consisted of $24.4 million used primarily in
the acquisitions of US Assemblies New England, Inc., Pacific Consultants LLC,
and MTS Systems Chaska operations and $37.9 million used for capital
expenditures. Capital expenditures decreased in fiscal 2002 by $4.6 million as
compared to the prior fiscal year. Capital expenditures were principally used
for buildings, clean room facilities set-up, printed circuit board assembly
equipment, and information technology equipment and upgrades across several of
our facilities. We estimate capital expenditures in fiscal 2003 will decrease to
approximately $12 million.

Net cash provided by financing activities for fiscal 2002, 2001, and 2000 was
$67.1 million, $119.5 million, and $74.7 million respectively. Our principal
sources of cash from financing activities in fiscal 2002 included proceeds of
approximately $79.4 million from our secondary offering of common stock offset
by a net decrease in long-term borrowings of $5.9 million. Net cash provided by
financing activities for fiscal 2001 consisted primarily of proceeds from our
initial public offering and net increase in long-term borrowings.

As of March 31, 2002, we had unrestricted cash of $11.5 million and total
borrowings, including capitalized lease obligations, of approximately $99.3
million. Of these borrowings, we had approximately $61.7 million outstanding
under our IBM Credit Corporation credit facility and $0.2 million outstanding
our US Bank revolving credit facility. Effective March 31, 2002 IBM Credit
lowered the available borrowings under its facility from $80 million to $65
million and US Bank lowered the available borrowings under its facility from $30
million to $15 million. Borrowings under our two U.S. credit facilities are
limited to the lesser of the facility amount or the available borrowing base
calculated as a percentage of accounts receivable and inventory balances, which
limits and may restrict our ability to access the full amount of available
borrowings. We also have a $3.2 million credit facility serving our Netherlands
operations. As of March 31, 2002, we had $0.5 million outstanding under our
Netherlands credit facility. Each credit facility bears interest on outstanding
borrowings at variable interest rates, which as of March 31, 2002, were 6.4% for
the IBM facility, 5.8% for the US Bank facility, and 5.5% for the Netherlands
facility. As of March 31, 2002, we had an aggregate of $4.2 million of
additional borrowing availability under our credit facilities. Our IBM credit
facility matures in September 2003 and our US Bank credit facility matures in
June 2004. We have reached agreement on lending facilities, including a
revolving credit line and term note, for our Thailand operation with Thai
Farmers Bank for approximately $7 million to be immediately available from the
term note.

All of these credit facilities are secured by substantially all of our assets.
We are required to meet different financial covenants under these facilities,
including the ratio of net income to net sales, the ratio of our liabilities to
tangible


                                       17

<PAGE>

net worth, the ratio of our current assets to current liabilities, and fixed
charge coverage ratios specific to each agreement. One agreement tests the ratio
of our earnings before net interest expense, income taxes, depreciation and
amortization, or EBITDA, less unfinanced expenditures, to our principal and
interest payments. The other tests the ratio of EBITDA to the sum of our
principal and interest, capital expenditures and tax expense. On March 31, 2002,
we were in compliance with all covenants. On April 30, 2002, and May 31, 2002,
we were not in compliance with our tangible net worth covenant under our US Bank
credit facility, which if not cured or waived, could have resulted in an event
of default. We have obtained a one-time waiver of our compliance with this
tangible net worth ratio covenant from US Bank. Covenants on our U.S. credit
facilities have been reset to encompass current expectations of business trends
over the remainder of the commitments. Aggregate borrowing capacity and the
borrowing base calculation formulas of the arrangements remain unchanged from
previous amendments of such facilities.

In addition to our credit facilities, we had other debt obligations totaling
$36.9 million as of March 31, 2002. See Notes 7 and 10 to our consolidated
financial statements. At March 31, 2002, we were not in compliance with one
covenant in our capital lease facility with Bank of America. Waiver of this
non-compliance has been obtained, but will result in the $7.9 million balance at
March 31, 2002, being fully paid off in July 2002.

On May 3, 2002 we announced a definitive agreement with two institutional
investors for the private placement of up to $50 million of our 6 1/2 percent
convertible notes with attached warrants to purchase common stock. Forty million
dollars of convertible notes may be funded in a series of installments over the
next several months, subject to maintenance of a minimum conversion price. The
remaining $10 million of convertible notes may be purchased at the option of
investors at a fixed conversion price. The initial installment of $5 million was
funded on May 10, 2002, with a conversion price of $2.28, determined from market
prices following this funding date. This price is below the minimum conversion
price for additional funding amounts. There can be no guarantee we will obtain
the additional $45 million of convertible notes from the private placement.

Our continued viability depends on our ability to generate additional cash from
operations or obtain additional sources of funds for working capital. Our
ability to maintain sufficient liquidity depends, in part, on our achieving
anticipated revenue targets and intended expense reductions from our
restructuring activities. We believe that 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 renegotiated
covenants we have obtained under our revolving credit facilities, as well as the
new agreements we have reached to provide additional borrowing capacity, we have
sufficient cash flow to meet our needs for fiscal 2003. We may not achieve these
targets or realize the intended expense reductions. If our operating goals are
not met, we will be required to secure additional financing from lenders or sell
additional securities.

We 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.

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, 2002, we had total borrowings of
$63.0 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 $630,000
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 2002, sales denominated in Euros totaled $47.5 million, sales
denominated in Singapore dollars totaled $31.9 million and sales denominated in
Chinese renminbi totaled $73.5 million. Costs related to these sales are largely
denominated in their respective currencies, thereby


                                       18

<PAGE>

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, 2002 and 2001 levels relative to each of the currencies in which our
revenues and expenses are denominated would result in a decrease in operating
income of approximately $334,000 and $379,000, respectively, for the fiscal
years ended March 31, 2002 and 2001.

For the fiscal years ended March 31, 2002 and 2001, the amount we consider
permanently invested in foreign subsidiaries and translated into dollars using
the year end exchange rate was $44.8 million and $43.7 million, respectively,
and the potential loss in fair value resulting from a hypothetical 10% adverse
change in foreign currency exchange rate amounts to $4.1 million and $4.0,
respectively. Actual amounts may differ.

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

Impact of Inflation

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

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 141, " Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." Under these new standards
the pooling of interest method is eliminated, the purchase method of accounting
on all business combinations completed after June 30, 2001 is required and
purchased goodwill is no longer amortized over its useful life. Rather, goodwill
will be subject to a periodic impairment test based on its fair value, with a
transitional impairment test, required to be completed by the end of the second
quarter of fiscal 2003. Any impairment charge resulting from the transitional
impairment test will be reflected as a cumulative effect of a change in
accounting principle. SFAS No. 142 was adopted by us as of April 1, 2002. Prior
to adopting this standard, we evaluated our 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, we recorded goodwill impairment
of $24.2 million in fiscal 2002. We currently evaluating whether any additional
write-downs in goodwill may be required as a result of implementing the new
accounting standard. Application of these standards had or will have the
following impact on our consolidated financial statements:

     o    Goodwill recorded on acquisitions subsequent to June 30, 2001 of $17.3
          million in connection with Pacific Consultants LLC and $1.3 million in
          connection with MTS Systems Corporation is not being amortized.

     o    Application of the non-amortization provisions of goodwill is expected
          to result in an annual increase of earnings of approximately $0.8
          million in connection with acquisitions consummated prior to June 30,
          2001 for which amortization had previously been recorded.

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 is not expected to have a material
impact on our consolidated results of operations, financial position or cash
flows.


                                       19

<PAGE>

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 - We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

Inventory - We value our inventory on a first-in, first-out basis at the lower
of cost or estimated market value. We regularly review inventory quantities on
hand and record a provision for excess and obsolete inventory based primarily on
our estimate forecast of product demand, production requirements and our ability
to sell back excess inventory requirements to our customers. If assumptions
change, additions changes, additional write-downs may be required.

Goodwill and Intangible Impairment - 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. Effective
April, 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets", and we will analyze our
goodwill for impairment issues in fiscal 2003. We will be required to perform
this analysis on an annual basis going forward. During the year ended March 31,
2002, we recorded $24.2 million in impairment losses related to goodwill and
other intangible assets.

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, 2002, we recorded $27.0 million of valuation allowances
related to our net deferred tax assets as of March 31, 2002.


                                       20

<PAGE>

CONSOLIDATED BALANCE SHEETS
PEMSTAR Inc.

<TABLE>
<CAPTION>
(In thousands, except per share data)                              March 31,    March 31,
                                                                     2002         2001
                                                                   ---------    ---------
<S>                                                                <C>          <C>
Assets
Current assets:
     Cash and cash equivalents                                     $  11,483    $   5,882
     Restricted cash                                                   1,423          459
     Accounts receivable, net                                        122,752      106,510
     Recoverable income taxes                                          3,873           --
     Inventories, net                                                 92,929      113,421
     Unbilled services                                                16,356        9,734
     Deferred income taxes                                                45        1,322
     Prepaid expenses and other                                        8,507        5,838
                                                                   ---------    ---------
Total current assets                                                 257,368      243,166

Property, plant and equipment, net                                    99,108       73,806

Goodwill, net                                                         34,678       29,164
Deferred income taxes                                                  1,111          893
Other assets                                                           3,459        2,048
                                                                   ---------    ---------

Total assets                                                       $ 395,724    $ 349,077
                                                                   =========    =========

Liabilities and shareholders' equity Current liabilities:
     Bank overdrafts                                               $      --    $  13,443
     Accounts payable                                                 79,410       70,791
     Accrued expenses and other                                       15,738       12,762
     Income taxes payable                                                 21        1,197
     Current maturities of long-term debt                             13,999        9,041
     Current maturities of capital lease obligations                  10,865        4,081
                                                                   ---------    ---------
Total current liabilities                                            120,033      111,315

Long-term debt, less current maturities                               71,340       75,136
Capital lease obligations, less current maturities                     3,122        9,737
Other liabilities and deferred credits                                 7,832        2,177

Shareholders' equity:
    Common stock, par value $0.01, 150,000 shares authorized;
       shares issued and outstanding; 2002 - 36,701 shares;
       2001 - 28,294 shares                                              367          283
    Additional paid-in capital                                       232,233      137,139
    Accumulated other comprehensive loss                              (2,131)      (2,299)
    Retained (deficit) earnings                                      (36,164)      17,853
    Loans to shareholders                                               (908)      (2,264)
                                                                   ---------    ---------
         Total shareholders' equity                                  193,397      150,712
                                                                   ---------    ---------

Total liabilities and shareholders' equity                         $ 395,724    $ 349,077
                                                                   =========    =========
</TABLE>

See notes to consolidated financial statements.


                                       21

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
PEMSTAR Inc.

<TABLE>
<CAPTION>
(In thousands, except per share data)                Year Ended March 31,
                                                  2002        2001         2000
                                               ---------    ---------    ---------
<S>                                            <C>          <C>          <C>
Net sales                                      $ 657,493    $ 635,307    $ 393,842
Costs of goods sold                              627,457      581,278      363,974
                                               ---------    ---------    ---------
Gross profit                                      30,036       54,029       29,868

Selling, general and administrative expenses      53,351       37,366       21,576
Amortization                                       2,152        1,961        1,281
Goodwill impairment charge                        24,228           --           --
                                               ---------    ---------    ---------
Operating (loss) income                          (49,695)      14,702        7,011

Other income (expense) - net                         829          967          (74)
Interest expense                                  (7,077)      (7,550)      (3,588)
                                               ---------    ---------    ---------
(Loss) income before income taxes                (55,943)       8,119        3,349

Income tax (benefit) expense                      (1,926)       1,436          698
                                               ---------    ---------    ---------
Net (loss) income                              $ (54,017)   $   6,683    $   2,651
                                               =========    =========    =========

Net (loss) income per common share:
     Basic                                     $   (1.56)   $    0.29    $    0.23
     Diluted                                       (1.56)        0.25         0.15

Shares used in computing net (loss) income
   per common share:
     Basic                                        34,717       23,013       11,503
     Diluted                                      34,717       26,943       17,167
</TABLE>

See notes to consolidated financial statements.


                                       22

<PAGE>

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PEMSTAR Inc.

<TABLE>
<CAPTION>
(In thousands)                                                    Accumulated
                                   Common Stock       Additional    Other       Retained
                                 -------------------    Paid in  Comprehensive  Earnings     Loans to
                                 Shares      Amount     Capital      Loss       (Deficit)  Shareholders     Total
                                 ------    ---------  ---------- -------------  ---------  ------------   ---------
<S>                              <C>       <C>         <C>         <C>          <C>          <C>          <C>
Balance, March 31, 1999          11,270    $     113   $   7,949   $     (32)   $   8,525    $      --    $  16,555
Issuance of common stock in
    employee stock programs       1,565           15       2,410          --           --       (1,855)         570
Issuance of common stock            985           10       4,913          --           --       (1,403)       3,520
Repurchase of common stock           (1)          --          --          --           (6)          --           (6)
Comprehensive income:
    Net income                       --           --          --          --        2,651           --        2,651
    Foreign currency
      translation adjustment         --           --          --        (740)          --           --         (740)
                                                                                                          ---------
    Comprehensive income             --           --          --          --           --           --        1,911
Other                                --           --         123          --           --           --          123
                                 ------    ---------   ---------   ---------    ---------    ---------    ---------
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       1,437          --           --         (200)       1,241
Payments on loans to
    shareholders                     --           --          --          --           --        1,194        1,194
Issuance of common stock          9,316           94      93,805          --           --           --       93,899
Conversion of redeemable 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
                                 ======    =========   =========   =========    =========    =========    =========
</TABLE>

See notes to consolidated financial statements.


                                       23

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
PEMSTAR Inc.

<TABLE>
<CAPTION>
                                                                         Year ended March 31,
(In thousands)                                                     2002          2001        2000
                                                                 ---------    ---------    ---------
<S>                                                              <C>          <C>          <C>
Cash flows from operating activities:
     Net (loss) income                                           $ (54,017)   $   6,683    $   2,651
     Adjustments to reconcile net (loss) income to net
          cash used in operating activities:
          Depreciation                                              18,299       12,097        7,455
          Amortization                                               3,085        1,961        1,281
          Goodwill impairment charge                                24,228           --           --
          Deferred income taxes                                      1,059         (146)      (2,179)
          Gain on sale of property, plant and equipment                (49)        (417)         (42)
          Issuance of stock options for services                        --           --          150
          Other deferred credits                                      (356)        (292)        (571)
          Change in operating assets and liabilities:
               Accounts receivable                                 (12,596)     (41,563)     (23,828)
               Inventories                                          24,986      (43,222)     (22,962)
               Recoverable income taxes                             (3,873)          --        1,889
               Unbilled services                                    (6,622)      (7,804)         698
               Prepaid expenses and other                           (2,318)      (4,816)      (1,041)
               Accounts payable                                      7,554       21,149       15,404
               Accrued expenses and other                              313        2,151          870
                                                                 ---------    ---------    ---------
                    Net cash used in operating activities             (307)     (54,219)     (20,225)
Cash flows used in investing activities:
     (Increase) decrease in restricted cash                         (1,090)          10          155
     Business acquisitions, net of cash acquired                   (24,361)     (21,225)     (39,473)
     Proceeds from sale of property, plant and equipment             2,178        1,073          122
     Purchases of property, plant and equipment                    (37,930)     (42,542)     (13,415)
                                                                 ---------    ---------    ---------
                    Net cash used in investing activities          (61,203)     (62,684)     (52,611)
Cash flows from financing activities:
     Bank overdrafts                                               (13,504)       3,242        8,569
     Proceeds from common stock sales                               79,384       93,899           --
     Proceeds from employee stock sales                              5,686        1,241          802
     Payments on loans to shareholders                               1,464        1,194           --
     Repurchase of common stock                                         --           --           (6)
     Proceeds from private placement offering                           --           --       18,000
     Proceeds from grants                                              550           --           --
     Proceeds from sale and leaseback                                  911        4,060           --
     Principal payments on long-term borrowings                    (60,072)     (94,457)      (4,645)
     Proceeds from long-term borrowings                             54,156      110,968       52,892
     Debt placement costs                                           (1,411)        (635)        (878)
                                                                 ---------    ---------    ---------
                    Net cash provided by financing activities       67,164      119,512       74,734

Effect of exchange rate changes on cash                                (53)         546            2
                                                                 ---------    ---------    ---------
                    Net increase in cash and cash equivalents        5,601        3,155        1,900
Cash and cash equivalents:
     Beginning of year                                               5,882        2,727          827
                                                                 ---------    ---------    ---------
     End of year                                                 $  11,483    $   5,882    $   2,727
                                                                 =========    =========    =========
</TABLE>

See notes to consolidated financial statements.

                                       24

<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, 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 to 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 - Goodwill associated with acquisitions prior to June 30, 2001 is being
amortized over 20 years using the straight-line method. In accordance with
Statements of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets", goodwill acquired after June 30, 2001 is not amortized but
is tested annually for impairment. In accordance with SFAS No.142, amortization
of goodwill associated with acquisitions prior to June 30, 2001 will be
discontinued after March 31, 2002. After March 31, 2002 this goodwill will be
tested annually for impairment. Amortization of goodwill in 2002 and 2001 was
$2,152 and $1,392, respectively.

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 an impairment exists, the Company measures the
impairment utilizing discounted cash flows.


                                       25

<PAGE>

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, 2002 and 2001.

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

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

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

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

Income taxes - The Company accounts for income taxes following the provisions of
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires that deferred
income taxes be recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end, based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable 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 $1,015, $489 and $410 for the years ended March 31, 2002,
2001, and 2000, 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.

Stock-based compensation - The Company has adopted the pro-forma disclosure
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.

Net income (loss) per common share - The Company follows the provisions of SFAS
No. 128, "Earnings Per Share." Basic net income (loss) per share is computed
based upon the weighted average number of common shares issued and outstanding
during each year. Diluted net income (loss) per share amounts assume conversion,
exercise or issuance of all potential common stock instruments (stock options as
discussed in Note 14 and convertible


                                       26

<PAGE>

preferred stock as discussed in Note 12). The following table reflects the
components of common shares outstanding in accordance with SFAS No. 128:

                                                          Year ended March 31,
                                                         2002     2001     2000
                                                        ------   ------   ------
   Weighted average common shares outstanding - basic   34,717   23,013   11,503
   Effect of dilutive securities:
        Preferred stock conversion ..................       --    1,677    4,144
        Stock options ...............................       --    2,253    1,520
                                                        ------   ------   ------
   Shares used in computing net income
        (loss) per common share - diluted ...........   34,717   26,943   17,167
                                                        ======   ======   ======

New Accounting Pronouncements - In July 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." Under these new standards the pooling of
interest method is eliminated, the purchase method of accounting on all business
combinations completed after June 30, 2001 is required and purchased goodwill is
no longer amortized over its useful life. Rather, goodwill will be subject to a
periodic impairment test based on its fair value. Any impairment charge
resulting from the transitional impairment test will be reflected as a
cumulative effect of a change in accounting principle. SFAS No. 142 was adopted
by the Company as of April 1, 2002. Prior to adopting this standard, 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 in
fiscal 2002. The Company is currently evaluating whether any additional
write-downs in goodwill may be required as a result of implementing the new
accounting standard. Application of these standards had or will have the
following impact on the Company's consolidated financial statements:

     o    Goodwill recorded on acquisitions subsequent to June 30, 2001 of
          $17,356 in connection with Pacific Consultants LLC and $1,257 in
          connection with MTS Systems Corporation is not being amortized.

     o    Application of the non-amortization provisions of goodwill is expected
          to result in an annual increase of earnings of approximately $840 in
          connection with acquisitions consummated prior to June 30, 2001 for
          which amortization had previously been recorded.

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 adoption
of this pronouncement is not expected to have a 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 income or shareholders' equity.

Note 2.  Acquisitions

In June 1999, the Company acquired Quadrus, Inc., a division of Bell
Microproducts, Inc. Quadrus is a provider of electronic manufacturing services
to original equipment manufacturers. The purchase price of $34,966 was funded
through the issuance of Series B preferred stock in the aggregate amount of
$18,000 to certain of the Company's existing investors, with the remaining
amount funded by borrowing 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 $12,346 had been recorded as goodwill
prior to the remaining unamortized balance of $10,603 being written off in March
2002 as a result of the Company's analysis of impairment.


                                       27

<PAGE>

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 is being
amortized over an estimated useful life of 20 years. 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 following the close.
The transaction was accounted for as a purchase. The excess of the purchase
price over the estimated fair value of net assets acquired of $17,356 was
recorded as goodwill, which has not been amortized in accordance with SFAS No.
142.

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, 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, 2001 and 2000 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.


                                       28

<PAGE>

Unaudited Pro Forma Consolidated Statements of Operations

                                                       Year Ended March 31,
                                                    2002       2001       2000
                                                  --------   --------   --------
         Net sales .............................. $674,016   $650,904   $436,891
         Net income (loss) ......................  (53,767)     6,944        218

         Net income (loss) per share - basic .... $  (1.55)  $   0.30   $   0.02
         Net income (loss) per share - diluted ..    (1.55)      0.26       0.01

Note 3.  Accounts Receivable

Accounts receivable consists of the following:

                                                               March 31,
                                                            2002        2001
                                                         ---------    ---------
     Accounts receivable .............................   $ 131,476    $ 107,744
     Less allowance for doubtful accounts ............      (8,724)      (1,234)
                                                         ---------    ---------
                                                         $ 122,752    $ 106,510
                                                         =========    =========

Note 4.  Inventories

Inventories consist of the following:
                                                                March 31,
                                                            2002         2001
                                                         ---------    ---------
     Raw materials ...................................   $  85,587    $  94,971
     Work in process .................................       8,763       11,042
     Finished goods ..................................       5,255        9,562
     Less allowance for inventory obsolescence .......      (6,676)      (2,154)
                                                         ---------    ---------
                                                         $  92,929    $ 113,421
                                                         =========    =========

Note 5.  Property, Plant and Equipment, Net

Property, plant and equipment consists of the following:

                                                               March 31,
                                                           2002         2001
                                                         ---------    ---------
     Land ............................................   $   3,027    $   1,812
     Buildings and improvements ......................      27,362       15,860
     Machinery and equipment .........................      73,046       54,150
     Computer hardware and software ..................      24,091       12,360
     Construction in progress ........................      10,113       11,538
                                                         ---------    ---------
                                                           137,639       95,720
     Less accumulated depreciation ...................     (38,531)     (21,914)
                                                         ---------    ---------
                                                         $  99,108    $  73,806
                                                         =========    =========

Note 6.  Goodwill, Net

Goodwill consists of the following:
                                                               March 31,
                                                            2002         2001
                                                         ---------    ---------
     Goodwill .........................................  $  36,538    $  31,570
     Less accumulated amortization ....................     (1,860)      (2,406)
                                                         ---------    ---------
                                                         $  34,678    $  29,164
                                                         =========    =========

                                       29

<PAGE>

Note 7.  Financing Arrangements

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                     March 31,
                                                                                  2002        2001
                                                                                --------    --------
<S>                                                                             <C>         <C>
Domestic revolving credit facilities, interest at prime plus a margin ranging
    up to 163 basis points or LIBOR plus a margin ranging from 175 to 350
    basis points (6.39% at March 31, 2002 and 8.91% at March 31, 2001) ......   $ 61,947    $ 61,200
Foreign revolving credit facilities, interest rates ranging from 5.36%
    to 5.85% or LIBOR plus a margin of 150 basis points (5.5% at March
    31, 2002 and 7.0% at March 31, 2001) ....................................      3,283       1,597
Note payable, paid in full during fiscal 2002 ...............................         --       8,500
Notes payable bearing interest ranging from 6.8% to 10.8%, due in
    monthly payments of principal and interest of $145 through September 2003
    and $90 through December 2006, with a balloon payment of $790 due October
    2003. The Company has an option to extend the balloon payment for 24
    months. The notes are secured by equipment ..............................      7,662       3,855
Foreign notes payable, interest 2.8% due June 2002 ..........................      6,894       2,742
Bonds payable to the City of Rochester with variable interest rates
    ranging from 1.85% to 2.10%, interest due monthly. Annual
    principal payments ranging from $155 to $575 are due through June 2018 ..      4,445       4,990
Other .......................................................................      1,108       1,293
                                                                                --------    --------
                                                                                  85,339      84,177
Less current maturities .....................................................    (13,999)     (9,041)
                                                                                --------    --------
                                                                                $ 71,340    $ 75,136
                                                                                ========    ========
</TABLE>

Payment of the bonds is secured by irrevocable letters of credit in favor of the
trustee in the amount of $5,081 expiring August 2003. The Company is required to
maintain letters of credit sufficient to pay all outstanding principal and
interest under the bonds. 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 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
reported as restricted cash.

Aggregate maturities of long-term debt are as follows:

       Year ending March 31:
             2003 ..........................................   $13,999
             2004 ..........................................    63,931
             2005 ..........................................     1,421
             2006 ..........................................     1,287
             2007 ..........................................     1,166
             Thereafter ....................................     3,535
                                                               -------
                                                               $85,339
                                                               =======

The Company has 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 on
Revolver A - June 2003 and Revolver B - June 2004. Advances under the Revolving
Credit Facilities, which are limited to the lesser of the facility amount or the
available borrowing base calculated as a percentage of eligible accounts
receivable and inventory balances, bear interest at prime or LIBOR plus a margin
depending on the ratio of consolidated senior debt to EBITDA. The Company is
obligated to pay a monthly fee of

                                       30

<PAGE>

0.25% to 0.375% on the unused portion of the facilities. The Revolving Credit
Facilities are collateralized by substantially all domestic non-real estate
assets of the Company. The lender for Revolver A is also a major customer of the
Company. In addition, the Company has letters of credit totaling $8,907
outstanding as of March 31, 2002. Restricted cash balances of $946 relate to
certain letters of credit outstanding at March 31, 2002. The financing
arrangements are subject to certain covenants that require the Company to
maintain certain financial ratios, including minimum liquidity and debt
coverage, and limit investments and cash distributions.

The Company also has separate available lines of credit in certain foreign
locations totaling $8,090, due at various dates through March 2003. Advances
under these lines of credit bear interest at fixed and variable rates ranging
from 2.8% to 5.9% at March 31, 2002. The lines of credit are secured by certain
foreign inventory, receivables, fixed assets and corporate guarantee of the
Company, in one instance.

Notes payable totaling $869 are subordinated to the Revolving Credit Facilities.
These notes require the maintenance of restricted cash balances shown as $477
and $459 in restricted cash and $198 and $240 in other assets at March 31, 2002
and 2001, respectively.

Note 8.  Other Income (Expense) - Net

The other income and expense consists of the following:

                                                    Year Ended March 31,
                                                   2002    2001     2000
                                                   -----   -----    -----

Foreign currency gains .........................   $ 691   $ 507    $ 243
Minority interest in net (income)/loss of
  consolidated subsidiaries.....................      --      84     (191)
Net other income (expense) .....................     138     376     (126)
                                                   -----   -----    -----
                                                   $ 829   $ 967    $ (74)
                                                   =====   =====    =====

Note 9.  Fair Value of Financial Instruments

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

Note 10.  Commitments and Contingencies

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

                                                       Capital      Operating
      Year Ending March 31,                            Leases        Leases
                                                       -------      --------
          2003 .....................................   $12,219      $ 12,628
          2004 .....................................     2,668        10,077
          2005 .....................................       673         7,874
          2006 .....................................         -         7,055
          2007 .....................................         -         4,226
          Thereafter ...............................         -        10,077
                                                       -------      --------
      Total minimum lease payments .................    15,560      $ 51,937
      Less amount representing interest ............    (1,573)     ========
                                                       -------
      Present value of minimum lease payment .......    13,987
      Less current portion .........................   (10,865)
                                                       -------
                                                       $ 3,122
                                                       =======

                                       31

<PAGE>

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

                                                              March 31,
                                                           2002        2001
                                                         --------    --------
     Machinery and equipment .........................   $ 14,154    $ 12,294
     Furniture and fixtures ..........................        649         645
     Computer hardware and software ..................      8,328       5,049
                                                         --------    --------
                                                           23,131      17,988
     Less accumulated depreciation ...................     (6,085)     (3,479)
                                                         --------    --------
                                                         $ 17,046    $ 14,509
                                                         ========    ========


Total rent expense recognized under operating leases for the years ended March
31, 2002, 2001 and 2000 totaled $10,039, $5,175 and $3,027, respectively.

    Note 11.  Income Taxes

Income (loss) before income taxes consisted of the following:

                                                    Year ended March 31,
                                                2002        2001       2000
                                              --------    --------   --------
     Domestic .............................   $(57,885)   $  3,403   $  2,485
     Foreign ..............................      1,942       4,716        864
                                              --------    --------   --------
                                              $(55,943)   $  8,119   $  3,349
                                              ========    ========   ========

The provision for income taxes consisted of the following:

                                                    Year ended March 31,
                                                 2002       2001       2002
                                                -------    -------    -------
     Current:
           Domestic ........................    $(5,638)   $ 2,500    $ 2,378
           Foreign .........................      2,653       (918)       499
                                                -------    -------    -------
                                                 (2,985)     1,582      2,877
     Deferred:
           Domestic ........................      2,418     (1,247)    (1,678)
           Foreign .........................     (1,359)     1,101       (501)
                                                -------    -------    -------
                                                  1,059       (146)    (2,179)
                                                -------    -------    -------
                                                $(1,926)   $ 1,436    $   698
                                                =======    =======    =======

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

                                                    Year ended March 31,
                                                2002        2001        2000
                                              --------    --------    --------
     Computed  "expected" tax rate .........  $(19,021)   $  2,761    $  1,139
     Increase (decrease) in income taxes
        resulting from:
           State taxes, net of credits and
              federal income tax benefit ...    (1,608)        105        (289)
           Benefit of foreign sales/
              extraterritorial income
              exclusion ....................      (291)       (244)         --
           Foreign taxes ...................    (7,896)     (1,284)       (296)
           Valuation allowance .............    26,962          --          --
           Other ...........................       (72)         98         144
                                              --------    --------    --------
                                              $ (1,926)   $  1,436    $    698
                                              ========    ========    ========

                                       32

<PAGE>

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

                                                                 March 31,
                                                             2002        2001
                                                           --------    --------
     Deferred tax assets:
           Allowance for doubtful accounts .............   $  2,694    $    456
           Allowance for inventory obsolescence ........      1,667         700
           Goodwill ....................................      7,914          --
           Deferred revenue ............................        886         730
           Domestic net operating losses ...............      5,476          --
           State tax credits ...........................      1,142         866
           Foreign expenses for book purposes ..........      1,539
           Foreign net operating losses ................     11,025       1,002
           Other .......................................        633         557
                                                           --------    --------
        Total deferred tax assets ......................     32,976       4,311
     Deferred tax liabilities:
           Accelerated depreciation ....................     (1,477)       (300)
           Foreign expenses accelerated for tax purposes     (2,878)     (1,611)
           Other .......................................       (503)       (185)
                                                           --------    --------
        Total deferred tax liabilities .................     (4,858)     (2,096)
     Valuation allowance:
           Domestic ....................................    (18,432)         --
           Foreign .....................................     (8,530)         --
                                                           --------    --------
        Total valuation allowance ......................    (26,962)         --
                                                           --------    --------

     Net deferred tax assets ...........................   $  1,156    $  2,215
                                                           ========    ========

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 $22,451 of domestic net operating loss
carryforwards, which will expire in 2022. Of this $22,451 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 $8,123 of foreign net operating loss carryforwards that have an
unlimited carryforward period, and foreign net operating loss carryforwards of
$25,141 that will expire from 2011 to 2012. The state tax credit carryforwards
of $1,730 expire at varying dates through 2016. The foreign tax expense in China
was decreased by $231 ($0.02 and $0.01 per share on a basic and diluted basis,
respectively) in fiscal 2000 by $480 ($.02 and $.02 per share on a basic and
diluted basis, respectively) in fiscal 2001 and by $323 ($.01 and $.01 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, 2002. The foreign tax expense in Singapore was
decreased by $774 ($.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.

Note 12.  Mandatory 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 13.  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,
                                                    2002       2001       2000
                                                  --------   --------   --------
     Net sales:
         Americas ............................    $478,965   $529,907   $318,616
         Asia ................................     128,602     72,982     44,314
         Europe ..............................      49,926     32,418     30,912
                                                  --------   --------   --------
                                                  $657,493   $635,307   $393,842
                                                  ========   ========   ========
     Long-lived assets:
         Americas ............................    $ 94,590   $ 67,018   $ 42,463
         Asia ................................      40,757     33,860     10,421
         Europe ..............................       3,009      5,033      4,124
                                                  --------   --------   --------
                                                  $138,356   $105,911   $ 57,008
                                                  ========   ========   ========

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,
                                             2002           2001           2000
                                             ----           ----           ----
     Customer A ..........................   24.8%           23.0%         37.0%
     Customer B ..........................   14.0            16.0          15.0
     Customer C ..........................    5.9            11.0           4.8

As of March 31, 2002 and 2001, receivables from these customers represented 38%
and 29% of total accounts receivable, respectively.

Note 14.  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 498 shares of common stock available for grant or sale to board
members and employees under incentive stock option and purchase plans approved
by shareholders. Current exercisable options are 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>

Grants under stock option plans are accounted for using APB No. 25 and related
interpretations. 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 income would have been reduced to the
pro forma amounts reported below.

                                                         Year Ended March 31,
                                                   2002        2001     2000
                                                 --------    -------   -------
      Net income (loss):
          As reported .........................  $(54,017)   $ 6,683   $ 2,651
          Pro forma ...........................   (56,836)     4,207    (4,499)
      Basic earnings (loss) per share:
          As reported .........................  $  (1.56)   $  0.29   $  0.23
          Pro forma ...........................     (1.64)      0.18     (0.39)
      Diluted earnings (loss) per share:
          As reported .........................  $  (1.56)   $  0.25   $  0.15
          Pro forma ...........................     (1.64)      0.16     (0.39)

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
5.42%, 5.70% and 6.13% for 2002, 2001 and 2000, respectively, volatility factor
of expected market price of our common stock of 0.8, 1.4 and 0.5 for 2002, 2001
and 2000, respectively, and expected lives of ten years.

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

<TABLE>
<CAPTION>
                                                                     Year Ended March 31,
                                                     2002                2001              2000
                                               -----------------  -----------------  -----------------
                                                        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 .......   4,419   $ 5.93    3,845    $ 3.91     2,173    $1.40
       Granted ..............................     704    11.30    1,189     11.44     3,269     4.39
       Exercised/forfeited ..................  (1,658)    5.05     (615)     3.96    (1,597)    1.47
                                               ------            ------              ------
       Outstanding, end of year .............   3,465     7.44    4,419      5.93     3,845     3.91
                                               ======            ======              ======
       Exercisable, end of year .............   2,074     5.49    3,081      5.08     3,029     4.18
       Weighted average fair value per
         share of options granted during
         the year ...........................  $ 9.38        -   $10.92         -    $ 2.35        -
</TABLE>

At March 31, 2002, the options outstanding have average remaining contractual
lives and exercise prices as follows:

          Shares       Average Contractual Life        Exercise Price
          ------       ------------------------        --------------
          1,971               7.1 years                 $0.33 - $5.00
            371               9.3 years                 $5.01 - 10.99
            745               8.3 years                   $11.00
            378               9.2 years                $11.01 - 23.31

As of March 31, 2002 and 2001, the Company had loans outstanding to shareholders
in connection with the exercise of stock options for the purchase of 176 shares
and 378, respectively. Loans totaling $200, $108 and $600 are due in December,
2002, November, 2003 and March, 2005, respectively, and bear interest at 2.71%
to 6.01%. The loans are secured by the shares of common stock purchased for full
recourse against the respective shareholder's personal assets.

                                       35

<PAGE>

Note 15.  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/or provide
employer contributions based on the Company's performance and other factors.
Employer contributions for the years ended March 31, 2002, 2001 and 2000
totaled, $1,366, $1,063 and $413, respectively.

The Company sponsors a defined benefit retirement plan program at its
Netherlands facility. As of March 31, 2002, the fair value of the plan assets
and projected benefit obligations were $3,773 and $3,511, respectively. Expenses
associated with this plan totaled $122 and $295 for the years ended March 31,
2002 and 2001, respectively.

Employee Stock Purchase Plan

During 2001, the Company established an employee stock discount purchase plan
that provides for the sale of up to 500 shares 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, 2002 and
2001, 135 and 36 shares of common stock were issued to employees pursuant to
this plan. The weighted average fair value of shares sold in 2002 and 2001, was
$10.06 and $7.85.

    Note 16.  Supplemental Cash Flow Information

<TABLE>
<CAPTION>
                                                                                    Year Ended March 31,
                                                                                   2002      2001      2000
                                                                                  -------   -------   -------
     <S>                                                                          <C>       <C>       <C>
     Supplemental disclosures for cash flow information:
        Cash payments for:
            Interest ..........................................................   $ 7,234   $ 7,344   $ 3,555
            Income taxes ......................................................     1,812     1,797     1,197
     Supplemental schedule of non-cash investing and financing activities:
        Property and equipment acquired through capital lease agreements ......   $ 5,230   $11,166   $ 2,514
        Purchase of minority interest in consolidated subsidiary through
            issuance of common stock (acquired 30% and 25% interests by issuing
            783 and 653 shares in August, 1998 and January, 2000,
            respectively) .....................................................        --        --     3,263
        Common stock issued to acquire Pacific Consultants LLC ................    10,000        --        --
</TABLE>

Note 17.  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 $49,700 for the year
ended March 31, 2002, which included approximately $24,228 as a result of a
goodwill impairment charge in the fourth quarter. The Company continues to
evaluate its operations and has implemented certain restructuring activities
prior to and subsequent to its fiscal year end to improve its operating results.
Although the operating loss for fiscal 2002 was not unexpected given the
downturn in the economy after September 11, 2001 and the resultant impact on
several large customers of the Company in certain industry sectors, the
Company's ability to continue to fund it operations and to grow the business
depends on its ability to generate additional cash from operations or obtain
additional sources of funds for working capital.

The domestic revolving credit facilities require the Company to maintain certain
financial covenants for which the Company was not in compliance at December 31,
2001. The Company was successful in obtaining waivers for the violations;
however, there is no assurance that such waivers, if needed, will be available
from the Company's lenders in the future. The Company, subsequent to year end,
has renegotiated its financial covenants pertaining to the revolving credit
facilities with the lenders in conjunction with its fiscal 2003 operating plan.
The Company's operating plan includes the continued implementation of its
restructuring program initiated toward the end of its

                                       36

<PAGE>

2002 fiscal year to further improve the operating performance as well as
initiatives to reduce specific cash expenditures related to general and
administrative expenses.

The Company is dependent upon achieving certain revenue and expense targets in
their fiscal 2003 operating plan. The Company expects to meet its financial
projections for the 2003 fiscal year and, if necessary, to continue 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.

Subsequent to year end, the Company entered in a Securities Purchase Agreement
(the Agreement) with two investors under which the Company agreed to sell, in a
private placement, up to $50,000 of 6 1/2% convertible senior subordinated notes
together with related seven year warrants to purchase shares of the Company's
common stock. Each issuance of notes will include warrants which provide for 30%
warrant coverage with an exercise price equal to the applicable conversion price
of the respective note issuance. In May 2002, the Company advanced $5,000 of
notes under the terms of the Agreement with a conversion price of $2.28 and
related seven year warrants to purchase 1,000 shares of the Company's common
stock at an exercise price of $2.00 per share. Management was also successful in
obtaining a credit facility with a foreign bank for borrowings of up to
approximately $6,200 in June 2002.

In addition, in June 2002 the Company reached agreement with a customer to
recover approximately $10,400 for inventories purchased by the Company under
certain customer purchase orders for expected production requirements, which
were subsequently revised or cancelled resulting in excess inventory quantities.
Under terms of the agreement, the Company will receive payment for these
inventories in July 2002.

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 as well as successful efforts to generate new
customers in various industry sectors, the renegotiated covenants it has
obtained under its revolving credit facilities, as well as the new agreements it
has reached to provide additional borrowing capacity, it will meet its fiscal
2003 financial plan. Management further believes that the reduction in expense
will not have a material adverse impact on its revenue growth.


                                       37

<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, 2002 and 2001, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended March 31, 2002. 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 use 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, 2002 and 2001 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended March 31, 2002,
in conformity with accounting principles generally accepted in the United
States.

                                       /s/ Ernst & Young LLP

                                       Ernst & Young LLP

Minneapolis, Minnesota
May 13, 2002, except for Note 17,
    as to which the date is June 28, 2002


                                       38

<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 2002 and 2001. 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)                                2002       2001        2001        2001        2001        2000         2000        2000
<S>                                <C>         <C>        <C>         <C>         <C>         <C>          <C>         <C>
Net Sales ......................   $145,686    $171,223   $173,380    $167,204    $184,435    $184,366     $143,902    $122,604
Cost of goods sold .............    147,147     170,202    158,343     151,765     167,728     168,319      132,535     112,696
                                   --------    --------   --------    --------    --------    --------     --------    --------
Gross profit ...................     (1,461)      1,021     15,037      15,439      16,707      16,047       11,367       9,908

Selling, general and
  administrative expenses ......     13,523      19,303     10,395      10,130      11,597      10,187        8,062       7,520
Amortization ...................        636         522        516         478         568         547          503         343
Goodwill impairment charges ....     24,228           -          -           -           -           -            -           -
                                   --------    --------   --------    --------    --------    --------     --------    --------
Operating (loss) income ........    (39,848)    (18,804)     4,126       4,831       4,542       5,313        2,802       2,045

Other income (expense) - net ...       (111)        528        194         217         752         176          275        (236)
Interest expense (benefit) .....     (1,991)     (1,589)    (1,491)     (2,006)     (2,165)     (1,900)      (1,622)     (1,863)
                                   --------    --------   --------    --------    --------    --------     --------    --------
Income (loss) before income taxes   (41,950)    (19,865)     2,829       3,042       3,129       3,589        1,455         (54)
Income tax expense (benefit) ...      5,018      (7,332)      (143)        530         336         954          349        (203)
                                   --------    --------   --------    --------    --------    --------     --------    --------
Net (loss) income ..............   $(46,968)   $(12,533)  $  2,972    $  2,512       2,793    $  2,635     $  1,106    $    149
                                   ========    ========   ========    ========    ========    ========     ========    ========

Net (loss) income per common
  share:
     Basic .....................     $(1.28)    $(0.34)       $0.08      $0.08       $0.10        $0.09       $0.05       $0.01
     Diluted ...................      (1.28)     (0.34)        0.08       0.08        0.09         0.09        0.04        0.01
</TABLE>


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