EXHIBIT 13.1



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



PEMSTAR Inc.



Annual Report 2003



Part II



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FINANCIAL REPORT

PEMSTAR Inc.



TABLE OF CONTENTS



|                                                                                      |  |     
|------------------------------------------------------------------------------------- |  | ----
|                                                                                      |  | Page
|Selected Financial Data                                                               |  | 10  
|Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12  
|Consolidated Balance Sheets                                                           |  | 21  
|Consolidated Statements of Operations                                                 |  | 22  
|Consolidated Statement 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  
|Market for Pemstars Common Stock and Related Shareholder Matters                     |  | 40  



9



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SELECTED FINANCIAL DATA



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



|                                                                                    |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | -------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|(In thousands, except per share data)                                               |  | Year Ended March 31, |        
|                                                                                    |  | 2003                 |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |        
|Consolidated Statements of Operations Data:                                         |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net sales                                                                           |  | $                    | 668,175 |   |      | $ | 657,493 |      |  | $ | 635,307 |   |  | $    | 393,842 |   |  | $ | 187,381 |  
|Cost of goods sold                                                                  |  |                      | 637,074 |   |      |   | 627,457 |      |  |   | 581,278 |   |  |      | 363,974 |   |  |   | 172,219 |  
|                                                                                    |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Gross profit                                                                        |  |                      | 31,101  |   |      |   | 30,036  |      |  |   | 54,029  |   |  |      | 29,868  |   |  |   | 15,162  |  
|                                                                                    |  |                      |         |   |     
|Selling, general and administrative expenses                                        |  |                      | 51,076  |   |      |   | 53,351  |      |  |   | 37,366  |   |  |      | 21,576  |   |  |   | 10,955  |  
|Amortization                                                                        |  |                      | 129     |   |      |   | 2,152   |      |  |   | 1,961   |   |  |      | 1,281   |   |  |   | 190     |  
|Restructuring costs                                                                 |  |                      | 4,249   |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Goodwill impairment charge                                                          |  |                      |        |   |      |   | 24,228  |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                                                    |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Operating (loss) income                                                             |  |                      | (24,353 | ) |      |   | (49,695 | )    |  |   | 14,702  |   |  |      | 7,011   |   |  |   | 4,017   |  
|                                                                                    |  |                      |         |   |     
|Other income (expense)  net                                                        |  |                      | 558     |   |      |   | 829     |      |  |   | 967     |   |  |      | (74     | ) |  |   | (438    | )
|Interest expense                                                                    |  |                      | (8,870  | ) |      |   | (7,077  | )    |  |   | (7,550  | ) |  |      | (3,588  | ) |  |   | (640    | )
|                                                                                    |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|(Loss) income before income taxes and cumulative effect of accounting change        |  |                      | (32,665 | ) |      |   | (55,943 | )    |  |   | 8,119   |   |  |      | 3,349   |   |  |   | 2,939   |  
|                                                                                    |  |                      |         |   |     
|Income tax expense (benefit)                                                        |  |                      | 753     |   |      |   | (1,926  | )    |  |   | 1,436   |   |  |      | 698     |   |  |   | 1,273   |  
|                                                                                    |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|(Loss) income before cumulative effect of accounting change                         |  |                      | (33,418 | ) |      |   | (54,017 | )    |  |   | 6,683   |   |  |      | 2,651   |   |  |   | 1,666   |  
|                                                                                    |  |                      |         |   |     
|Cumulative effect of accounting change(1)                                           |  |                      | (5,346  | ) |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                                                    |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net (loss) income                                                                   |  | $                    | (38,764 | ) |      | $ | (54,017 | )    |  | $ | 6,683   |   |  | $    | 2,651   |   |  | $ | 1,666   |  
|                                                                                    |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                                    |  |                      |         |   |     
|(Loss) income before cumulative effect of accounting change per common share:       |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic                                                                               |  | $                    | (.90    | ) |      | $ | (1.56   | )    |  | $ | .29     |   |  | $    | .23     |   |  | $ | .15     |  
|Diluted                                                                             |  |                      | (.90    | ) |      |   | (1.56   | )    |  |   | .25     |   |  |      | .15     |   |  |   | .12     |  
|Net (loss) income per common share:                                                 |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic                                                                               |  | $                    | (1.04   | ) |      | $ | (1.56   | )    |  | $ | .29     |   |  | $    | .23     |   |  | $ | .15     |  
|Diluted                                                                             |  |                      | (1.04   | ) |      |   | (1.56   | )    |  |   | .25     |   |  |      | .15     |   |  |   | .12     |  
|Weighted average number of common shares outstanding(2):                            |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic                                                                               |  |                      | 37,133  |   |      |   | 34,717  |      |  |   | 23,013  |   |  |      | 11,503  |   |  |   | 10,897  |  
|Diluted                                                                             |  |                      | 37,133  |   |      |   | 34,717  |      |  |   | 26,943  |   |  |      | 17,167  |   |  |   | 14,143  |  
|                                                                                    |  |                      |         |   |     
|Other Financial Data:                                                               |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Depreciation                                                                        |  | $                    | 20,021  |   |      | $ | 18,299  |      |  | $ | 12,097  |   |  | $    | 7,455   |   |  | $ | 3,331   |  
|Capital expenditures                                                                |  |                      | 12,555  |   |      |   | 37,930  |      |  |   | 42,542  |   |  |      | 13,415  |   |  |   | 8,657   |  
|                                                                                    |  |                      |         |   |     
|Supplemental Data:                                                                  |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|EBITDA(3)                                                                           |  | $                    | (3,645  | ) |      | $ | (4,187  | )    |  | $ | 29,727  |   |  | $    | 15,673  |   |  | $ | 7,100   |  
|Net cash provided by (used in) operating activities                                 |  |                      | 47,311  |   |      |   | (307    | )    |  |   | (54,219 | ) |  |      | (20,225 | ) |  |   | 65      |  
|Net cash used in investing activities                                               |  |                      | (15,593 | ) |      |   | (61,203 | )    |  |   | (62,684 | ) |  |      | (52,611 | ) |  |   | (4,989  | )
|Net cash (used in) provided by financing activities                                 |  |                      | (9,946  | ) |      |   | 67,164  |      |  |   | 119,512 |   |  |      | 74,734  |   |  |   | 2,556   |  
|                                                                                    | 
|                                                                                    | 
|                                                                                    |  | As of March 31,      |        
|                                                                                    |  | 2003                 |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |        
|Consolidated Balance Sheet Data:                                                    |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Unrestricted cash and cash equivalents                                              |  | $                    | 32,762  |   |      | $ | 11,483  |      |  | $ | 5,882   |   |  | $    | 2,727   |   |  | $ | 827     |  
|Working capital (Restated-(5))                                                      |  |                      | 52,723  |   |      |   | 75,388  |      |  |   | 70,651  |   |  |      | 4,649   |   |  |   | 12,783  |  
|Total assets                                                                        |  |                      | 372,062 |   |      |   | 395,724 |      |  |   | 349,077 |   |  |      | 190,451 |   |  |   | 64,983  |  
|Long-term debt and capital lease obligations less current maturities (Restated-(5)) |  |                      | 23,119  |   |      |   | 12,515  |      |  |   | 23,673  |   |  |      | 10,181  |   |  |   | 7,090   |  
|Total shareholders equity                                                          |  |                      | 159,867 |   |      |   | 193,397 |      |  |   | 150,712 |   |  |      | 22,673  |   |  |   | 16,555  |  
|Book value per share                                                                |  | $                    | 4.26    |   |      | $ | 5.27    |      |  | $ | 5.33    |   |  | $    | 1.64    |   |  | $ | 1.47    |  
|Tangible book value per common share(4)                                             |  | $                    | 3.35    |   |      | $ | 4.32    |      |  | $ | 4.30    |   |  | $    | 0.14    |   |  | $ | 1.13    |  
|                                                                                    | 

|(1) | See Note 1 to the Consolidated Financial Statements under the caption Goodwill, included herein.
|--- | --------------------------------------------------------------------------------------------------

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

|(3) | EBITDA means net (loss) income before interest expense, income taxes, depreciation and amortization (including any goodwill impairment). EBITDA is presented because we believe it is
an indicator of our ability to incur and service debt 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Tangible book value is total shareholder equity minus goodwill and other intangible assets.
|--- | -------------------------------------------------------------------------------------------

|(5) | Restated to classify domestic revolving line of credit as current under EITF 95-22  See Note 7 to Consolidated Financial Statements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------



10



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SELECTED FINANCIAL DATA (Continued)



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



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



11



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



PEMSTAR Inc.



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



OVERVIEW



We provide a comprehensive range of global engineering, product design, automation and test,
manufacturing and fulfillment services to customers in the communications, computing and data storage, industrial equipment, and medical industries. We provide these services on a global basis through 15 strategic locations in North America, South
America, Asia and Europe. These customer solutions support our customers products from initial development and design through manufacturing to worldwide distribution and aftermarket support.



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



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



| |  | enhanced product and service offerings while allowing us to offer cost-effective manufacturing and engineering capabilities;
| | - | ----------------------------------------------------------------------------------------------------------------------------



| |  | access to new customers; and
| | - | ----------------------------



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



Our sales are generally derived from master supply and manufacturing agreements, with current demand evidenced by purchase orders, or from
specific purchase orders for discrete projects. We charge our customers separately for engineering and manufacturing services. We recognize revenues from product sales, net of product returns and warranty costs, typically at the time of product
shipment. In limited circumstances, although the product remains in our facilities, we recognize revenue when title to, and risks and rewards of ownership of, the products have contractually passed to the customer. Revenue from services is
recognized as they are performed and collection is reasonably certain. Our sales from engineering services, which includes process test and automation equipment production and prototype development, accounted for 17.8%, 16.3% and 7.2% of our total
net sales in fiscal 2003, 2002 and 2001, respectively. The purchase of Pacific Consultants in fiscal 2002 contributed to this growth. Manufacturing services accounted for 82.2%, 83.7% and 92.8% of our total net sales in fiscal 2003, 2002, and 2001,
respectively.



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



12



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



RESULTS OF OPERATIONS



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



|                                                                             |  |                      |    |  |       |    |  |       |   
|---------------------------------------------------------------------------- |  | -------------------- | -- |  | ----- | -- |  | ----- | --
|                                                                             |  | Year Ended March 31, |   
|                                                                             |  | 2003                 |    |  | 2002  |    |  | 2001  |   
|Net sales                                                                    |  | 100.0                | %  |  | 100.0 | %  |  | 100.0 | % 
|Cost of goods sold                                                           |  | 95.3                 | %  |  | 95.4  | %  |  | 91.5  | % 
|                                                                             |  |                      |    |  |       |    |  |       |   
|Gross profit                                                                 |  | 4.7                  | %  |  | 4.6   | %  |  | 8.5   | % 
|                                                                             |  |                      |   
|Selling, general and administrative expenses                                 |  | 7.6                  | %  |  | 8.1   | %  |  | 5.9   | % 
|Restructuring                                                                |  | .7                   | %  |  |      | %  |  |      | % 
|Amortization                                                                 |  |                     | %  |  | .3    | %  |  | .3    | % 
|Goodwill impairment charge                                                   |  |                     | %  |  | 3.7   | %  |  |      | % 
|                                                                             |  |                      |    |  |       |    |  |       |   
|                                                                             |  |                      |   
|Operating (loss) income                                                      |  | (3.6                 | )% |  | (7.5  | )% |  | 2.3   | % 
|                                                                             |  |                      |   
|Other income (expense)  net                                                 |  |                     | %  |  | .1    | %  |  | .2    | % 
|Interest expense                                                             |  | (1.3                 | )% |  | (1.1  | )% |  | (1.2  | )%
|                                                                             |  |                      |    |  |       |    |  |       |   
|(Loss) income before income taxes and cumulative effect of accounting change |  | (4.9                 | )% |  | (8.5  | )% |  | 1.3   | % 
|                                                                             |  |                      |   
|Income tax expense (benefit)                                                 |  | .1                   | %  |  | (.3   | )% |  | .2    | % 
|                                                                             |  |                      |    |  |       |    |  |       |   
|(Loss) income before cumulative effect of accounting change                  |  | (5.0                 | )% |  | (8.2  | )% |  | 1.1   | % 
|                                                                             |  |                      |   
|Cumulative effect of accounting change                                       |  | (.8                  | )% |  |      | %  |  |      | % 
|                                                                             |  |                      |    |  |       |    |  |       |   
|Net (loss) income                                                            |  | (5.8                 | )% |  | (8.2  | )% |  | 1.1   | % 
|                                                                             |  |                      |    |  |       |    |  |       |   



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



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



Gross profit  Our gross profit increased $1.1 million in fiscal 2003 to $31.1 million, from $30.0 million in fiscal 2002. This increase was due to cost
savings of restructuring actions taken during fiscal 2003 offset, in part, by changes in sales mix including reduced sales volumes from higher gross profit communication customers. We incurred inventory write-downs of $8.1 million in fiscal 2003
versus $5.4 million in fiscal 2002 for excess inventory due to customer bankruptcies, reduced customer orders below anticipated levels and order cancellations as the communications market continued its decline early in our 2003 fiscal year. Over the
year, we completed our planned restructuring efforts including the reduction of headcount and consolidation of certain facilities. These actions are realizing cost savings exceeding $3 million per quarter. The facilities and infrastructure developed
to support higher levels of net sales will continue to be an operating issue if sales volumes decrease. We will continue to monitor and take necessary actions in order to balance our cost structure to the anticipated level of net sales.



13



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



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



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



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



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



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



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



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



Gross profit  Our gross profit decreased $24 million in fiscal 2002 to $30.0 million, from $54.0 million in fiscal 2001. This decrease was due, in part, to the sales decline at facilities operated for the full prior fiscal year
and changes in sales mix including reduced sales volume from higher gross profit communication customers. Expansion of facilities during fiscal 2002 added fixed costs of $14.3 million for those facilities that were in operation in fiscal 2001. We
also incurred inventory write-downs of $5.4 million in the current year for excess inventory due to reduced customer orders below anticipated levels and order cancellations. In addition, gross profit decreased due to transitional operating costs
associated with shifting certain manufacturing programs from higher to lower cost facilities, start-up costs associated with new customers and severance costs resulting from reductions in workforce. The gross profit declines were offset by $6.0
million of gross profit from sales at acquired companies and facilities not in operation for the full fiscal year 2001. The facilities and other infrastructure developed to support higher levels of net sales will continue to be an operating issue as
we enter fiscal 2003 and is being addressed with restructuring actions to reduce cash expenditures in fiscal 2003.



14



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



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



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



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



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



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



LIQUIDITY AND CAPITAL RESOURCES



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



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



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



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



15



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



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



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



As of April
25, 2003, Pemstar entered into a new $90 million revolving credit facility to replace its facility with IBM Credit and US Bank. This new facility is with Congress Financial Corporation (a subsidiary of Wachovia Bank, N.A.), Fleet Capital and US
Bank. The term of this new facility is three years with maturity in April 2006. In addition, as of March 28, 2003, the Company entered into a $12 million sale and leaseback of its main Rochester facility, which after placement of lease deposits and
restricted cash to collateralize outstanding bonds, resulted in net proceeds of $5.8 million.



All of these credit facilities are secured by substantially all of our assets. New domestic credit facilities include a covenant to attain minimum net income before interest expense, income taxes, depreciation and
amortization (EBITDA), for domestic and worldwide operations. We are required under certain foreign credit facilities to meet various financial covenants, including minimum location net worth, maximum debt to equity ratios, and minimum location net
income, all of which we were in compliance with at March 31, 2003.



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



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



During the quarter ended
December 31, 2003 the Company was in negotiation with lenders related to shortfalls from minimum cash flow covenants in its domestic credit facilities. In January, 2004 the Company obtained an amendment to those facilities, with effectiveness from
September 30, 2003, reducing the required minimum cash flow requirements, limiting their application to quarterly measurement periods (reduced from monthly requirements) and providing that such covenants will not be applicable during quarters in
which the Company maintains $13,000 of borrowing availability under the line in excess of actual borrowed amounts. An additional amendment was obtained, which temporarily allows for full use of available collateral, which could have become
restricted by customer balance concentration limits of the facilities.



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



16



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reductions. If our operating goals are not met, we may be required to secure additional waivers of any resulting covenant
violations under existing lending facilities, secure additional financing from lenders or sell additional securities.



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



CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS



The
Company is obligated to make future payments under various contracts, such as debt agreements, lease agreements, and unconditional purchase obligations, and has certain contingent commitments related to a business acquisition. The following table
represents contractual cash obligations and other commercial commitments of the Company as of March 31, 2003:



|                                   |  |       |         |                   |   |                   |  |                   |        |                   |   |                   |  |                |       |  |   |        |  |   |       
|---------------------------------- |  | ----- | ------- | ----------------- | - | ----------------- |  | ----------------- | ------ | ----------------- | - | ----------------- |  | -------------- | ----- |  | - | ------ |  | - | ------
|(Amounts in thousands)             |  | Total |         | Due in Fiscal2004 |   | Due in Fiscal2005 |  | Due in Fiscal2006 |        | Due in Fiscal2007 |   | Due in Fiscal2008 |  | Due Thereafter
|Revolving credit facilites         |  | $     | 57,870  |                   | $ | 57,870            |  | $                 |       |                   | $ |                  |  | $              |      |  | $ |       |  | $ |      
|Other long-term debt               |  |       | 20,703  |                   |   | 10,427            |  |                   | 1,806  |                   |   | 1,711             |  |                | 1,512 |  |   | 5,003  |  |   | 244   
|Capital lease obligations          |  |       | 37,535  |                   |   | 6,284             |  |                   | 2,766  |                   |   | 1,345             |  |                | 1,356 |  |   | 1,383  |  |   | 24,401
|Operating leases                   |  |       | 49,834  |                   |   | 11,936            |  |                   | 9,679  |                   |   | 8,175             |  |                | 5,885 |  |   | 5,200  |  |   | 8,959 
|Unconditional purchase obligations |  |       | 13,681  |                   |   | 13,681            |  |                   |       |                   |   |                  |  |                |      |  |   |       |  |   |      
|                                   |  |       |         |                   |   |                   |  |                   |        |                   |   |                   |  |                |       |  |   |        |  |   |       
|Total contractual cash obligations |  | $     | 179,623 |                   | $ | 100,198           |  | $                 | 14,251 |                   | $ | 11,231            |  | $              | 8,753 |  | $ | 11,586 |  | $ | 33,604
|                                   |  |       |         |                   |   |                   |  |                   |        |                   |   |                   |  |                |       |  |   |        |  |   |       



Domestic revolving credit facilities
of $45,851, included above will not require repayment on a current basis, provided that credit facility covenants continue to be met. See Notes 2, 7 and 11 to the Consolidated Financial Statements for additional information regarding these
obligations.



|                          |  |                       |        |                                 |         |       |         |   |         |  |         |   |             |   |   |  |   |   |  |   |  
|------------------------- |  | --------------------- | ------ | ------------------------------- | ------- | ----- | ------- | - | ------- |  | ------- | - | ----------- | - | - |  | - | - |  | - | -
|(Amounts in thousands)    |  | CommittedTotalAmounts |        | Amount of commitment expiration
|                          |  |                       | 1 year |                                 | 2 years |       | 3 years |   | 4 years |  | 5 years |   | Over 5years
|Standby letters of credit |  | $                     | 6,138  |                                 | $       | 5,138 |         | $ | 1,000   |  | $       |  |             | $ |  |  | $ |  |  | $ | 



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



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS



Interest Rate Risk



Our exposure to interest rate risk arises principally from the variable rates associated with our borrowings. On March 31, 2003, we had total borrowings of $61.7 million bearing variable interest rates. An adverse
change of one percent in the interest rate of all borrowings, which bear interest at variable rates, would cause us to incur a change in interest expense of approximately $.6 million on an annual basis.



Foreign Currency Exchange Risk



Fluctuations in the rate of exchange between the U.S. dollar and the currencies of countries
other than the U.S. in which we conduct business could adversely affect our financial results. Except for sales in the Netherlands, Singapore and China, our sales are principally denominated in U.S. dollars. As a result, we have relatively limited
exposure to foreign currency exchange risk on our sales. For fiscal 2003, sales denominated in Euros totaled $67.8 million, sales denominated in Singapore dollars totaled $31.9 million and sales denominated in Chinese renminbi totaled $66.7 million.
Costs related to these sales are largely denominated in their respective currencies, thereby limiting our transaction risk exposures. However, for sales not denominated in U.S. dollars, if there is an increase in the rate at which a foreign currency
is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases, and if we price our products and services in the foreign currency, we will receive
less in U.S. dollars than we did before the rate increase went into effect. If we price our products and services in U.S. dollars and competitors price their products in local currency, an increase in the relative strength of the U.S. dollar could
result in our prices being uncompetitive in a market where business is transacted in the local currency.



17



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The reported results of our foreign operations will be influenced during their translation into U.S. dollars by currency
movements against the U.S. dollar. The result of a uniform 10% strengthening in the value of the U.S. dollar from March 31, 2003, 2002 and 2001 levels relative to each of the currencies in which our revenues and expenses are denominated would have
resulted in a decrease in operating income of approximately $1.2 million, $.3 million and $0.4 million, respectively, for the fiscal years ended March 31, 2003, 2002 and 2001.



At March 31, 2003 and 2002, the amount we consider permanently invested in foreign subsidiaries and translated into dollars using the year
end exchange rate was $53.1 million and $44.8 million, respectively, and the potential loss in fair value resulting from a hypothetical 10% strengthening in the value of the U.S. dollar currency exchange rate amounts to $4.8 million and $4.1
million, respectively. Actual amounts may differ.



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



Impact of Inflation



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



NEW ACCOUNTING PRONOUNCEMENTS



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



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



CRITICAL ACCOUNTING POLICIES



Managements Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and adjustments,
including those related to returns, bad debts, inventories, intangible assets, income taxes, restructuring costs, retirement benefits, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions.



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



18



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



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



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



Long-lived assets The Company follows SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires that long-lived assets, including goodwill, be reviewed for impairment whenever events or circumstances indicate the carrying amount of an asset
may not be recoverable. The Company evaluates potential impairment by comparing the carrying amount of the assets with the estimated undiscounted cash flows associated with them. If impairment exists, the Company measures the impairment utilizing
discounted cash flows. The Company adopted SFAS No. 144 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, at April 1, 2003. This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supercedes SFAS No. 121. This adoption had no material impact on the Companys consolidated results of operations, financial position or cash flows.



Income TaxesIn determining the carrying value of our net deferred tax
assets, we must assess the likelihood of sufficient future taxable income in related tax jurisdictions, based on estimates and assumptions to realize the benefit of these assets. If these estimates and related assumptions change in the future, we
may be required to record additional valuation allowances against our deferred tax assets, resulting in additional income tax expense in our consolidated statement of operations. Management evaluates quarterly whether the deferred tax assets may be
realized and assesses the need for additional valuation allowances or reduction of existing allowances quarterly. During the year ended March 31, 2003, we recorded $8.6 million of additional valuation allowances related to our net deferred tax
assets as of March 31, 2003, bringing the total allowance to $35.5 million.



CAUTIONARY STATEMENTS



This report contains certain
forward-looking statements. These forward-looking statements may contain statements of intent, belief or current expectations of Pemstar Inc. and its management. Such forward-looking statements are not guarantees of future results and
involve risks and uncertainties that may cause actual results to differ materially from the potential results discussed in the forward-looking statements. In addition to factors discussed above, risks and uncertainties that may cause such
differences include but are not limited to; a continued decline in economic conditions or a recession; the effects of September 11, 2001, or future terrorist attacks in the United States and the engagement of military forces of the United States and
its allies in other parts of the world, as well as any future events in response to these developments, including rumors or threats of war, actual conflicts or trade disruptions; changes in demand for electronics manufacturing and design services;
changes in demand by major customers due to cancellations, reductions or delays of orders; shortages or price fluctuations in component parts; difficulties managing our expansion and integrating acquired businesses; increased competition and other
risk factors listed from time to time in the Companys Securities and Exchange



19



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Commission filings, including but not limited to Exhibit 99 to the Companys Annual Report on Form 10-K for the
fiscal year ended March 31, 2003. The foregoing list is not exhaustive and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements.



20



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CONSOLIDATED BALANCE SHEETS

PEMSTAR Inc.



|                                                                                                                                |  |                       |         |   |                       |   |         |  
|------------------------------------------------------------------------------------------------------------------------------- |  | --------------------- | ------- | - | --------------------- | - | ------- | -
|(In thousands, except per share data)                                                                                           |  | March 31, 2003        |         |   | March 31, 2002        |  
|                                                                                                                                |  | (RestatedSee Note 7) |         |   | (RestatedSee Note 7) |  
|Assets                                                                                                                          |  |                       |         |   |                       |   |         |  
|Current assets:                                                                                                                 |  |                       |         |   |                       |   |         |  
|Cash and cash equivalents                                                                                                       |  | $                     | 32,762  |   |                       | $ | 11,483  |  
|Restricted cash                                                                                                                 |  |                       | 4,268   |   |                       |   | 1,423   |  
|Accounts receivable, net                                                                                                        |  |                       | 112,316 |   |                       |   | 122,752 |  
|Recoverable income taxes                                                                                                        |  |                       | 282     |   |                       |   | 3,873   |  
|Inventories, net                                                                                                                |  |                       | 69,279  |   |                       |   | 92,929  |  
|Unbilled services                                                                                                               |  |                       | 10,797  |   |                       |   | 16,356  |  
|Deferred income taxes                                                                                                           |  |                       | 35      |   |                       |   | 45      |  
|Prepaid expenses and other                                                                                                      |  |                       | 7,474   |   |                       |   | 8,507   |  
|                                                                                                                                |  |                       |         |   |                       |   |         |  
|Total current assets                                                                                                            |  |                       | 237,213 |   |                       |   | 257,368 |  
|                                                                                                                                |  |                      
|Property, plant and equipment, net                                                                                              |  |                       | 93,200  |   |                       |   | 99,108  |  
|                                                                                                                                |  |                      
|Goodwill, net                                                                                                                   |  |                       | 33,771  |   |                       |   | 34,678  |  
|Deferred income taxes                                                                                                           |  |                       | 1,705   |   |                       |   | 1,111   |  
|Other assets                                                                                                                    |  |                       | 6,173   |   |                       |   | 3,459   |  
|                                                                                                                                |  |                       |         |   |                       |   |         |  
|                                                                                                                                |  |                      
|Total assets                                                                                                                    |  | $                     | 372,062 |   |                       | $ | 395,724 |  
|                                                                                                                                |  |                       |         |   |                       |   |         |  
|                                                                                                                                |  |                      
|Liabilities and shareholders equity                                                                                            |  |                       |         |   |                       |   |         |  
|Current liabilities:                                                                                                            |  |                       |         |   |                       |   |         |  
|Revolving credit facilities and current maturities of long-term debt                                                            |  | $                     | 68,297  |   |                       | $ | 75,946  |  
|Current maturities of capital lease obligations                                                                                 |  |                       | 5,288   |   |                       |   | 10,865  |  
|Accounts payable                                                                                                                |  |                       | 88,083  |   |                       |   | 79,410  |  
|Income taxes payable                                                                                                            |  |                       | 191     |   |                       |   | 21      |  
|Accrued expenses and other                                                                                                      |  |                       | 22,631  |   |                       |   | 15,738  |  
|                                                                                                                                |  |                       |         |   |                       |   |         |  
|Total current liabilities                                                                                                       |  |                       | 184,490 |   |                       |   | 181,980 |  
|                                                                                                                                |  |                      
|Long-term debt, less current maturities                                                                                         |  |                       | 10,276  |   |                       |   | 9,393   |  
|Capital lease obligations, less current maturities                                                                              |  |                       | 12,843  |   |                       |   | 3,122   |  
|Other liabilities and deferred credits                                                                                          |  |                       | 4,586   |   |                       |   | 7,832   |  
|                                                                                                                                |  |                      
|Shareholders equity:                                                                                                           |  |                       |         |   |                       |   |         |  
|Common stock, par value $0.01, 150,000 shares authorized; shares issued and outstanding; 200337,486 shares; 200236,701
shares |  |                       | 375     |   |                       |   | 367     |  
|Additional paid-in capital                                                                                                      |  |                       | 234,943 |   |                       |   | 232,233 |  
|Accumulated other comprehensive loss                                                                                            |  |                       | (14     | ) |                       |   | (2,131  | )
|Accumulated deficit                                                                                                             |  |                       | (74,928 | ) |                       |   | (36,164 | )
|Loans to shareholders                                                                                                           |  |                       | (509    | ) |                       |   | (908    | )
|                                                                                                                                |  |                       |         |   |                       |   |         |  
|Total shareholders equity                                                                                                      |  |                       | 159,867 |   |                       |   | 193,397 |  
|                                                                                                                                |  |                       |         |   |                       |   |         |  
|                                                                                                                                |  |                      
|Total liabilities and shareholders equity                                                                                      |  | $                     | 372,062 |   |                       | $ | 395,724 |  
|                                                                                                                                |  |                       |         |   |                       |   |         |  



See notes to consolidated financial
statements.



21



---

CONSOLIDATED STATEMENTS OF OPERATIONS

PEMSTAR Inc.



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



See notes to consolidated financial
statements.



22



---

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

PEMSTAR Inc.



|                                                                  |  |              |  |                          |     |                                   |   |         |                                      |   |        |                      |  |   |         |   |  |   |        |   |  |   |         |  
|----------------------------------------------------------------- |  | ------------ |  | ------------------------ | --- | --------------------------------- | - | ------- | ------------------------------------ | - | ------ | -------------------- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|(In thousands)                                                    |  | Common Stock |  | AdditionalPaid inCapital |     | AccumulatedOtherComprehensiveLoss |   |         | RetainedEarnings(AccumulatedDeficit) |   |        | Loans toShareholders |  |   | Total   |  
|                                                                  |  | Shares       |  | Amount                   |     |                                   |   |         |                                     
|Balance, March 31, 2000                                           |  | 13,819       |  | $                        | 138 |                                   | $ | 15,395  |                                      | $ | (772   | )                    |  | $ | 11,170  |   |  | $ | (3,258 | ) |  | $ | 22,673  |  
|Issuance of common stock in employee stock programs               |  | 449          |  |                          | 4   |                                   |   | 1,719   |                                      |   |       |                      |  |   |        |   |  |   | (200   | ) |  |   | 1,523   |  
|Payments on loans to shareholders                                 |  |             |  |                          |    |                                   |   |        |                                      |   |       |                      |  |   |        |   |  |   | 1,194  |   |  |   | 1,194   |  
|Issuance of common stock                                          |  | 9,316        |  |                          | 94  |                                   |   | 93,523  |                                      |   |       |                      |  |   |        |   |  |   |       |   |  |   | 93,617  |  
|Conversion of preferred stock                                     |  | 4,710        |  |                          | 47  |                                   |   | 26,502  |                                      |   |       |                      |  |   |        |   |  |   |       |   |  |   | 26,549  |  
|Comprehensive income:                                             |  |              |  |                          |     |                                   |   |         |                                      |   |        |                      |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                        |  |             |  |                          |    |                                   |   |        |                                      |   |       |                      |  |   | 6,683   |   |  |   |       |   |  |   | 6,683   |  
|Foreign currency translation adjustment                           |  |             |  |                          |    |                                   |   |        |                                      |   | (1,527 | )                    |  |   |        |   |  |   |       |   |  |   | (1,527  | )
|                                                                  |  |              |  |                          |     |                                   |   |         |                                      |   |        |                      |  |   |         |   |  |   |        |   |  |   |         |  
|Comprehensive income                                              |  |             |  |                          |    |                                   |   |        |                                      |   |       |                      |  |   |        |   |  |   |       |   |  |   | 5,156   |  
|                                                                  |  |              |  |                          |     |                                   |   |         |                                      |   |        |                      |  |   |         |   |  |   |        |   |  |   |         |  
|Balance, March 31, 2001                                           |  | 28,294       |  |                          | 283 |                                   |   | 137,139 |                                      |   | (2,299 | )                    |  |   | 17,853  |   |  |   | (2,264 | ) |  |   | 150,712 |  
|Issuance of common stock in employee stock programs               |  | 1,271        |  |                          | 12  |                                   |   | 5,782   |                                      |   |       |                      |  |   |        |   |  |   | (108   | ) |  |   | 5,686   |  
|Payments on loans to shareholders                                 |  |             |  |                          |    |                                   |   |        |                                      |   |       |                      |  |   |        |   |  |   | 1,464  |   |  |   | 1,464   |  
|Issuance of common stock                                          |  | 6,275        |  |                          | 63  |                                   |   | 79,321  |                                      |   |       |                      |  |   |        |   |  |   |       |   |  |   | 79,384  |  
|Issuance of common stock in connection with business acquisitions |  | 861          |  |                          | 9   |                                   |   | 9,991   |                                      |   |       |                      |  |   |        |   |  |   |       |   |  |   | 10,000  |  
|Comprehensive (loss) income:                                      |  |              |  |                          |     |                                   |   |         |                                      |   |        |                      |  |   |         |   |  |   |        |   |  |   |         |  
|Net loss                                                          |  |             |  |                          |    |                                   |   |        |                                      |   |       |                      |  |   | (54,017 | ) |  |   |       |   |  |   | (54,017 | )
|Foreign currency translation adjustment                           |  |             |  |                          |    |                                   |   |        |                                      |   | 168    |                      |  |   |        |   |  |   |       |   |  |   | 168     |  
|                                                                  |  |              |  |                          |     |                                   |   |         |                                      |   |        |                      |  |   |         |   |  |   |        |   |  |   |         |  
|Comprehensive loss                                                |  |             |  |                          |    |                                   |   |        |                                      |   |       |                      |  |   |        |   |  |   |       |   |  |   | (53,849 | )
|                                                                  |  |              |  |                          |     |                                   |   |         |                                      |   |        |                      |  |   |         |   |  |   |        |   |  |   |         |  
|Balance, March 31, 2002                                           |  | 36,701       |  |                          | 367 |                                   |   | 232,233 |                                      |   | (2,131 | )                    |  |   | (36,164 | ) |  |   | (908   | ) |  |   | 193,397 |  
|Issuance of common stock in employee stock programs               |  | 785          |  |                          | 8   |                                   |   | 1,092   |                                      |   |       |                      |  |   |        |   |  |   |        |   |  |   | 1,100   |  
|Payments on loans to shareholders                                 |  |             |  |                          |    |                                   |   |        |                                      |   |       |                      |  |   |        |   |  |   | 399    |   |  |   | 399     |  
|Issuance of warrants                                              |  |             |  |                          |    |                                   |   | 1,618   |                                      |   |       |                      |  |   |        |   |  |   |       |   |  |   | 1,618   |  
|Comprehensive (loss) income:                                      |  |              |  |                          |     |                                   |   |         |                                      |   |        |                      |  |   |         |   |  |   |        |   |  |   |         |  
|Net loss                                                          |  |             |  |                          |    |                                   |   |        |                                      |   |       |                      |  |   | (38,764 | ) |  |   |       |   |  |   | (38,764 | )
|Foreign currency translation adjustment                           |  |             |  |                          |    |                                   |   |        |                                      |   | 2,117  |                      |  |   |        |   |  |   |       |   |  |   | 2,117   |  
|                                                                  |  |              |  |                          |     |                                   |   |         |                                      |   |        |                      |  |   |         |   |  |   |        |   |  |   |         |  
|Comprehensive loss                                                |  |             |  |                          |    |                                   |   |        |                                      |   |       |                      |  |   |        |   |  |   |       |   |  |   | (36,647 | )
|                                                                  |  |              |  |                          |     |                                   |   |         |                                      |   |        |                      |  |   |         |   |  |   |        |   |  |   |         |  
|Balance, March 31, 2003                                           |  | 37,486       |  | $                        | 375 |                                   | $ | 234,943 |                                      | $ | (14    | )                    |  | $ | (74,928 | ) |  | $ | (509   | ) |  | $ | 159,867 |  
|                                                                  |  |              |  |                          |     |                                   |   |         |                                      |   |        |                      |  |   |         |   |  |   |        |   |  |   |         |  



See notes to consolidated financial
statements.



23



---

CONSOLIDATED STATEMENTS OF CASH FLOWS

PEMSTAR Inc.



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



See notes to consolidated financial
statements.



24



---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PEMSTAR Inc.

(In thousands, except per share data)



Note 1. Nature of Business and Significant Accounting Policies



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



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



Revenue recognition Revenue from the sales of products is recognized when the product is shipped to the customer. In limited circumstances, although the
physical product remains on the Companys premises at the request of the customer, when title and risks and rewards of ownership have contractually passed to the customer, revenue is recognized in accordance with the guidance of Staff
Accounting Bulletin No. 101. Revenue from design, development and engineering services is recognized when the services are performed and collectibility is reasonably certain. Such services provided under fixed price contracts are accounted for using
the percentage of completion method as outlined in SOP 81-1, Accounting for Performance of Contract-Type and Certain Production-Type Contracts. Revenue recognized in excess of billed amounts under fixed price contracts or unbilled
engineering services is classified as unbilled services in the balance sheet.



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



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



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



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



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



Goodwill
Effective April 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized. This standard also requires, at a
minimum, an annual assessment of the carrying value of goodwill and other intangibles with indefinite useful lives. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized. Intangible
assets with finite lives are amortized over their estimated useful lives. Prior to 2003, goodwill and indefinite-lived intangible assets were amortized over periods not exceeding 40 years. Goodwill at March 31, 2003 and 2002 of $33,771 and $34,678,
respectively, is net of accumulated amortization of $1,860.



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



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



25



---

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



|                                                    |  |                      |         |   |      |   |         |      |  |   |      
|--------------------------------------------------- |  | -------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -----
|                                                    |  | Year Ended March 31,
|                                                    |  | 2003                 |         |   | 2002 |   |         | 2001
|Reported net (loss) income                          |  | $                    | (38,764 | ) |      | $ | (54,017 | )    |  | $ | 6,683
|Add: Adjustment for accounting change(1)            |  |                      | 5,346   |   |      |   |        |      |  |   |     
|Amortization, net of tax                            |  |                      |        |   |      |   | 2,152   |      |  |   | 856  
|                                                    |  |                      |         |   |      |   |         |      |  |   |      
|Adjusted net (loss) income                          |  | $                    | (33,418 | ) |      | $ | (51,865 | )    |  | $ | 7,539
|                                                    |  |                      |         |   |      |   |         |      |  |   |      
|                                                    |  |                      |        
|Reported basic (loss) income per common share       |  | $                    | (1.04   | ) |      | $ | (1.56   | )    |  | $ | .29  
|Add: Adjustment for accounting change               |  |                      | .14     |   |      |   |        |      |  |   |     
|Amortization, net of tax                            |  |                      |        |   |      |   | .07     |      |  |   | .04  
|                                                    |  |                      |         |   |      |   |         |      |  |   |      
|Adjusted basic net (loss) income per common share   |  | $                    | (.90    | ) |      | $ | (1.49   | )    |  | $ | .33  
|                                                    |  |                      |         |   |      |   |         |      |  |   |      
|                                                    |  |                      |        
|Reported diluted (loss) income per common share     |  | $                    | (1.04   | ) |      | $ | (1.56   | )    |  | $ | .25  
|Add: Adjustment for accounting change               |  |                      | .14     |   |      |   |        |      |  |   |     
|Amortization, net of tax                            |  |                      |        |   |      |   | .07     |      |  |   | .03  
|                                                    |  |                      |         |   |      |   |         |      |  |   |      
|Adjusted diluted net (loss) income per common share |  | $                    | (.90    | ) |      | $ | (1.49   | )    |  | $ | .28  
|                                                    |  |                      |         |   |      |   |         |      |  |   |      

| | 
| | 

| | (1) | Reported in fourth fiscal quarter as a change to first fiscal quarter
| | --- | ---------------------------------------------------------------------



Long-lived assets The Company follows SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. SFAS No. 121 requires that long-lived assets, including goodwill, be reviewed for impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. The Company evaluates potential impairment by
comparing the carrying amount of the assets with the estimated undiscounted cash flows associated with them. If impairment exists, the Company measures the impairment utilizing discounted cash flows.



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



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



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



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



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



Income taxes The Company accounts for income taxes following the provisions of
SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires that deferred income taxes be recognized for the tax consequences in future years 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.



26



---

Research and development Research and development costs are expensed when incurred and totaled $1,011,
$1,015 and $489 for the years ended March 31, 2003, 2002, and 2001, respectively.



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



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



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



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



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



The fair value of each option grant
has been estimated at the grant date using a Black-Scholes option pricing model with the following weighted average assumptions: dividend rate of 0% for all years; risk-free interest rates of 3.83%, 5.42% and 5.70% for 2003, 2002 and 2001,
respectively, volatility factor of expected market price of our common stock of 1.5, 0.8 and 1.4 for 2003, 2002 and 2001, respectively, and expected lives of ten years.



Net (loss) income per common share The Company follows the provisions of SFAS No. 128, Earnings Per Share. Basic
net (loss) income per share is computed based upon the weighted average number of common shares issued and outstanding during each year. Diluted net (loss) income per share amounts assume conversion, exercise or issuance of all potential common
stock instruments (stock options as discussed in Note 15 and convertible preferred stock as discussed in Note 13).



27



---

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



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



Common stock equivalents and their
impact on net loss have been excluded from the diluted per share calculation for 2003 and 2002, since the Company incurred net losses and the inclusion of common stock equivalents would have had an anti-dilutive impact. Potentially dilutive
securities, which have been excluded, consist of i) unexercised stock options and warrants to purchase 5,978 and 3,465 shares of the Companys common stock as of March 31, 2003 and 2002, respectively, and ii) 2,193 shares of the Companys
common stock issuable upon conversion of convertible debt as of March 31, 2003.



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



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



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



Note 2.
Acquisitions



In August 2000, the Company acquired Turtle Mountain
Corporation. Turtle Mountain is an electronics manufacturing service provider for commercial and military customers. The purchase price of $20,638, including liabilities assumed, was funded with proceeds of a term loan of $9,500 with the remainder
borrowed under the Companys operating line of credit. The transaction was accounted for as a purchase. Accordingly, the net assets and operating results have been included in the Companys financial statements from the date of
acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired of $9,680 has been recorded as goodwill and was being amortized over an estimated useful life of 20 years until March 31, 2002 when a new
accounting pronouncement was adopted (See Note 1). In September 2001, in connection with the terms of the purchase agreement, the Company was required to pay additional contingent consideration, which had the effect of increasing the purchase price
and goodwill by $750.



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



In September 2001, the Company purchased the membership interests
and business of Pacific Consultants LLC (a provider of electromechanical design and test consulting services). The initial purchase price was approximately $20,642, including common stock valued at $10,000, cash and costs of $6,792, and cash or
common stock of $3,850 payable up to two years from the date of the acquisition. The purchase agreement provides for additional adjustment of the purchase price, payable in cash or common stock, up to an additional $40,000, if earnings targets are
met for the acquired business in the two years following the close. The transaction was accounted for as a purchase. Accordingly, the net assets and operating results



28



---

have been included in the Companys financial statements from the date of acquisition. The excess of the purchase
price over the estimated fair value of net assets acquired was recorded as goodwill and has not been amortized in accordance with SFAS No. 142. Goodwill of $17,356 was recorded at March 31, 2002 and increased by $4,376 in the year ended March 31,
2003, for payments made in connection with purchase agreement adjustment of purchase price contract provisions.



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



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



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



The following unaudited pro forma
combined summary statement of operations for the years ended March 31, 2002 and 2001 was prepared in accordance with APB No. 16 and assumes the acquisitions had occurred at the beginning of the periods presented. The following pro forma data reflect
adjustments for interest expense, amortization of goodwill, where applicable, and depreciation of fixed assets. The unaudited pro forma financial information is provided for informational purposes only and does not purport to be indicative of the
future results of the Company.



Unaudited Pro Forma Consolidated Statements of
Operations



|                                             |  |                      |         |   |      |   |        
|-------------------------------------------- |  | -------------------- | ------- | - | ---- | - | -------
|                                             |  | Year ended March 31,
|                                             |  | 2002                 |         |   | 2001
|Net sales                                    |  | $                    | 674,016 |   |      | $ | 650,904
|Net (loss) income                            |  |                      | (53,767 | ) |      |   | 6,944  
|                                             |  |                     
|Net (loss) income per common share  basic   |  | $                    | (1.55   | ) |      | $ | .30    
|Net (loss) income per common share  diluted |  |                      | (1.55   | ) |      |   | .26    



Note 3. Accounts Receivable



Accounts receivable consists of the following:



|                                     |  |           |         |   |      |   |         |  
|------------------------------------ |  | --------- | ------- | - | ---- | - | ------- | -
|                                     |  | March 31, |        
|                                     |  | 2003      |         |   | 2002 |  
|Accounts receivable                  |  | $         | 115,799 |   |      | $ | 131,476 |  
|Less allowance for doubtful accounts |  |           | (3,483  | ) |      |   | (8,724  | )
|                                     |  |           |         |   |      |   |         |  
|                                     |  | $         | 112,316 |   |      | $ | 122,752 |  
|                                     |  |           |         |   |      |   |         |  



Note 4. Inventories



Inventories consist of the following:



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



29



---

Note 5. Property, Plant and Equipment, Net



Property, plant and equipment consists of the following:



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



Note 6. Goodwill, Net



Goodwill consists of the following:



|                              |  |           |        |   |      |   |        |  
|----------------------------- |  | --------- | ------ | - | ---- | - | ------ | -
|                              |  | March 31, |       
|                              |  | 2003      |        |   | 2002 |  
|Goodwill                      |  | $         | 35,631 |   |      | $ | 36,538 |  
|Less accumulated amortization |  |           | (1,860 | ) |      |   | (1,860 | )
|                              |  |           |        |   |      |   |        |  
|                              |  | $         | 33,771 |   |      | $ | 34,678 |  
|                              |  |           |        |   |      |   |        |  



Note 7. Financing Arrangements



Revolving credit facilities and long-term debt consist of the following:



|                                                                                                                                                                                                                                                 |  |           |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                                                                                                 |  | March 31, |        
|                                                                                                                                                                                                                                                 |  | 2003      |         |   | 2002 |  
|Domestic revolving credit facilities, interest at prime plus a margin ranging up to 350 basis points or LIBOR plus a margin ranging from 175
to 350 basis points (7.37% at March 31, 2003 and 6.39% at March 31, 2002)                           |  | $         | 45,851  |   |      | $ | 61,947  |  
|Foreign revolving credit facilities, interest rates ranging from 4.8% to 5.85% or LIBOR plus a margin of 150 basis points (5.85% at March 31,
2003 and 5.5% at March 31, 2002)                                                                   |  |           | 12,019  |   |      |   | 3,283   |  
|Convertible senior subordinated notes bearing interest at 6.5%, due May 1, 2007                                                                                                                                                                  |  |           | 4,541   |   |      |   |        |  
|Notes payable bearing interest ranging from 5.3% to 7.1%, due in monthly payments of principal and interest of $297 through April 2004 for
domestic notes and a balloon payment of $1,812 for a foreign note. The notes are secured by equipment |  |           | 5,308   |   |      |   | 7,662   |  
|Foreign notes payable, interest 5.0% through June 2004 and prime less 100 basis points thereafter to June 2007, due in monthly payments of
$117 through June 2007. The notes are secured by buildings                                            |  |           | 5,951   |   |      |   | 6,894   |  
|Bonds payable to the City of Rochester with variable interest rates ranging from 1.35% to 1.40%, interest due monthly. Annual principal
payments ranging from $155 to $575 are due through June 2018                                             |  |           | 3,870   |   |      |   | 4,445   |  
|Other                                                                                                                                                                                                                                            |  |           | 1,033   |   |      |   | 1,108   |  
|                                                                                                                                                                                                                                                 |  |           |         |   |      |   |         |  
|                                                                                                                                                                                                                                                 |  |           | 78,573  |   |      |   | 85,339  |  
|Less current maturities                                                                                                                                                                                                                          |  |           | (68,297 | ) |      |   | (75,946 | )
|                                                                                                                                                                                                                                                 |  |           |         |   |      |   |         |  
|                                                                                                                                                                                                                                                 |  | $         | 10,276  |   |      | $ | 9,393   |  
|                                                                                                                                                                                                                                                 |  |           |         |   |      |   |         |  



The Company restated its Consolidated
Balance Sheets as of March 31, 2003 and 2002 to properly classify its domestic revolving line of credit as a current liability in accordance with the Emerging Issues Task Force conclusions on Issue Number 95-22, Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement (EITF 95-22). This restatement had no impact on the Companys results of operations or cash
flows for the fiscal years ended March 31, 2003, 2002 or 2001. The domestic revolving line of credit is classified as current liability in accordance with EITF 95-22, since the Loan and Security Agreement contain a subjective acceleration clause and
contract provisions that require the cash receipts of the Company to be used to repay amounts outstanding under the credit facility (See Note 18).



30



---

Payment of the bonds is secured by irrevocable letters of credit in favor of the trustee in the amount of $3,943 expiring
in August 2003. The Company is required to maintain letters of credit sufficient to pay all outstanding principal and interest under the bonds. Restricted cash at March 31, 2003 includes $3,943 of cash pledged to back these irrevocable letters of
credit, replacing the previous mortgage on the Rochester headquarters and manufacturing facilities. Interest on the bonds is variable and is payable monthly until, at the option of the Company with the consent of US Bank, the rate is fixed
(conversion date). In the event the Company exercises its option to convert the interest rate on the bonds from a variable rate to a fixed rate, a remarketing agent, currently FBS Investment Services, Inc., shall determine the fixed rate in
accordance with a remarketing agreement. Upon exercise of this option, a mandatory tender shall occur on which date the bonds are called and reissued. Prior to the conversion date, the holders of the bonds may require the trustee to purchase the
bonds at a price equal to the principal amount thereof plus accrued interest thereon. Upon presentation for redemption, the remarketing agent will attempt to resell the bonds at a price that is not less than par. Bond sinking funds and proceeds from
the bonds, to the extent unused, are shown as $325 and $477 in restricted cash and $0 and $198 in other assets at March 31, 2003 and 2002, respectively. In April 2003, notice of redemption was made with redemption occurring in May 2003. All related
restricted cash amounts and debt have been classified as current assets and liabilities.



Aggregate maturities of long-term debt are as follows:



|                      |  |   |       
|--------------------- |  | - | ------
|Year ending March 31: |  |  
|2004                  |  | $ | 68,297
|2005                  |  |   | 1,806 
|2006                  |  |   | 1,711 
|2007                  |  |   | 1,512 
|2008                  |  |   | 5,003 
|Thereafter            |  |   | 244   
|                      |  |   |       
|                      |  | $ | 78,573
|                      |  |   |       



In May 2002, pursuant to a securities
purchase agreement, the Company sold to two investors $5,000 face value of 6 1⁄2% convertible senior subordinated notes with a conversion price of $2.28 per share together with a seven year warrant which provided for the purchase of 788 shares of
the Companys common stock at an exercise price of $2.28 per share. The initial carrying value of the notes was reduced by $532 for the fair value of the common stock warrant issued to the two investors. The discount to the note is being
amortized over the seven-year life of the note.



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



In July 2002, the Company entered into an amendment and termination agreement eliminating the remaining obligation to sell notes and related warrants pursuant to the securities purchase agreement. The Company issued
additional warrants in consideration for the amendment and termination agreement providing for the purchase of 250 shares of the Companys common stock. The fair value of the warrants of $188 was charged to interest expense as a cost of
termination of the agreement.



As of March 31, 2003, the Company had revolving
credit facilities with IBM Credit Corporation and US Bank totaling $80,000 ($65,000   Revolver A and $15,000  Revolver B, respectively) for revolving credit loans and letters of credit, which expire at December
2003. Under available borrowing base limitations, calculated as percentage of eligible accounts receivable and inventory balances, the Company could borrow $46,938 under the agreements at March 31, 2003. In April 2003, the Company entered into new
revolving credit facilities with Congress Financial Corporation and Fleet Capital Corporation, which, as amended to include US Bank, provide up to $90,000 of revolving credit loans and letters of credit and expire in April 2006. The facilities,
which are limited to the lesser of the facilities amount or the available borrowing base, calculated as a percentage of eligible accounts receivable and inventory balances, bear interest at prime or Eurodollar rate plus a margin from 75 to 150 basis
points, and 275 to 350 basis points, respectively, depending on excess available borrowing capacity within the facilities. The Company is obligated to pay a monthly fee of 1⁄2        % on the unused portion
of the facilities. The Company used proceeds to pay off existing domestic revolving credit facilities with IBM Credit Corporation and US Bank, leaving remaining credit available under the new agreements at $17,355 at the closing date of April 29,
2003. The revolving credit facilities are collateralized by substantially all domestic assets and by investments in foreign subsidiaries.



31



---

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



The Company also has separate available lines of credit in certain foreign locations totaling $15,072, due at various dates through May 2003, renewable at the discretion
of the lender. Certain of these lines have been renewed subsequent to year end, consistent with past experience with these lenders. These lines were used in part to repay the note payable balloon payment due in May 2003 and have been expanded
subsequent to March 31, 2003, to replace available credit used for that payment. Advances under these lines of credit bear interest at fixed and variable rates ranging from 4.8% to 5.1% at March 31, 2003. The lines of credit are both unsecured and
secured by certain foreign inventories, receivables and fixed assets.



Note
8. Restructuring Costs



During fiscal 2003, the Company incurred
restructuring costs of $4,249. Of this, $1,810, related to the decision to consolidate separate manufacturing facilities in San Jose, California, into a single facility, consisting of lease continuation costs of $1,037 and accelerated amortization
of leasehold improvements of $773. Additionally, $2,439 of severance costs were incurred, primarily in The Netherlands and in the United States locations, responding to reductions in local business requirements. Restructuring costs remaining
to be paid consist of amounts to satisfy remaining lease term requirements of $537.



Note 9. Other Income (Expense)  Net



The other income
and expense consists of the following:



|                                                           |  |                      |     |      |   |      |  |   |    
|---------------------------------------------------------- |  | -------------------- | --- | ---- | - | ---- |  | - | ---
|                                                           |  | Year Ended March 31,
|                                                           |  | 2003                 |     | 2002 |   | 2001
|Foreign currency gains                                     |  | $                    | 387 |      | $ | 691  |  | $ | 507
|Minority interest in net loss of consolidated subsidiaries |  |                      |    |      |   |     |  |   | 84 
|Other income (expense)-net                                 |  |                      | 171 |      |   | 138  |  |   | 376
|                                                           |  |                      |     |      |   |      |  |   |    
|                                                           |  | $                    | 558 |      | $ | 829  |  | $ | 967
|                                                           |  |                      |     |      |   |      |  |   |    



Note 10. Fair Value of Financial
Instruments



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



Note 11. Commitments
and Contingencies



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



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



32



---

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



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



Total rent expense recognized under
operating leases for the years ended March 31, 2003, 2002 and 2001 totaled $13,329, $10,039 and $5,175, respectively.



In March 2003, the Company sold land and buildings housing its Rochester, Minnesota, location in a transaction valued at $12,000, which is treated as a financing
transaction, because of the continuing use of the property. Proceeds totaled $5,775, after deducting $309 of transaction costs, $1,917 of security deposits and $3,943 of restricted cash placed with US Bank to replace collateral for letters of credit
backing the related City of Rochester Bonds outstanding (See Note 9). Leaseback rental payments total $969, $1,303, $1,330, $1,356, $$1,383 and $24,401 for years ended March 31, 2004, 2005, 2006, 2007, 2008 and thereafter, respectively. Other
manufacturing equipment totaling $1,701 was financed subsequent to recent purchases in sale-leaseback transactions during the year ended March 31, 2003.



The Company is currently a defendant, along with several current and former officers and directors, in a consolidated putative class action captioned in re PEMSTAR
Securities Litigation, alleging violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 12 of the Securities Act of 1933. The lawsuit is a consolidation of several lawsuits, the first of which was
commenced in United States District Court for the District of Minnesota on July 24, 2002. The plaintiffs, several individual shareholders, allege, in essence, that the defendants defrauded the Companys shareholders by making optimistic
statements during a time when they should have known that business prospects were less promising and allege that the registration statement filed by the Company in connection with the secondary offering contained false, material misrepresentations.
An Amended Consolidated Complaint was filed January 9, 2003. On August 23, 2002 and October 2, 2002 two different individual shareholders also commenced virtually identical shareholder derivative actions against the Company as nominal defendant and
its Board. Those actions are currently pending in Unites States District Court for the District of Minnesota. The allegations in the derivative actions are based on many of the same facts that gave rise to the securities action. The lawsuit alleges
that the Board of the Company breached its fiduciary duties. It is too early to predict the likelihood of prevailing on the various lawsuits described above. Pemstar believes the actions are wholly without merit and is vigorously defending against
the claims. The Company has recorded no loss accrual as such amounts are not deemed estimable.



Note 12. Income Taxes



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



|         |  |                      |         |   |      |   |         |      |  |   |      
|-------- |  | -------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -----
|         |  | Year ended March 31,
|         |  | 2003                 |         |   | 2002 |   |         | 2001
|Domestic |  | $                    | (43,342 | ) |      | $ | (57,885 | )    |  | $ | 3,403
|Foreign  |  |                      | 10,677  |   |      |   | 1,942   |      |  |   | 4,716
|         |  |                      |         |   |      |   |         |      |  |   |      
|         |  | $                    | (32,665 | ) |      | $ | (55,943 | )    |  | $ | 8,119
|         |  |                      |         |   |      |   |         |      |  |   |      



The provision for income taxes
consisted of the following:



|          |  |                      |       |   |      |   |        |      |  |   |        |  
|--------- |  | -------------------- | ----- | - | ---- | - | ------ | ---- |  | - | ------ | -
|          |  | Year ended March 31, |      
|          |  | 2003                 |       |   | 2002 |   |        | 2001 | 
|Current:  |  |                      |       |   |      |   |        |      |  |   |        |  
|Domestic  |  | $                    | 76    |   |      | $ | (5,638 | )    |  | $ | 2,500  |  
|Foreign   |  |                      | 1,261 |   |      |   | 2,653  |      |  |   | (918   | )
|          |  |                      |       |   |      |   |        |      |  |   |        |  
|          |  |                      | 1,337 |   |      |   | (2,985 | )    |  |   | 1,582  |  
|Deferred: |  |                      |       |   |      |   |        |      |  |   |        |  
|Domestic  |  |                      |      |   |      |   | 2,418  |      |  |   | (1,247 | )
|Foreign   |  |                      | (584  | ) |      |   | (1,359 | )    |  |   | 1,101  |  
|          |  |                      |       |   |      |   |        |      |  |   |        |  
|          |  |                      | (584  | ) |      |   | 1,059  |      |  |   | (146   | )
|          |  |                      |       |   |      |   |        |      |  |   |        |  
|          |  | $                    | 753   |   |      | $ | (1,926 | )    |  | $ | 1,436  |  
|          |  |                      |       |   |      |   |        |      |  |   |        |  



33



---

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, |        
|                                                           |  | 2003                 |         |   | 2002 |   |         | 2001 | 
|Computed expected tax rate                               |  | $                    | (11,106 | ) |      | $ | (19,021 | )    |  | $ | 2,761  |  
|Increase (decrease) in income taxes resulting from:        |  |                      |         |   |      |   |         |      |  |   |        |  
|State taxes, net of credits and federal income tax benefit |  |                      | (2,224  | ) |      |   | (1,608  | )    |  |   | 105    |  
|Benefit of foreign sales/extraterritorial income exclusion |  |                      | (263    | ) |      |   | (291    | )    |  |   | (244   | )
|Foreign taxes                                              |  |                      | (5,409  | ) |      |   | (7,896  | )    |  |   | (1,284 | )
|Valuation allowance                                        |  |                      | 8,553   |   |      |   | 26,962  |      |  |   |       |  
|Other                                                      |  |                      | 384     |   |      |   | (72     | )    |  |   | 98     |  
|                                                           |  |                      |         |   |      |   |         |      |  |   |        |  
|                                                           |  | $                    | 753     |   |      | $ | (1,926  | )    |  | $ | 1,436  |  
|                                                           |  |                      |         |   |      |   |         |      |  |   |        |  



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



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



No provision has been made for U.S.
income taxes related to undistributed earnings of foreign subsidiaries, which are intended to be permanently reinvested. The Company has approximately $67,000 of domestic net operating loss carryforwards, which will expire in 2023. Of this $67,000
carryforward total, $8,455 will result in tax benefits that will not reduce tax expense on current earnings, but rather will increase additional paid-in-capital. The Company has approximately $9,747 of foreign net operating loss carryforwards that
have an unlimited carryforward period, and foreign net operating loss carryforwards of $3,241 that will expire from 2011 to 2012. The state tax credit carryforwards of $1,900 expire at varying dates through 2016.



The foreign tax expense in China was decreased by $725 ($0.02 and $0.02 per share on a basic
and diluted basis, respectively) in fiscal 2003, by $323 ($.01 and $.01 per share on a basic and diluted basis, respectively) in fiscal 2002 and by $480 ($.02 and $.02 per share on a basic and diluted basis, respectively) in fiscal year 2002 as a
result of the benefit of a tax holiday. This holiday ran at 50% relief of the normal 15% income tax rate through December 31, 2000, and will continue at the 7.5% rate thereafter through December 31, 2003. Beginning on January 1, 2004, China began a
new tax holiday and will use a 10% tax rate through December 31, 2006. The foreign tax expense in Singapore was decreased by $1,082 ($.03 and $.03 per share on a basic and diluted basis, respectively) and $774 ($.02 and $.02 per share on a basic and
diluted basis, respectively) in fiscal 2002, as the result of the benefit of a tax holiday. This holiday will continue at full relief of the normal 24.5% income tax rate through March 31, 2005. During fiscal 2003, current tax expense in Mexico was
reduced through the use of $21,900 of net operating losses carried forward from prior years. Such loss carryforwards had been fully reserved for at March 31, 2002.



34



---

Note 13. Mandatorily Redeemable and Convertible Preferred Stock



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



Note 14. Geographic and Concentration of Credit Risk Information



The Company derives its revenue from one reportable segment, electronic manufacturing services. The Company classifies sales geographically based upon country from which
the final product is delivered. The following is a summary of net sales and long-lived assets by geographic location:



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



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



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



|           |  |                      |   |  |      |   |  |      |  
|---------- |  | -------------------- | - |  | ---- | - |  | ---- | -
|           |  | Year Ended March 31, |  
|           |  | 2003                 |   |  | 2002 |   |  | 2001 |  
|Customer A |  | 23.4                 | % |  | 24.8 | % |  | 23.0 | %
|Customer B |  | 10.8                 |   |  | 14.0 |   |  | 16.0 |  
|Customer C |  |                     |   |  |     |   |  | 11.0 |  



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



Note 15. Shareholders Equity



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



The Company has 1,015 shares
of common stock available for grant or sale to board members and employees under incentive stock option and purchase plans approved by shareholders. Options are generally granted at prices equal to the fair market value on the dates of grant. All
options are exercisable over a ten-year period.



35



---

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



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



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



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



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



Note 16. Employee Benefit Plans



Retirement Plans



The Company sponsors various employee retirement savings plans that allow qualified employees to provide for their retirement on a
tax-deferred basis. In accordance with the terms of the retirement savings plans, the Company is required to match certain of the participants contributions and, at its discretion, may provide employer contributions based on the Companys
performance and other factors. Employer contributions for the years ended March 31, 2003, 2002 and 2001 totaled, $1,486, $1,366 and $1,063, respectively.



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



|Employee | Stock Purchase Plan
|-------- | -------------------



During 2001, the Company established an employee stock discount purchase plan that provides for the sale of up to 1,000 shares, as amended during 2002, of the companys stock at discounted purchase prices,
subject to certain limitations. The cost per share under this plan is 85 percent of the market value of the Companys common stock at the date of purchase, as defined. During the years ended March 31, 2003, 2002 and 2001, 730, 135 and 36 shares
of common stock were issued to employees pursuant to this plan, respectively. The weighted average fair value of shares sold in 2003, 2002 and 2001, was $1.44, $10.06 and $7.84, respectively.



36



---

Note 17. Supplemental Cash Flow Information



|                                                                                                                                           |  |                      |       |      |   |        |  |   |       
|------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------- | ----- | ---- | - | ------ |  | - | ------
|                                                                                                                                           |  | Year Ended March 31,
|                                                                                                                                           |  | 2003                 |       | 2002 |   | 2001  
|Supplemental disclosures for cash flow information:                                                                                        |  |                      |       |      |   |        |  |   |       
|Cash payments for:                                                                                                                         |  |                      |       |      |   |        |  |   |       
|Interest                                                                                                                                   |  | $                    | 7,283 |      | $ | 7,234  |  | $ | 7,344 
|Income taxes                                                                                                                               |  |                      | 1,492 |      |   | 1,812  |  |   | 1,797 
|Supplemental schedule of non-cash investing and financing activities:                                                                      |  |                      |       |      |   |        |  |   |       
|Property and equipment acquired through capital lease agreements                                                                           |  |                      | 2,222 |      |   | 5,230  |  |   | 11,166
|Common stock issued to acquire Pacific Consultants LLC                                                                                     |  |                      |      |      |   | 10,000 |  |   |      
|Common stock warrants for financing fees                                                                                                   |  |                      | 1,056 |      |   |       |  |   |      
|Restricted cash held from sale/leaseback proceeds to replace mortgage as collateral on outstanding letters of credit collateralizing
bonds |  |                      | 3,943 |      |   |       |  |   |      
|Lease deposits held from sale/leaseback proceeds                                                                                           |  |                      | 1,917 |      |   |       |  |   |      
|Deferred financing costs held from sale/leaseback proceeds                                                                                 |  |                      | 309   |      |   |       |  |   |      



Note 18. Cash Requirements



The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred an operating loss of approximately $24,353 for the year
ended March 31, 2003, which included $4,249 of restructuring costs. The Company continues to evaluate its operations to determine the need for further restructuring in response to market conditions. Although the operating loss for fiscal 2003 was
not unexpected, given the continuing downturn in the economy after September 11, 2001, and the resultant impact on several large customers of the Company in certain industry sectors has been significant, the Companys ability to continue to
fund its operations and to grow the business depends on its ability to generate additional cash from operations or obtain additional sources of funds for working capital. During fiscal 2003, the Company generated cash from operations, principally
from improving its working capital utilization, as well as, cash from new financing including the sale and leaseback of certain land, buildings and equipment.



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



During the quarter ended December 31, 2003 the Company was in negotiation with lenders related to shortfalls from minimum cash flow
covenants in its domestic credit facilities. In January, 2004 the Company obtained an amendment to those facilities, with effectiveness from September 30, 2003, reducing the required minimum cash flow requirements, limiting their application to
quarterly measurement periods (reduced from monthly requirements) and providing that such covenants will not be applicable during quarters in which the Company maintains $13,000 of borrowing availability under the line in excess of actual borrowed
amounts. An additional amendment was obtained, which temporarily allows for full use of available collateral, which could have become restricted by customer balance concentration limits of the facilities.



Compliance by the Company with certain covenants in its new credit facility is dependent upon
the Company achieving certain revenue and expense targets in its fiscal 2004 operating plan. The Company expects to meet its financial projections for the 2004 fiscal year. The Company also believes that, if necessary, it would be able to secure
additional financing from its lenders or sell additional Company equity securities; however, there can be no assurance that such funding can be obtained or that future credit facility violations will be waived.



Management believes that, as a result of the restructuring actions it has taken to reduce
cash expenditures, the efforts it continues to make to increase revenues from continuing customers and to generate new customers in various industry sectors, the replacement of its revolving credit facilities it has obtained, and the new agreements
it has reached to provide additional borrowing capacity, it will meet its fiscal 2004 financial plan; however, there can be no assurance that such financial plan will be met.



37



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REPORT OF INDEPENDENT AUDITORS



The Board of Directors and Shareholders

PEMSTAR Inc.



We have audited the accompanying consolidated balance
sheets of PEMSTAR Inc. as of March 31, 2003 and 2002, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended March 31, 2003. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



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



In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of PEMSTAR Inc. at March 31, 2003 and 2002 and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2003, in conformity with
accounting principles generally accepted in the United States.



As discussed in
Notes 1 and 6 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, in 2003. As described in Note 7, the Company has restated its
consolidated financial statements for March 31, 2003 and March 31, 2002.



Ernst & Young LLP



Minneapolis, Minnesota

May 7, 2003, except for Note 18,

as to which the date is July 10, 2003

and paragraphs one of Note 7 and

three of Note 18, as to which the date

is February 10, 2004



38



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QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

PEMSTAR Inc.



The following table sets
forth unaudited quarterly financial information of PEMSTAR for the quarterly periods in fiscal 2003 and 2002. Historically, we have experienced some seasonal variation in net sales, with net sales typically being highest in the quarter ended
December 31 and lowest in the quarter ended March 31. This seasonal variation reflects the order patterns of our largest customers, who typically order a higher proportion of their annual production in their final fiscal quarter. This variation may
be offset in part by internal growth and acquisitions. This information has been derived from our monthly consolidated financial statements which are unaudited, but, in the opinion of management, fairly represent our financial performance. This
information should be read in conjunction with the consolidated financial statements and the related notes contained elsewhere in this report. The operating results for any previous quarter are not necessarily indicative of results for any future
period.



|                                                                                |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | ------------- |  | - | ------------ | - |  | ------------ | ------- | - | ------------ | - | ------- | ------------- |  | - | ------------ | - |  | - | ------- | - |  | - | ------- | -
|Quarter Ended (In thousands, except per share
data)                             |  | Mar. 31,2003 |         |   | Dec. 31,2002 |   |         | Sept. 30,2002 |  |   | June 30,2002 |   |  | Mar. 31,2002 |         |   | Dec. 31,2001 |   |         | Sept. 30,2001 |  |   | June 30,2001 |  
|Net Sales                                                                       |  | $            | 166,848 |   |              | $ | 171,841 |               |  | $ | 176,382      |   |  | $            | 153,104 |   |              | $ | 145,686 |               |  | $ | 171,223      |   |  | $ | 173,380 |   |  | $ | 167,204 |  
|Cost of goods sold                                                              |  |              | 156,944 |   |              |   | 159,199 |               |  |   | 168,495      |   |  |              | 152,436 |   |              |   | 147,147 |               |  |   | 170,202      |   |  |   | 158,343 |   |  |   | 151,765 |  
|                                                                                |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|Gross profit                                                                    |  |              | 9,904   |   |              |   | 12,642  |               |  |   | 7,887        |   |  |              | 668     |   |              |   | (1,461  | )             |  |   | 1,021        |   |  |   | 15,037  |   |  |   | 15,439  |  
|                                                                                |  |              |         |   |              |   |         |              
|Selling, general and administrative expenses                                    |  |              | 11,097  |   |              |   | 11,819  |               |  |   | 13,790       |   |  |              | 14,370  |   |              |   | 13,523  |               |  |   | 19,303       |   |  |   | 10,395  |   |  |   | 10,130  |  
|Restructuring                                                                   |  |              | (134    | ) |              |   | 503     |               |  |   | 924          |   |  |              | 2,956   |   |              |   |        |               |  |   |             |   |  |   |        |   |  |   |        |  
|Amortization                                                                    |  |              | 27      |   |              |   | 27      |               |  |   | 27           |   |  |              | 48      |   |              |   | 636     |               |  |   | 522          |   |  |   | 516     |   |  |   | 478     |  
|Goodwill impairment charges                                                     |  |              |        |   |              |   |        |               |  |   |             |   |  |              |        |   |              |   | 24,228  |               |  |   |             |   |  |   |        |   |  |   |        |  
|                                                                                |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|Operating (loss) income                                                         |  |              | (1,086  | ) |              |   | 293     |               |  |   | (6,854       | ) |  |              | (16,706 | ) |              |   | (39,848 | )             |  |   | (18,804      | ) |  |   | 4,126   |   |  |   | 4,831   |  
|                                                                                |  |              |         |   |              |   |         |              
|Other income (expense)net                                                      |  |              | 1,033   |   |              |   | (288    | )             |  |   | (164         | ) |  |              | (23     | ) |              |   | (111    | )             |  |   | 528          |   |  |   | 194     |   |  |   | 217     |  
|Interest expensenet                                                            |  |              | (1,733  | ) |              |   | (1,706  | )             |  |   | (2,596       | ) |  |              | (2,835  | ) |              |   | (1,991  | )             |  |   | (1,589       | ) |  |   | (1,491  | ) |  |   | (2,006  | )
|                                                                                |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|(Loss) income before income taxes and cumulative effect of an accounting change |  |              | (1,786  | ) |              |   | (1,701  | )             |  |   | (9,614       | ) |  |              | (19,564 | ) |              |   | (41,950 | )             |  |   | (19,865      | ) |  |   | 2,829   |   |  |   | 3,042   |  
|                                                                                |  |              |         |   |              |   |         |              
|Income tax (benefit) expense                                                    |  |              | (112    | ) |              |   | 242     |               |  |   | 351          |   |  |              | 272     |   |              |   | 5,018   |               |  |   | (7,332       | ) |  |   | (143    | ) |  |   | 530     |  
|                                                                                |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|(Loss) income before cumulative effect of accounting change                     |  |              | (1,674  | ) |              |   | (1,943  | )             |  |   | (9,965       | ) |  |              | (19,836 | ) |              |   | (49,968 | )             |  |   | (12,533      | ) |  |   | 2,972   |   |  |   | 2,512   |  
|                                                                                |  |              |         |   |              |   |         |              
|Cumulative effect of accounting change1                                         |  |              |        |   |              |   |        |               |  |   |             |   |  |              | (5,346  | ) |              |   |        |               |  |   |             |   |  |   |        |   |  |   |        |  
|                                                                                |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|                                                                                |  |              |         |   |              |   |         |              
|Net (loss) income                                                               |  | $            | (1,674  | ) |              | $ | (1,943  | )             |  | $ | (9,965       | ) |  | $            | (25,182 | ) |              | $ | (46,968 | )             |  | $ | (12,533      | ) |  | $ | 2,972   |   |  | $ | 2,512   |  
|                                                                                |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|                                                                                |  |              |         |   |              |   |         |              
|(Loss) income before cumulative effect of accounting change per common share:   |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|Basic                                                                           |  | $            | (.04    | ) |              | $ | (.05    | )             |  | $ | (.27         | ) |  | $            | (.54    | ) |              | $ | (1.28   | )             |  | $ | (.34         | ) |  | $ | .08     |   |  | $ | .08     |  
|Diluted                                                                         |  |              | (.04    | ) |              |   | (.05    | )             |  |   | (.27         | ) |  |              | (.54    | ) |              |   | (1.28   | )             |  |   | (.34         | ) |  |   | .08     |   |  |   | .08     |  
|                                                                                |  |              |         |   |              |   |         |              
|Net (loss) income per common share:                                             |  |              |         |   |              |   |         |               |  |   |              |   |  |              |         |   |              |   |         |               |  |   |              |   |  |   |         |   |  |   |         |  
|Basic                                                                           |  | $            | (.04    | ) |              | $ | (.05    | )             |  | $ | (.27         | ) |  | $            | (.68    | ) |              | $ | (1.28   | )             |  | $ | (.34         | ) |  | $ | .08     |   |  | $ | .08     |  
|Diluted                                                                         |  |              | (.04    | ) |              |   | (.05    | )             |  |   | (.27         | ) |  |              | (.68    | ) |              |   | (1.28   | )             |  |   | (.34         | ) |  |   | .08     |   |  |   | .08     |  

---

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



39



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MARKET FOR PEMSTARS COMMON STOCK AND RELATED SHAREHOLDER MATTERS

PEMSTAR Inc.



Market Information



Our
common stock has been quoted on the NASDAQ national market under the symbol PMTR since our initial public offering of common stock in August 2000. The following table sets forth, for the periods indicated, the high and low sales prices
per share of our common stock, as reported on the NASDAQ national market.



|                                      |  |      |       |     |   |     
|------------------------------------- |  | ---- | ----- | --- | - | ----
|                                      |  | High |       | Low
|Fiscal 2002:                          |  |      |       |     |   |     
|First Quarter                         |  | $    | 15.00 |     | $ | 6.38
|Second Quarter                        |  | $    | 18.55 |     | $ | 9.06
|Third Quarter                         |  | $    | 16.48 |     | $ | 9.94
|Fourth Quarter                        |  | $    | 13.98 |     | $ | 8.36
|                                      |  |     
|Fiscal 2003:                          |  |      |       |     |   |     
|First Quarter                         |  | $    | 9.68  |     | $ | 1.13
|Second Quarter                        |  | $    | 1.80  |     | $ | .77 
|Third Quarter                         |  | $    | 2.47  |     | $ | .80 
|Fourth Quarter                        |  | $    | 3.90  |     | $ | 2.05
|                                      |  |     
|Fiscal 2004:                          |  |      |       |     |   |     
|First Quarter (through June 24, 2003) |  | $    | 4.45  |     | $ | 2.06



Holders



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



Dividends



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



40