<PAGE>

      As filed with the Securities and Exchange Commission on May 16, 2000
                                                         Registration No.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                ---------------

                                    FORM S-1
                             REGISTRATION STATEMENT
                                     under
                           The Securities Act of 1933

                                ---------------

                                  PEMSTAR INC.
             (Exact name of registrant as specified in its charter)

                                     3672                  41-1771227
      Minnesota               (Primary Standard         (I.R.S. Employer
   (State or other                Industrial         Identification Number)
   jurisdiction of            Classification Code
   incorporation or                 Number)
    organization)


                           3535 Technology Drive N.W.
                           Rochester, Minnesota 55901
                                 (507) 288-6720
         (Address, including zip code, and telephone number, including
            area code, of registrant's principal executive offices)

                                Allen J. Berning
                                  Pemstar Inc.
                           3535 Technology Drive N.W.
                           Rochester, Minnesota 55901
                                 (507) 288-6720
      (Name, address, including zip code, and telephone number, including
                        area code, of agent for service)

                                ---------------

                                   Copies to:

        Jonathan B. Abram                           Dennis M. Myers
       Dorsey & Whitney LLP                         Kirkland & Ellis
      220 South Sixth Street                    200 East Randolph Drive
Minneapolis, Minnesota 55402-1498               Chicago, Illinois 60601
          (612) 340-2600                             (312) 861-2000


                                ---------------

        Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.

                                ---------------

   If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [_]
   If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [_]
   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering: [_]
   If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]

                        CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                            Maximum Aggregate
 Titles of Each Class of Securities to be    Offering Price      Amount of
                Registered                         (1)        Registration Fee
------------------------------------------------------------------------------
<S>                                         <C>               <C>
Common Stock, par value $.01 per share
 (2).......................................   $115,000,000        $30,360
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1)  Estimated solely for purposes of calculating the registration fee pursuant
     to Rule 457(o).
(2)  Includes certain associated preferred stock rights that will be issued to
     each shareholder pursuant to a rights agreement.

                                ---------------

   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities, and it is not soliciting an offer to buy      +
+these securities, in any jurisdiction where the offer or sale in not          +
+permitted.                                                                    +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                   Subject to Completion, dated May 16, 2000

PROSPECTUS

                                         Shares

                                    PEMSTAR

                                  Common Stock

--------------------------------------------------------------------------------

  This is our initial public offering of common stock. We are offering up to
           shares of common stock. No public market currently exists for our
shares.

  We propose to list our common stock on the Nasdaq National Market under the
symbol "PMTR." The anticipated price range is $      to $      per share.

    Investing in the shares involves risks. "Risk Factors" begin on page 8.

<TABLE>
<CAPTION>
                                                                      Per
                                                                     Share Total
                                                                     ----- -----
<S>                                                                  <C>   <C>
Public Offering Price............................................... $     $
Underwriting Discount...............................................
Proceeds to Pemstar.................................................
</TABLE>

  We and certain selling shareholders have granted the underwriters a 30-day
option to purchase up to       additional shares of common stock on the same
terms and conditions as set forth above to cover over-allotments, if any.

  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.

Lehman Brothers, on behalf of the underwriters, expects to deliver the shares
on or about              , 2000.

--------------------------------------------------------------------------------

Lehman Brothers                                               Robertson Stephens

           Chase H&Q

                      CIBC World Markets

                                                        Fidelity Capital Markets
                           a division of National Financial Services Corporation

       , 2000
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                      Page
                                      ----
<S>                                   <C>
Prospectus Summary..................    3
Risk Factors........................    8
Use of Proceeds.....................   14
Dividend Policy.....................   14
Capitalization......................   15
Dilution............................   16
Unaudited Pro Forma Consolidated
 Financial Data.....................   17
Selected Consolidated Financial
 Data...............................   20
Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations......................   21
</TABLE>
<TABLE>
<CAPTION>
                                   Page
                                   ----
<S>                                <C>
Business.........................   28
Management.......................   40
Related Party Transactions.......   47
Principal Shareholders...........   48
Description of Capital Stock.....   50
Shares Eligible for Future Sale..   54
Underwriting.....................   56
Legal Matters....................   58
Experts..........................   58
Where You Can Find More
 Information.....................   59
Index to Financial Statements....  F-1
</TABLE>


                             ABOUT THIS PROSPECTUS

   You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it
is unlawful. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.

   This preliminary prospectus is subject to completion prior to this offering.

   Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are forward-looking statements. These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"anticipates," "believe," "continue," "could," "estimate," "expects,"
"intends," "may," "plans," "seeks," "should," or "will" or the negative of
these terms or similar expressions are generally intended to identify forward-
looking statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including the factors discussed under "Risk Factors."

   PEMSTAR(R) is a registered trademark of Pemstar Inc. Other trademarks and
trade names appearing in this prospectus are the property of their respective
holders.

   Until           , 2000, all dealers selling shares of the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

                                       2
<PAGE>

                               PROSPECTUS SUMMARY

   This summary highlights information we present in greater detail elsewhere
in this prospectus. This prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those discussed in the forward-looking statements as a result of factors
described under "Risk Factors" and elsewhere in this prospectus.

                                  Pemstar Inc.

   We are a leading provider of electronics manufacturing services, or EMS, to
original equipment manufacturers, or OEMs, in the communications, computing,
data storage, industrial and medical equipment markets. We offer our
communications industry customers substantial expertise and experience in the
wireless and optical systems markets that are experiencing rapidly growing
demand for specialized engineering and manufacturing services. We provide a
comprehensive range of engineering, manufacturing and fulfillment services to
our customers on a global basis through nine facilities strategically located
in the United States, Mexico, Asia and Europe. Our comprehensive service
offerings support our customers' needs from product development and design
through manufacturing to worldwide distribution and aftermarket support. Since
our founding in 1994, we have experienced strong financial growth and
consistent profitability, with Manufacturing Market Insider ranking our revenue
growth rate of 110% in fiscal 2000 the highest among the top twenty domestic
EMS companies for their most recent fiscal year.

   The EMS industry is experiencing dramatic growth primarily driven by the
overall growth of the electronics industry, increased use of outsourcing among
OEMs and frequent OEM asset divestitures to EMS businesses. By outsourcing EMS,
OEMs are able to focus on their core competencies, such as product development,
sales, marketing and customer service, while leveraging the expertise of EMS
providers in assembly and test operations and supply chain management. OEMs are
increasingly outsourcing a broad spectrum of design services, including product
definition, design for manufacturability and design for test. Technology
Forecasters, Inc., or TFI, projects that the global EMS industry will grow at
an average annual rate of 20%, from $60 billion of revenues in 1998 to $149
billion in 2003. TFI also projects that the communications segment, which
represented $19 billion of revenues in 1998, will be the fastest growing EMS
market through 2003. Additionally, the EMS industry is highly fragmented, with
over 3,000 independent EMS companies in existence and the twenty largest
companies accounting for only 56% of the worldwide market in 1998 based on
revenues.

   Our customers include industry leading OEMs such as 3M, Efficient Networks,
Electronics For Imaging, Fluke Corporation, Fujitsu, Hewlett Packard,
Honeywell, IBM, Motorola, Pinnacle, RSA, Seagate and Sony. We also have
leveraged our expertise in the wireless and optical systems markets to develop
strong relationships with a number of emerging wireless and optical systems
OEMs, including Ancor Communications, Interwave, Optical Networks, Optical
Solutions, Repeater Technologies and Western Multiplex.

   Over the past several years, we have completed a number of acquisitions and
established new operations in order to expand our geographic presence, enhance
our product and service offerings, diversify our customer base and increase our
production capacity. In June 1999, we acquired Quadrus Manufacturing, a
division of Bell Microproducts, located in San Jose, California, which
primarily serves the communications sector in North America. In May 1999, we
also acquired a division of Fluke Corporation located in Almelo, the
Netherlands, which primarily serves the industrial equipment sector in Europe
and North America. Since 1994, we have established operations in Guadalajara,
Mexico; Tianjin, China; Singapore and Bangkok, Thailand, which have expanded
our manufacturing and distribution capabilities and further broadened our
customer base. We continue to actively pursue potential acquisitions to
complement our organic growth and to expand our business.

                                       3
<PAGE>


                           Our Competitive Strengths

   We have established strong, long-term relationships with numerous OEMs, many
of which are leaders in their respective markets. Our business is built on
several specific strengths, including the following:

  .  World-Class Engineering Capabilities. Utilizing over 400 engineering
     professionals worldwide, we differentiate ourselves in the EMS
     marketplace by providing our customers with world-class engineering and
     product management services. Our engineering capabilities enable us to
     design and enhance the manufacturability of our customers' products,
     thereby increasing product quality, reducing both time to market and
     manufacturing costs as well as improving our customers' overall
     profitability.

  .  Communications Focus with Specific Wireless and Optical Systems
     Expertise. We focus substantial resources on the rapidly expanding
     communications industry and have developed specific expertise in the
     high growth wireless and optical systems market segments. As a result,
     revenues from communications OEMs increased to approximately 34% of our
     total revenues in fiscal 2000 from 16% in fiscal 1999.

  .  Comprehensive Manufacturing and Fulfillment Services. We complement our
     engineering capabilities with a comprehensive range of manufacturing,
     value-added assembly, final systems build-to-order, worldwide
     distribution and aftermarket services. These capabilities enable us to
     provide OEMs with a complete solution for all of their EMS needs.

  .  Global Scale and Infrastructure. We have established a network of
     facilities in the world's major electronics markets--North America,
     Europe and Asia--to serve the increasing outsourcing needs of both
     multinational and regional OEMs. As a result, we are able to reduce the
     time and cost required to bring our customers' products to market.

                                  Our Strategy

   Our objective is to enhance our position as a leading EMS provider to OEMs
worldwide. We intend to achieve this objective by continuing to employ the
following strategies:

  .  Leverage our world-class engineering services;

  .  Provide comprehensive engineering, manufacturing and fulfillment service
     offerings;

  .  Focus on high growth EMS market segments;

  .  Expand our global scale and infrastructure;

  .  Pursue selective acquisitions;

  .  Focus on quality management; and

  .  Provide superior supply chain management.

                                ----------------

   Pemstar is a Minnesota corporation incorporated in 1994. Our principal
executive office is located at 3535 Technology Drive N.W., Rochester, Minnesota
55901. Our telephone number is (507) 288-6720. We maintain a website on the
Internet at www.pemstar.com. Our website, and the information contained
therein, is not a part of this prospectus.

                                       4
<PAGE>

                                  The Offering

Common stock offered by Pemstar.....          shares

Common stock to be outstanding
 after the offering.................
                                              shares

Use of proceeds.....................    We intend to use the net proceeds from
                                        this offering to repay existing
                                        indebtedness and for general corporate
                                        purposes, including working capital,
                                        capital expenditures and possible
                                        acquisitions. See "Use of Proceeds."

Proposed Nasdaq National Market         "PMTR"
symbol..............................

   The number of shares that will be outstanding after the offering is based on
the number of shares outstanding as of March 31, 2000, and excludes:

  .  3,845,232 shares of common stock issuable upon exercise of stock options
     outstanding as of March 31, 2000, with a weighted average exercise price
     of $4.35 per share; and

  .  1,327,362 additional shares reserved for issuance under our stock option
     plans as of March 31, 2000.

   Our fiscal year ends on March 31 of each year and fiscal years are
identified in this prospectus according to the calendar year in which they end.
For example, the fiscal year ended March 31, 2000, is referred to as "fiscal
2000." Except as otherwise indicated, all information in this prospectus
assumes that the underwriters do not exercise the option granted by us and
certain selling shareholders to purchase additional shares in this offering and
that all of our outstanding preferred stock is converted into common stock upon
the consummation of this offering and reflects a 3-for-1 stock split, which was
effective in May 2000.

                                       5
<PAGE>

                      Summary Consolidated 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 elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                           Year Ended March 31,
                                ----------------------------------------------
                                 1996     1997      1998      1999      2000
                                -------  -------  --------  --------  --------
                                  (in thousands, except per share data)
<S>                             <C>      <C>      <C>       <C>       <C>
Consolidated Statements of
 Income Data:
Net sales.....................  $22,021  $31,895  $165,049  $187,381  $393,842
Costs of goods sold...........   18,724   27,347   147,962   172,219   363,974
                                -------  -------  --------  --------  --------
Gross profit..................    3,297    4,548    17,087    15,162    29,868
Selling, general and
 administrative expenses......    2,309    2,976     8,328    10,955    21,576
Amortization..................       --       --        54       190     1,281
                                -------  -------  --------  --------  --------
Operating income..............      988    1,572     8,705     4,017     7,011
Other income (expense) -net...      187      247       455      (438)      (74)
Interest expense..............     (255)    (315)     (746)     (640)   (3,588)
                                -------  -------  --------  --------  --------
Income before income taxes....      920    1,504     8,414     2,939     3,349
Income tax expense............      289      554     3,097     1,273       698
                                -------  -------  --------  --------  --------
Net income....................  $   631  $   950  $  5,317  $  1,666  $  2,651
                                =======  =======  ========  ========  ========
Net income per share:
  Basic.......................  $  0.08  $  0.12  $   0.55  $   0.15  $   0.23
  Diluted.....................     0.08     0.12      0.49      0.12      0.15
Weighted average number of
 common shares outstanding
 (1):
  Basic.......................    7,645    8,009     9,653    10,897    11,503
  Diluted.....................    7,758    8,039    10,874    14,143    17,167
Other Financial Data:
Depreciation..................  $   600  $   911  $  1,929  $  3,331  $  7,455
Capital expenditures..........    1,587    2,887     8,393     8,657    13,415
Supplemental Data:
EBITDA (2)....................  $ 1,775  $ 2,730  $ 11,143   $ 7,100  $ 15,673
Net cash provided by (used in)
 operating activities.........      150      776    (1,374)       65   (20,225)
Net cash provided by (used in)
 investing activities.........   (1,576)  (2,938)  (10,126)   (5,545)  (53,489)
Net cash provided by (used in)
 financing activities.........    1,343    2,133    14,661     3,112    75,612
</TABLE>

                                       6
<PAGE>

   The as adjusted consolidated balance sheet data gives effect to the
automatic conversion of all of our outstanding shares of preferred stock into
shares of common stock upon consummation of this offering and the consummation
of this offering and the application of the net proceeds as described under
"Use of Proceeds," as if each had occurred on March 31, 2000.

<TABLE>
<CAPTION>
                                                        As of March 31, 2000
                                                      ------------------------
                                                               As Adjusted (3)
                                                       Actual    (unaudited)
                                                      -------- ---------------
                                                           (in thousands)
<S>                                                   <C>      <C>
Consolidated Balance Sheet Data:
Unrestricted cash and cash equivalents............... $  2,727     $41,427
Working capital......................................   49,649      96,749
Total assets.........................................  190,451     229,151
Long-term debt and capital lease obligations less
 current maturities..................................   55,181      10,031
Total shareholders' equity...........................   22,673     141,472
</TABLE>
--------
(1)  For an explanation of the determination of the weighted average number of
     common shares outstanding used in computing net income per share, see Note
     1 of the notes to consolidated financial statements.

(2)  EBITDA means earnings before net interest expense, income taxes,
     depreciation and amortization. EBITDA is presented because we believe it
     is an indicator of our ability to incur and service debt and a similar
     formula is used by our lenders in determining compliance with financial
     covenants. However, EBITDA should not be considered as an alternative to
     cash flow from operating activities, as a measure of liquidity or as an
     alternative to net income as a measure of operating results in accordance
     with generally accepted accounting principles.

(3)  We intend to use approximately $63.9 million of the net proceeds from this
     offering to repay existing indebtedness. The table above reflects the
     repayment of $53.6 million, the amount of our indebtedness outstanding as
     of March 31, 2000. Subsequently, we incurred additional indebtedness of
     $10.3 million. See "Use of Proceeds."

                                       7
<PAGE>

                                  RISK FACTORS

   You should carefully consider the risks described below before making a
decision to buy our shares. If any of the following risks actually occur, our
business could be harmed. In that event, the trading price of our shares might
decline, and you could lose all or part of your investment. You should also
refer to the other information set forth in this prospectus, including our
consolidated financial statements and related notes.

                  Risks Relating to Our Business and Industry

A downturn in the EMS markets we serve would likely negatively affect our net
sales.

   The communications, computing, data storage, industrial and medical
equipment markets of the EMS industry are characterized by intense competition,
relatively short product life-cycles and significant fluctuations in product
demand. In addition, these EMS industry markets are generally subject to rapid
technological change and product obsolescence. If any of these factors or other
factors reduce demand for specific products or components that we design or
manufacture for our customers, our net sales would likely be negatively
affected. Furthermore, these industries are subject to economic cycles and have
in the past experienced, and are likely in the future to experience,
recessionary periods. A recession or any other event leading to excess capacity
or a downturn in the EMS markets we serve would likely negatively affect our
net sales.

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

   We depend on a relatively small number of customers for a significant
portion of our net sales. Our two largest customers in fiscal 2000 were IBM and
Motorola, which represented approximately 37% and 15% of our total net sales.
In addition, our five largest customers in fiscal 2000 accounted for
approximately 75% of our net sales. We expect to continue to depend upon a
relatively small number of customers for a significant percentage of our net
sales. Because our major customers represent such a large part of our business,
the loss of any of our major customers could negatively impact our business.

   Our major customers may not continue to purchase products and services from
us at current levels or at all. For various reasons, including consolidation in
our customers' industries, we have in the past and expect in the future to
terminate or lose relationships with customers. We may not be able to expand
our customer base to make up any sales shortfalls if we lose a major customer.
Our attempts to diversify our customer base and reduce our reliance on
particular customers may not be successful.

Our business is not typified by long-term contracts, and cancellations,
reductions or delays in customer orders would adversely affect our
profitability.

   We do not typically obtain firm long-term purchase orders or commitments
from our customers. We work closely with our customers to develop forecasts for
future orders, but these forecasts are not binding. Customers may cancel their
orders, change production quantities from forecast volumes or delay production
for a number of reasons beyond our control. Any material delay, cancellation or
reduction of orders from our largest customers could cause our net sales to
decline significantly. In addition, as many of our costs and operating expenses
are relatively fixed, a reduction in customer demand can decrease our gross
margins and adversely affect our business, financial condition and results of
operations.

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

   Many of the products we manufacture require one or more components that we
order from sole-source suppliers. Supply shortages for a particular component
can delay production of all products using that component or cause cost
increases in the services we provide. In the past, some of the materials we
use, such

                                       8
<PAGE>

as capacitors and memory and logic devices, have been subject to industry-wide
shortages. As a result, suppliers have been forced to allocate available
quantities among their customers and we have not been able to obtain all of the
materials desired. Our inability to obtain these needed materials could slow
production or assembly, delay shipments to our customers, increase costs and
reduce operating income. In certain circumstances, we may bear the risk of
periodic component price increases. Accordingly, some component price increases
could increase costs and reduce our operating income.

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

We have experienced significant growth in a short period of time and we may
have trouble managing our expansion and integrating acquired businesses.

   We have grown rapidly in recent years due to acquisitions and organic
growth. Since 1994, we have completed two acquisitions and developed two
greenfield operations. As a result, we have a limited history of owning and
operating our acquired businesses on a consolidated basis. We cannot assure you
that we will be able to meet performance expectations or successfully integrate
our acquired businesses on a timely basis without disrupting the quality and
reliability of service to our customers or diverting management resources. Our
rapid growth has placed and will continue to place a significant strain on our
management, financial resources and on our information, operations and
financial systems. If we are unable to manage our growth effectively, it may
have an adverse effect on our business, financial condition and results of
operations. We cannot assure you that we will manage our growth effectively,
and we expect that our annual growth rate of net sales will decrease in the
future due to our increased size.

   We expect to continue to expand our operations through acquisitions and
greenfield expansions. These activities involve numerous risks, including
difficulty in integrating operations, technologies, systems, and products and
services of these acquired companies; diversion of management's attention; a
disruption of operations; increases in expenses and working capital
requirements; failure to enter effectively markets in which we have limited or
no prior experience and where competitors in such markets have stronger market
positions; and potential loss of key employees and customers of acquired
companies. In addition, acquisitions may involve financial risks, such as the
potential liabilities of the acquired businesses, the dilutive effect of the
issuance of additional equity securities, the incurrence of additional debt,
the financial impact of transaction expenses and the amortization of goodwill
and other intangible assets involved in any transactions that are accounted for
using the purchase method of accounting, and possible adverse tax and
accounting effects.

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

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

  .  Respond more quickly to new or emerging technologies;
  .  Have greater name recognition, critical mass and geographic and market
     presence;
  .  Be better able to take advantage of acquisition opportunities;

                                       9
<PAGE>

  .  Adapt more quickly to changes in customer requirements; and
  .  Devote greater resources to the development, promotion and sale of their
     services.

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

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

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

  .  Variations in customer orders relative to our manufacturing capacity;
  .  Variations in the timing of shipment of products to customers;
  .  Introduction and market acceptance of our customers' new products;
  .  Changes in competitive and economic conditions generally or in our
     customers' markets;
  .  Effectiveness of our manufacturing processes, including controlling
     costs;
  .  Changes in cost and availability of components or skilled labor; and
  .  The timing and price we pay for acquisitions and related acquisition
     costs.

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

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

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

We will need additional financing to support our future growth.

   We expect to continue to make substantial capital expenditures to expand our
operations and remain competitive in the rapidly changing EMS industry. Our
future success depends on our ability to obtain

                                       10
<PAGE>

additional financing and capital to support our future growth, if any. We may
not be able to obtain additional capital when we want or need it, and capital
may not be available on satisfactory terms. If we issue additional equity
securities or convertible debt to raise capital, it may be dilutive to your
ownership interest. In addition, any additional capital may have terms and
conditions that adversely affect our business, such as financial or operating
covenants.

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

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

  .  Economic or political instability;
  .  Transportation delays and interruptions;
  .  Foreign currency exchange rate fluctuations;
  .  Increased employee turnover and labor unrest;
  .  Longer payment cycles;
  .  Greater difficulty in collecting accounts receivable;
  .  Utilization of different systems and equipment;
  .  Difficulties in staffing and managing foreign personnel and diverse
     cultures; and
  .  Less developed infrastructures.

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

Our acquisition strategy may not succeed.

   As part of our business strategy, we expect to continue to grow by pursuing
acquisitions of other companies, assets or product lines that complement or
expand our existing business. Competition for attractive companies in our
industry is substantial. We cannot assure you that we will be able to identify
suitable acquisition candidates or finance and complete transactions that we
select. Failure to execute our acquisition strategy may adversely affect our
business, financial condition and results of operations.

We may be unable to protect our intellectual property, which would negatively
affect our ability to compete.

   We rely on our proprietary technology, and we expect that future
technological advances made by us will be critical to remain competitive.
Therefore, we believe that the protection of our intellectual property rights
is, and will continue to be, important to the success of our business. We rely
on a combination of patent, trademark and trade secret laws and restrictions on
disclosure to protect our intellectual property rights. Despite these
protections, unauthorized parties may attempt to copy or otherwise obtain and
use our proprietary technology. We cannot be certain that patents we have or
that may be issued as a result of our pending patent applications will protect
or benefit us or give us adequate protection from competing technologies. We
also cannot be certain that others will not develop our unpatented proprietary
technology or effective competing technologies on their own. We believe that
our proprietary technology does not infringe on the proprietary rights of
others. However, if others assert valid infringement claims against us with
respect to our past, current or future designs or processes, we could be
required to enter into expensive royalty arrangements, develop non-infringing
technologies or engage in costly litigation, which could negatively affect our
business, financial condition and results of operations.

                                       11
<PAGE>

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

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

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

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

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

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

                        Risks Relating to this Offering

Management has discretion in spending our proceeds from this offering.

   Management intends to use approximately $63.9 million of the net proceeds
from this offering to repay existing indebtedness and approximately $28.4
million of the net proceeds for general corporate purposes, including working
capital, capital expenditures and possible acquisitions. You should be aware
that we have broad discretion to determine the allocation of our proceeds from
this offering that will be used for general corporate purposes. You will not
have an opportunity to evaluate the economic, financial or other information on
which we base our decisions on how to use these proceeds. See "Use of
Proceeds."

The initial public offering price is significantly higher than the book value
of our common stock, and you will experience immediate and substantial dilution
in the book value of your investment.

   Prior investors paid a lower per share price than the price in this
offering. The initial public offering price is substantially higher than the
net book value per share of the outstanding common stock immediately after

                                       12
<PAGE>

this offering. Accordingly, if you purchase common stock in this offering, you
will incur immediate and substantial dilution of $    per share. In addition,
we have issued options to acquire common stock at prices significantly below
the initial public offering price. To the extent these outstanding options are
exercised, there will be further dilution to investors in this offering. See
"Dilution."

We do not intend to pay dividends on our common stock.

   We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future.

Future sales of our common stock, including the shares purchased in this
offering, may depress our stock price.

   Sales of a substantial number of shares of our common stock in the public
market by our shareholders after this offering, or the perception that such
sales are likely to occur, could depress the market price of our common stock
and could impair our ability to raise capital through the sale of additional
equity securities. Based on shares outstanding as of March 31, 2000, upon
completion of this offering we will have outstanding         shares of common
stock, assuming no exercise of the underwriters' overallotment option. Of these
shares, the      shares of common stock sold in this offering will be freely
tradable, without restriction, in the public market. After the lockup
agreements pertaining to this offering expire 180 days from the date of this
prospectus, an additional 18.5 million shares will be eligible for sale in the
public market. In addition, 3.0 million of the shares subject to outstanding
options will be exercisable, and if exercised, available for sale 180 days
after the date of this prospectus. See "Shares Eligible for Future Sale."

An active public market for our common stock may not develop, which could
impede your ability to sell your shares and depress our stock price.

   Before this offering, you could not buy or sell our common stock on the
public market. An active public market for our common stock may not develop or
be sustained after the offering, which could affect your ability to sell your
shares and depress the market price of your shares. The market price of your
shares may fall below the initial public offering price.

Provisions in our charter documents and Minnesota law may delay or prevent
acquisition of our company.

   Provisions of our amended articles of incorporation and our amended and
restated bylaws which we intend to adopt prior to completion of this offering
and provisions of Minnesota law may delay or prevent the acquisition of our
company which you may consider favorable. These provisions include the
following:

  .  No cumulative voting by shareholders for directors;
  .  A classified board of directors with three-year staggered terms;
  .  The ability of our board to set the size of the board of directors, to
     create new directorships and to fill vacancies;
  .  The ability of our board, without shareholder approval, to issue
     preferred stock, which may have rights and preferences that are superior
     to our common stock;
  .  The ability of our board to amend the bylaws;
  .  A shareholder rights plan, which discourages the unauthorized
     acquisition of 15% or more of our common stock or an unauthorized
     exchange or tender offer;

  .  Restrictions under Minnesota law on mergers or other business
     combinations between us and any holder of 10% or more of our outstanding
     common stock; and
  .  A requirement that at least two-thirds of our shareholders and at least
     two-thirds of our directors approve amendments of our articles of
     incorporation.

                                       13
<PAGE>

                                USE OF PROCEEDS

   We estimate the net proceeds from this offering to be approximately $92.3
million or approximately $       million if the underwriters exercise their
over-allotment option in full based on an assumed public offering price of
$      per share and after deducting our estimated underwriting and offering
expenses.

   We intend to use approximately $63.9 million of the net proceeds from this
offering to repay existing indebtedness and approximately $28.4 million for
general corporate purposes, including the funding of working capital, capital
expenditures and internal expansion. In addition, we may acquire companies,
assets or product lines that are complementary to ours, and a portion of the
net proceeds may be used for these acquisitions. While we engage from time to
time in discussions with respect to potential acquisitions, we cannot assure
you that any acquisitions will be made. Pending use of the net proceeds of this
offering, we intend to invest the net proceeds in short-term, interest bearing,
investment-grade marketable securities.

   As of May 15, 2000, the existing indebtedness to be repaid from a portion of
the net proceeds from this offering consisted of the following:

  .  Approximately $48.7 million under our two revolving credit facilities
     with US Bank, excluding accrued interest, with an effective interest
     rate of 11.0% and a final maturity date of August 2002;
  .  Approximately $15.0 million under our credit facility with IBM Credit
     Corporation, excluding accrued interest, with an interest rate of 10.0%
     and a final maturity date of May 2001; and
  .  Approximately $0.2 million under non-interest bearing notes issued to
     Rochester Area Economic Development, Inc., which are due and payable in
     the event we complete an initial public offering.

   We used borrowings under our US Bank revolving credit facilities to fund a
portion of the purchase price for Quadrus Manufacturing and all of the purchase
price of our Almelo, the Netherlands facility.

                                DIVIDEND POLICY

   We have never declared or paid any cash 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.

                                       14
<PAGE>

                                 CAPITALIZATION

   The following table sets forth our capitalization as of March 31, 2000:

  .  on an actual basis; and
  .  on a pro forma as adjusted basis to reflect (1) the automatic conversion
     of all of our outstanding preferred stock into common stock upon the
     consummation of this offering, and (2) the application of the net
     proceeds from this offering upon the consummation of this offering,
     assuming an initial public offering price of $      per share after
     deducting our estimated underwriting and offering expenses.

<TABLE>
<CAPTION>
                                                        As of March 31, 2000
                                                      -------------------------
                                                                   Pro Forma
                                                                As Adjusted (2)
                                                       Actual     (unaudited)
                                                      --------  ---------------
                                                       (in thousands, except
                                                            share data)
<S>                                                   <C>       <C>
Unrestricted cash and cash equivalents............... $  2,727     $ 41,427
                                                      ========     ========
Current maturities of long-term obligations.......... $ 15,229     $  6,829
                                                      ========     ========
Long-term obligations, net of current maturities:
  Revolving credit facility.......................... $ 45,000     $    --
  Industrial revenue bonds...........................    4,990        4,990
  Other total long-term obligations, net of current
   maturities........................................    5,191        5,041
                                                      --------     --------
    Total long-term obligations, net of current
     maturities......................................   55,181       10,031
Redeemable preferred stock (1).......................   26,549          --
Shareholders' equity:
  Preferred stock, $0.01 par value, 3,333,000 shares
   authorized and undesignated; none issued and
   outstanding on an actual and pro forma as adjusted
   basis.............................................                   --
  Common stock, $0.01 par value, 150,000,000 shares
   authorized; 13,819,260 shares issued and
   outstanding on an actual basis; and     issued and
   outstanding on a pro forma adjusted basis.........      138          185
  Additional paid-in capital.........................   15,395      134,147
  Accumulated other comprehensive loss...............     (772)        (772)
  Retained earnings..................................   11,170       11,170
  Loans to stockholders..............................   (3,258)      (3,258)
                                                      --------     --------
    Total shareholders' equity.......................   22,673      141,472
                                                      --------     --------
    Total capitalization............................. $104,403     $151,503
                                                      ========     ========
</TABLE>
--------
(1) The Series A and Series B preferred stock is subject to mandatory
    redemption rights and automatically convert into shares of common stock
    upon the consummation of this offering.

   The number of shares that will be outstanding after this offering is based
on the number of shares outstanding as of March 31, 2000, and excludes:

  .  3,845,232 shares of common stock issuable upon exercise of stock options
     outstanding as of March 31, 2000, with a weighted average exercise price
     of $4.35 per share; and
  .  1,327,362 additional shares reserved for issuance under our stock option
     plans as of March 31, 2000.

   See "Management--Stock Option Plans."

(2) We intend to use approximately $63.9 million of the net proceeds from this
    offering to repay existing indebtedness. The table above reflects the
    repayment of $53.6 million, the amount of such indebtedness outstanding as
    of March 31, 2000. Subsequent to March 31, 2000, we incurred additional net
    indebtedness of $10.3 million, which is being repaid with the proceeds from
    this offering. See "Use of Proceeds."

                                       15
<PAGE>

                                    DILUTION

   Our pro forma net tangible book value as of March 31, 2000, was
$             or $               per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible
assets, less our total liabilities, divided by the pro forma number of shares
of common stock outstanding, after giving effect to the conversion of all
outstanding shares of preferred stock into common stock. Dilution in pro forma
net tangible book value per share represents the difference between the amount
per share paid by investors in this offering and the pro forma net tangible
book value per share of our common stock immediately after this offering. After
giving effect to our sale of the            shares of common stock in this
offering, based upon an assumed initial public offering price of $
per share, our pro forma net tangible book value as of March 31, 2000 would
have been approximately $           or $           per share of common stock.
This represents an immediate increase in pro forma net tangible book value to
existing shareholders of $           per share and an immediate dilution to new
investors in this offering of $           per share. The following table
illustrates the per share dilution in pro forma net tangible book value to new
investors:

<TABLE>
   <S>                                                            <C>    <C>
   Assumed initial public offering price per share..............         $
     Pro forma net tangible book value per share as of March 31,
      2000......................................................  $
     Increase in pro forma net tangible book value per share
      attributable to new investors.............................
                                                                  ------
   Pro forma net tangible book value per share as of March 31,
    2000 after the offering.....................................
                                                                         ------
   Pro forma net tangible book value dilution per share to new
    investors...................................................         $
                                                                         ======
</TABLE>

   The following table summarizes, on a pro forma basis, as of March 31, 2000,
the differences between the number of shares of common stock purchased from us,
the aggregate cash consideration paid to us and the average price per share
paid by existing shareholders since our inception and new investors purchasing
shares of common stock in this offering. The calculation below is based on an
offering price of $      per share, before deducting estimated underwriting and
offering expenses payable by us:

<TABLE>
<CAPTION>
                                     Shares           Total
                                    Purchased     Consideration
                                 --------------- ---------------- Average Price
                                 Number  Percent  Amount  Percent   Per Share
                                 ------- ------- -------- ------- -------------
<S>                              <C>     <C>     <C>      <C>     <C>
Existing shareholders...........              %  $             %     $
New public investors (1)........
                                 -------   ---   --------   ---
  Total.........................           100%  $          100%
                                 =======   ===   ========   ===
</TABLE>
--------
(1)  The above discussion and the table does not include 3,845,232 shares of
     common stock issuable pursuant to the exercise of stock options under our
     stock option plans at a weighted average exercise price of $4.35 per
     share. To the extent that outstanding options are exercised in the future,
     there will be further dilution to investors. See "Capitalization" and
     "Management--Stock Option Plans."

                                       16
<PAGE>

                UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

   The unaudited pro forma consolidated statement of operations for the fiscal
year ended March 31, 2000 gives effect to the acquisition of Quadrus
Manufacturing, the consummation of this offering and the application of the net
proceeds therefrom as described under "Use of Proceeds," as if each had
occurred on April 1, 1999.

   The unaudited pro forma consolidated balance sheet gives pro forma effect to
the conversion of all of our outstanding preferred stock into common stock, the
consummation of this offering and the application of the net proceeds therefrom
as described under "Use of Proceeds," as if each had occurred on March 31,
2000.

   Our unaudited pro forma consolidated financial data should be read in
conjunction with our audited consolidated financial statements for the fiscal
year ended March 31, 2000, and the related notes thereto, which statements have
been audited by Ernst & Young LLP, independent auditors, whose report is
included elsewhere herein and the audited financial statements of Quadrus
Manufacturing and the related notes thereto, which statements have been audited
by McGladrey & Pullen, LLP, independent auditors, whose report is included
elsewhere herein.

   Our unaudited pro forma consolidated financial data has been prepared to
illustrate the effects of the Quadrus Manufacturing acquisition and the receipt
and application of the net proceeds from this offering. Our unaudited pro forma
consolidated financial data does not necessarily present our financial position
or results of operations as they would have been if the companies involved had
constituted one entity for the period presented and is not necessarily
indicative of our future results of operations or the results that might have
occurred if the forgoing transactions had been consummated on the indicated
dates.

                                       17
<PAGE>

                                  Pemstar Inc.

            Unaudited Pro Forma Consolidated Statement of Operations
                        Fiscal Year Ended March 31, 2000
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                          Quadrus                                            Pro Forma
                          Pemstar Inc. Manufacturing                                        As Adjusted
                           Year Ended  From April 1,                                        Year Ended
                           March 31,     1999, to    Acquisition   Pro Forma   Offering      March 31,
                              2000     June 7, 1999  Adjustments   Combined   Adjustments      2000
                          ------------ ------------- -----------  ----------- -----------   -----------
                           (audited)    (unaudited)               (unaudited)               (unaudited)
<S>                       <C>          <C>           <C>          <C>         <C>           <C>
Net sales...............    $393,842      $14,130       $  --      $407,972     $   --       $407,972
Costs of goods sold.....     363,974       16,810          --       380,784         --        380,784
                            --------      -------       -----      --------     ------       --------
Gross profit............      29,868       (2,680)         --        27,188         --         27,188
Selling, general and
 administrative
 expenses...............      21,576          627                    22,203         --         22,203
Amortization............       1,281           --         102 (a)     1,383         --          1,383
                            --------      -------       -----      --------     ------       --------
Operating income
 (loss).................       7,011       (3,307)       (102)        3,602         --          3,602
Other income (expense) -
 net....................         (74)          (7)                      (81)                      (81)
Interest expense........      (3,588)         (81)       (248)(b)    (3,917)     2,738 (c)     (1,179)
                            --------      -------       -----      --------     ------       --------
Income (loss) before
 income taxes...........       3,349       (3,395)       (350)         (396)     2,738          2,342
Income tax expense
 (benefit)..............         698       (1,307)       (135)         (744)     1,054 (d)        310
                            --------      -------       -----      --------     ------       --------
Net income (loss).......    $  2,651      $(2,088)      $(215)     $    348     $1,684       $  2,032
                            ========      =======       =====      ========     ======       ========
Net income (loss) per
 share:
  Basic.................    $   0.23                                                         $
  Diluted...............        0.15
Weighted average number
 of common shares
 outstanding:
  Basic.................      11,503
  Diluted...............      17,167
</TABLE>
--------
(a)  Reflects the additional amortization expense related to the allocation of
     the purchase price to goodwill for the acquisition. The amortization is
     based on the estimated useful life of twenty years for the goodwill.

(b)  Reflects the additional interest expense related to the borrowings
     required by us to complete the acquisition using borrowing capacity
     available under our credit facility with US Bank.

(c)  Reflects the decrease in interest expense in connection with the use of
     net proceeds from the offering to repay outstanding debt.

(d)  Reflects the income tax effect of adjustments (b) and (c) at a 38.5%
     effective tax rate.

                                       18
<PAGE>

                                  Pemstar Inc.

           Unaudited Pro Forma As Adjusted Consolidated Balance Sheet
                                 March 31, 2000
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                       Offering       Pro Forma
                                         Pemstar Inc. Adjustments    As Adjusted
                                         ------------ -----------    -----------
<S>                                      <C>          <C>            <C>
Assets
Current assets:
 Cash and cash equivalents..............   $  2,727    $100,000 (a)   $ 41,427
                                                         (7,750)(a)
                                                        (53,550)(a)
 Restricted cash........................        528                        528
 Accounts receivable, net...............     60,061                     60,061
 Inventories, net.......................     64,437                     64,437
 Deferred income taxes..................      2,232                      2,232
 Prepaid expenses and other.............      3,458                      3,458
                                           --------    --------       --------
   Total current assets.................    133,443      38,700        172,143
Property, plant, and equipment, net.....     34,933                     34,933
Goodwill, net...........................     20,691                     20,691
Other assets, net.......................      1,384                      1,384
                                           --------    --------       --------
   Total assets.........................   $190,451    $ 38,700       $229,151
                                           ========    ========       ========
Liabilities and Shareholders' Equity
Current liabilities:
 Bank overdrafts........................   $ 10,213    $              $ 10,213
 Accounts payable.......................     47,138                     47,138
 Accrued expenses and other.............      9,740                      9,740
 Income taxes payable...................      1,474                      1,474
 Current maturities of long-term debt...     12,930      (8,400)(a)      4,530
 Current maturities of capital lease
  obligations...........................      2,299                      2,299
                                           --------    --------       --------
   Total current liabilities............     83,794      (8,400)        75,394
Long-term debt, less current
 maturities.............................     51,114     (45,150)(a)      5,964
Capital lease obligations, less current
 maturities.............................      4,067                      4,067
Deferred grant income...................      1,713                      1,713
Deferred revenue........................        350                        350
Deferred income taxes...................         17                         17
Minority interest in consolidated
 subsidiaries...........................        174                        174
Redeemable stock:
 Series A preferred stock, $0.01 par
  value; 570 shares issued and
  outstanding...........................      8,549      (8,549)(b)         --
 Series B preferred stock, $0.01 per
  share; 1,000 shares issued and
  outstanding...........................     18,000     (18,000)(b)         --
Shareholders' Equity:
 Common stock, $0.01 par value; shares
  issued and outstanding--     ; 2000--
  13,819 shares; pro forma issued and
  outstanding--    shares...............        138          47 (b)        185
 Additional paid-in capital.............     15,395      26,502 (b)    134,147
                                                         92,250 (a)
 Accumulated other comprehensive loss...       (772)                      (772)
 Retained earnings......................     11,170                     11,170
 Loans to shareholders..................     (3,258)                    (3,258)
                                           --------    --------       --------
   Total shareholders' equity...........     22,673     118,799        141,472
                                           --------    --------       --------
   Total liabilities and shareholders'
    equity..............................   $190,451    $ 38,700       $229,151
                                           ========    ========       ========
</TABLE>
--------
(a)  Reflects our sale of            shares of common stock generating net
     proceeds of $92,250, after deducting our estimated underwriting and
     offering expenses totaling approximately $7,750, and the use of $53,550 of
     the estimated net proceeds to repay borrowings outstanding as of March 31,
     2000. Subsequent to March 31, 2000, we incurred additional net
     indebtedness of $10,300. We intend to repay total indebtedness of $63,900
     from the proceeds from this offering as detailed in "Use of Proceeds."
(b)  Reflects the conversion of our outstanding preferred stock into common
     stock upon closing of this offering.

                                       19
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial data as of and for the dates
and periods indicated have been derived from our audited consolidated financial
statements. The selected consolidated statements of income data for the fiscal
year ended March 31, 2000, and the historical consolidated balance sheet data
as of March 31, 2000, were derived from consolidated financial statements
audited by Ernst & Young LLP, whose report appears elsewhere in this
prospectus. The selected historical consolidated statements of income data for
the fiscal years ended March 31, 1998 and 1999, and the historical balance
sheet data as of March 31, 1999, were derived from consolidated financial
statements audited by McGladrey & Pullen, LLP, whose report appears elsewhere
in this prospectus. You should read the data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and the related notes
thereto appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                            Year Ended March 31,
                                 ----------------------------------------------
                                  1996     1997      1998      1999      2000
                                 -------  -------  --------  --------  --------
                                 (in thousands, except for per share data)
<S>                              <C>      <C>      <C>       <C>       <C>
Consolidated Statements of
 Income Data:
Net sales......................  $22,021  $31,895  $165,049  $187,381  $393,842
Costs of goods sold............   18,724   27,347   147,962   172,219   363,974
                                 -------  -------  --------  --------  --------
Gross profit...................    3,297    4,548    17,087    15,162    29,868
Selling, general and
 administrative expenses.......    2,309    2,976     8,328    10,955    21,576
Amortization...................       --       --        54       190     1,281
                                 -------  -------  --------  --------  --------
Operating income...............      988    1,572     8,705     4,017     7,011
Other income (expense) - net...      187      247       455      (438)      (74)
Interest expense...............     (255)    (315)     (746)     (640)   (3,588)
                                 -------  -------  --------  --------  --------
Income before income taxes.....      920    1,504     8,414     2,939     3,349
Income tax expense.............      289      554     3,097     1,273       698
                                 -------  -------  --------  --------  --------
Net income.....................  $   631  $   950  $  5,317  $  1,666  $  2,651
                                 =======  =======  ========  ========  ========
Net income per share:
 Basic.........................  $  0.08  $  0.12  $   0.55  $   0.15  $   0.23
 Diluted.......................     0.08     0.12      0.49      0.12      0.15
Weighted average number of
 common shares outstanding (1):
 Basic.........................    7,645    8,009     9,653    10,897    11,503
 Diluted.......................    7,758    8,039    10,874    14,143    17,167
Other Financial Data:
Depreciation...................  $   600  $   911  $  1,929  $  3,331  $  7,455
Capital expenditures...........    1,587    2,887     8,393     8,657    13,415
Supplemental Data:
EBITDA (2).....................  $ 1,775  $ 2,730  $ 11,143  $  7,100  $ 15,673
Net cash provided by (used in)
 operating activities..........      150      776    (1,374)       65   (20,225)
Net cash provided by (used in)
 investing activities..........   (1,576)  (2,938)  (10,126)   (5,545)  (53,489)
Net cash provided by (used in)
 financing activities..........    1,343    2,133    14,661     3,112    75,612
<CAPTION>
                                                 March 31,
                                 ----------------------------------------------
                                  1996     1997      1998      1999      2000
                                 -------  -------  --------  --------  --------
                                               (in thousands)
<S>                              <C>      <C>      <C>       <C>       <C>
Consolidated Balance Sheet
 Data:
Unrestricted cash and cash
 equivalents...................  $    64  $    34  $  3,195  $    827  $  2,727
Working capital................      719      525    12,873    12,783    49,649
Total assets...................    9,398   16,334    61,121    64,983   190,451
Long-term debt and capital
 lease obligations less current
 maturities....................    1,713    2,251     6,340     7,090    55,181
Total shareholders' equity.....    1,901    3,009    19,544    16,555    22,673
</TABLE>
--------
(1)  For an explanation of the determination of the weighted average number of
     common shares outstanding used in computing net income per share see Note
     1 of notes to consolidated financial statements.
(2)  EBITDA means earnings before net interest expense, income taxes,
     depreciation and amortization. EBITDA is presented because we believe it
     is an indicator of our ability to incur and service debt and a similar
     formula is used by our lenders in determining compliance with financial
     covenants. However, EBITDA should not be considered as an alternative to
     cash flow from operating activities, as a measure of liquidity or as an
     alternative to net income as a measure of operating results in accordance
     with generally accepted accounting principles.

                                       20
<PAGE>

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

   You should read the following discussion in conjunction with the "Selected
Consolidated Financial Data" section of this prospectus and our consolidated
financial statements and notes to those statements included elsewhere in this
prospectus. 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,
including the factors as described in the "Risk Factors" section of this
prospectus. Our actual results may differ materially from those contained in
any forward-looking statements.

Overview

   We are a leading provider of electronics manufacturing services to OEMs in
the communications, computing, data storage, industrial and medical equipment
markets. We provide OEMs with a comprehensive range of engineering,
manufacturing and fulfillment services on a global basis through nine
facilities strategically located in the United States, Mexico, Asia and Europe.
Our comprehensive service offerings support our customers' products from
initial development and design through manufacturing to worldwide distribution
and aftermarket support.

   We were 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 communications and computing OEMs. 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:

  .  In June 1997, we established a manufacturing facility to produce storage
     product components and assemblies in Bangkok, Thailand. This facility
     provides us with cost-effective manufacturing capabilities and a
     facility strategically located in Asia's growing communications and
     computing markets.
  .  In September 1997, we established a greenfield operation in Guadalajara,
     Mexico, which enhanced our cost-effective manufacturing capabilities in
     close proximity to Mexico's emerging communications and computing
     markets.
  .  In June 1998, we established a greenfield operation in Tianjin, China,
     which we believe made us one of the first independent EMS companies in
     northern China. Our facility in China has further enhanced our cost-
     effective manufacturing capabilities while giving us access to new
     customers in the communications, computing and data storage industries.
  .  In October 1998, we entered into a joint venture with Honguan
     Technologies, a mechanical fabrication company in Singapore. We own a
     51% controlling interest in this joint venture, Pemstar-Honguan Pte.
     This joint venture enables us to target data storage industry OEMs by
     adding specialized test and process equipment design, manufacturing and
     service capabilities and has further strengthened our presence in
     southeast Asia.
  .  In May 1999, we acquired a facility located in Almelo, the Netherlands,
     from Fluke Corporation, a manufacturer of precision test equipment,
     scopes and meters. In connection with this acquisition, we entered into
     a long-term supply agreement to provide manufacturing and design
     services to Fluke. In addition to adding Fluke as a key customer, the
     acquisition increased our engineering and design capabilities,
     particularly in the areas of electrical and industrial design and
     enabled us to expand into Europe.
  .  In June 1999, we acquired Quadrus Manufacturing, located in San Jose,
     California. Quadrus Manufacturing was a division of Bell Microproducts,
     a distributor of storage and semiconductor

                                       21
<PAGE>

     products. This acquisition further strengthened our relationships with
     OEMs in the communications market, including such industry leaders as
     Efficient Networks and Electronics For Imaging.

See Note 2 to our consolidated financial statements for further information
regarding our acquisitions.

   We derive most of our net sales from customer purchase orders. We recognize
sales, net of product returns and warranty costs, typically at the time of
product shipment or as services are rendered. Our net sales and margins from
period to period are affected by the volume of turnkey manufacturing
transactions as compared to consignment transactions. In turnkey
manufacturing, we purchase the materials and components necessary to produce
the products we are manufacturing, resulting in generally higher net sales and
cost of goods sold and generally lower margins. In consignment sales, the
customer purchases all or a portion of the materials and components necessary
for production, resulting in generally lower net sales and generally higher
margins, since we record only the value-added portion as revenue. Currently,
substantially all of our revenue is generated from turnkey transactions. In
addition, our net sales and margins are affected by the mix of projects
between engineering and manufacturing and the complexity of those projects.
For example, manufacturing projects typically generate lower margins than
engineering projects because of the high material content of a manufacturing
project as a percentage of revenue and the lower value-added content. 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 operating results are also impacted by the level of capacity
utilization of our manufacturing facilities, indirect labor, and selling,
general and administrative expense. 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. As our capacity has grown in recent years both
through greenfield operations and acquisitions, our selling, general and
administrative expenses have increased to support this growth.

   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 thirty to ninety days in advance. We work to minimize the risk
relative to our inventory by ordering materials and components only to the
extent necessary to satisfy existing customer orders. We believe we are
largely protected from the risk of inventory cost fluctuations because we
generally pass these costs through to our customers.

                                      22
<PAGE>

Results of Operations

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

<TABLE>
<CAPTION>
                                                            Fiscal Year Ended
                                                                March 31,
                                                            -------------------
                                                            1998   1999   2000
                                                            -----  -----  -----
<S>                                                         <C>    <C>    <C>
Net sales.................................................. 100.0% 100.0% 100.0%
Cost of goods sold.........................................  89.7   91.9   92.4
                                                            -----  -----  -----
Gross profit...............................................  10.3    8.1    7.6
Selling, general and administrative expenses...............   5.0    5.9    5.5
Amortization...............................................   0.0    0.1    0.3
                                                            -----  -----  -----
Operating income...........................................   5.3    2.1    1.8
Other income (expense)-net.................................   0.3   (0.2)  (0.0)
Interest expense...........................................  (0.5)  (0.3)  (0.9)
                                                            -----  -----  -----
Income before income taxes.................................   5.1    1.6    0.9
Income tax expense.........................................   1.9    0.7    0.2
                                                            -----  -----  -----
Net income.................................................   3.2%   0.9%   0.7%
                                                            =====  =====  =====
</TABLE>

 Fiscal Year Ended March 31, 2000 Compared to Fiscal Year Ended March 31, 1999

   Net Sales. Our net sales increased $206.4 million, or 110.1%, to $393.8
million in fiscal 2000 from $187.4 million in fiscal 1999. This increase
resulted from both organic growth and strategic acquisitions. In fiscal 2000,
our organic growth, which excludes net sales increases from operations acquired
in the preceding twelve months, accounted for $61.9 million, or 30.0%, of total
year-to-year growth and was driven by new projects with existing and new
customers in North America and Asia. Our acquisitions of Quadrus Manufacturing
and a European division of Fluke Corporation accounted for $144.5 million, or
70.0% of total year-to-year growth.

   Gross Profit. Our gross profit increased $14.7 million to $29.9 million in
fiscal 2000 from $15.2 million in fiscal 1999. This increase in gross profit
reflects the year-to-year growth in net sales. Gross margins decreased to 7.6%
of net sales in fiscal 2000 from 8.1% in fiscal 1999, primarily due to
initially lower gross margins of businesses acquired in fiscal 2000,
underutilization of assets in certain locations and set-up costs related to new
product introductions.

   Selling, General and Administrative Expenses. Our selling, general and
administrative expenses increased $10.6 million to $21.6 million in fiscal 2000
from $11.0 million in fiscal 1999. This increase was a result of increased
staffing levels and higher selling and administrative costs to support our
growth. As a percentage of net sales, our selling, general and administrative
expenses decreased to 5.5% in fiscal 2000 from 5.9% in fiscal 1999, due to our
leveraging these expenses over an increased revenue base.

   Amortization. Amortization increased $1.1 million to $1.3 million in fiscal
2000 from $0.2 million in fiscal 1999, primarily as a result of amortization of
goodwill arising out of our fiscal 2000 acquisitions.

   Other Income (Expense)--Net. Our other expense decreased $0.3 million to
$0.1 million in fiscal 2000 from $0.4 million in fiscal 1999. Fiscal 1999
includes a $0.4 million loss on the sale of property and equipment.

   Interest Expense. Our interest expense increased $3.0 million to $3.6
million in fiscal 2000 from $0.6 million in fiscal 1999. This increase reflects
increased borrowings required to fund acquisitions and

                                       23
<PAGE>

greenfield expansions as well as increased working capital requirements driven
by growth in business with new and existing customers.

   Income Tax Expense. In fiscal 2000, our effective tax rate decreased to
20.8% from 43.3% in fiscal 1999. This decrease resulted from the mix of
domestic versus international income from operations and the benefit of state
tax credits generated by the Quadrus acquisition. In general, our international
operations are being taxed at a lower rate than our domestic operations due to
tax holidays and incentives.

 Fiscal Year Ended March 31, 1999 Compared to Fiscal Year Ended March 31, 1998

   Net Sales. Our net sales increased $22.3 million, or 13.5%, to $187.4
million in fiscal 1999 from $165.0 million in fiscal 1998 due entirely to
organic growth. This growth was offset in part by a $41.6 million decline in
net sales to a customer that discontinued manufacturing a product that had
accounted for $43.7 million of our net sales in fiscal 1998. The organic growth
was the result of new programs with both new and existing customers as well as
the transition of a major project from a consignment to a turnkey basis.

   Gross Profit. Our gross profit decreased $1.9 million to $15.2 million in
fiscal 1999 from $17.1 in fiscal 1998. Gross margins decreased to 8.1% of net
sales in fiscal 1999 from 10.3% in fiscal 1998. These decreases resulted from
start-up expenses associated with our greenfield expansions in Mexico and China
and the transition of a major project from a consignment to a turnkey basis.

   Selling, General and Administrative Expenses. Our selling, general and
administrative expenses increased $2.6 million to $11.0 million in fiscal 1999
from $8.3 million in fiscal 1998. Selling, general and administrative expenses
increased to 5.9% of net sales in fiscal 1999 from 5.0% in fiscal 1998. These
increases reflect increased staffing and expenses added to support anticipated
growth.

   Amortization. Amortization increased $0.1 million to $0.2 million in fiscal
1999 from $0.1 million in fiscal 1998.

   Other Income (Expense)-Net. Our other income and expense was $0.4 million of
expense in fiscal 1999 compared to $0.5 million of income in fiscal 1998. This
decrease principally reflects recognition of minority interest in our net
income of consolidated subsidiaries and a loss on sales of property and
equipment in fiscal 1999.

   Interest Expense. Our interest expense decreased $0.1 million to $0.6
million in fiscal 1999 from $0.7 million in fiscal 1998. This decrease reflects
reduced borrowings under our bank agreement as a result of using the proceeds
from the sale of approximately $9.9 million of equity in fiscal 1998 to repay
indebtedness.

   Income Tax Expense. In fiscal 1999, our effective tax rate increased to
43.3% from 36.8% in fiscal 1998. This increase resulted from an increased
percentage of revenue derived from higher tax jurisdictions in fiscal 1999
versus fiscal 1998.

Quarterly Results of Operations

   The following table sets forth unaudited quarterly financial information of
Pemstar for the eight quarters ended fiscal 1999 and 2000. 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 variation may be offset in part by organic 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 prospectus. The operating results for any previous
quarter are not necessarily indicative of results for any future period.

                                       24
<PAGE>

<TABLE>
<CAPTION>
                                                       Quarter Ended
                         ----------------------------------------------------------------------------
                         June 30,  Sept. 30, Dec. 31,  Mar. 31, June 30, Sept. 30, Dec. 31,  Mar. 31,
                           1998      1998      1998      1999     1999     1999      1999      2000
                         --------  --------- --------  -------- -------- --------- --------  --------
                                                      (in thousands)
<S>                      <C>       <C>       <C>       <C>      <C>      <C>       <C>       <C>
Net sales............... $42,551    $44,641  $50,677   $49,512  $68,566   $97,550  $111,787  $115,939
Cost of goods sold......  38,507     41,250   46,439    46,023   62,275    89,817   103,845   108,037
                         -------    -------  -------   -------  -------   -------  --------  --------
Gross profit............   4,044      3,391    4,238     3,489    6,291     7,733     7,942     7,902
Selling, general and
 administrative
 expenses...............   2,238      2,368    3,015     3,334    3,895     5,003     5,862     6,816
Amortization............      16         16       75        83      205       271       277       528
                         -------    -------  -------   -------  -------   -------  --------  --------
Operating income........   1,790      1,007    1,148        72    2,191     2,459     1,803       558
Other income (expense)-
  net...................    (315)      (282)    (172)      331       --      (518)     (387)      831
Interest expense........     125        135      152       228      341       776       986     1,485
                         -------    -------  -------   -------  -------   -------  --------  --------
Income (loss) before
 income taxes...........   1,350        590      824       175    1,850     1,165       430       (96)
Income tax expense
 (benefit)..............     556        277      379        61      738       351        62      (453)
                         -------    -------  -------   -------  -------   -------  --------  --------
Net income.............. $   794    $   313  $   445   $   114  $ 1,112   $   814  $    368  $    357
                         =======    =======  =======   =======  =======   =======  ========  ========
</TABLE>

Liquidity and Capital Resources

   Our principle sources of liquidity are cash provided by operations,
borrowings under our various credit facilities and debt instruments and private
sales of equity. Our principal uses of cash have been to finance working
capital, acquisitions, greenfield expansions, 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 year 2000,
1999 and 1998 was ($20.2 million), $0.1 million and ($1.4 million),
respectively. Fluctuations in net cash provided by (used in) operating
activities are attributable to increases and decreases in our net income,
normal fluctuations in working capital and longer collection periods and lower
inventory turns at properties acquired in fiscal 2000.

   Net cash used in investing activities for fiscal 2000, 1999 and 1998 was
$53.5 million, $5.5 million and $10.1 million, respectively. In fiscal 2000,
our cash used in investing activities consisted primarily of $35.0 million used
in the acquisition of Quadrus Manufacturing, $13.4 million used for capital
expenditures and $4.5 million used in the acquisition of a European division of
Fluke Corporation.

   Net cash provided by financing activities for fiscal 2000, 1999 and 1998 was
$75.6 million, $3.1 million and $14.7 million, respectively. Our principal
sources of cash from financing activities in fiscal 2000 included proceeds of
approximately $18.0 million from the sale of private equity and proceeds from
long-term debt. Net cash provided by financing activities for fiscal 1999
consisted primarily of proceeds from long-term debt, offset in part by payments
of long-term debt, and net cash provided by financing activities for fiscal
1998 included proceeds of approximately $9.9 million from the sale of private
equity and proceeds from long-term debt offset in part by payments of short-
term and long-term debt.

   Our capital expenditures in fiscal 2000 consisted of $5.4 million of printed
circuit board assembly equipment purchased for our Tianjin, China facility and
an investment of $8.0 million in general equipment and information technology
upgrades across all of our facilities. We estimate our capital expenditures for
fiscal 2001 will increase over fiscal 2000 and will be used primarily for
equipment upgrades, optical technology equipment, information technology
systems and expansion of our facilities.

                                       25
<PAGE>

   As of March 31, 2000, we had unrestricted cash and cash equivalents of $2.7
million and total borrowings of approximately $70.4 million. Of these total
borrowings, we had approximately $53.4 million outstanding under our US Bank
revolving credit facility at an effective interest rate of 10.3%. On May 5,
2000, we entered into a new credit facility with IBM Credit Corporation, which
provides for borrowings up to $40.0 million, and amended our US Bank credit
facility to reduce our available borrowings from $65.0 million to $55.0
million. As of May 15, 2000, we had $48.7 million outstanding under the US Bank
credit facility and $15.0 million outstanding under our IBM facility. We also
have a $3.2 million credit facility serving our Netherlands operations. As of
March 31, 2000, we had $3.1 million outstanding under our Netherlands credit
facility. Each credit facility bears interest on outstanding borrowings at
variable interest rates, which as of May 15, 2000, were 11.0% for the US Bank
facility, 10.0% for the IBM facility and 5.75% for the Netherlands facility.
All of these credit facilities are secured by substantially all of our domestic
non real-estate assets. We also have certain financial covenants under these
facilities, which we are required to meet. We had other debt obligations
totaling $17.0 million as of March 31, 2000. See Notes 8 and 11 to our
consolidated financial statements. We intend to use a portion of the net
proceeds from this offering to repay indebtedness under our credit facilities.
Subsequent to this offering, we intend to revise our existing credit facilities
to increase our borrowing capacity.

   We believe that cash flows from operating activities, borrowings available
in our current financing agreements and the proceeds from this offering will be
sufficient to fund our currently anticipated working capital, planned capital
expenditures and debt service requirements for the next twelve months. However,
we regularly review acquisition and additional greenfield expansion
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. The sale of additional equity could result in additional
dilution to our shareholders. We cannot assure you that any financing
arrangements will be available in amounts or on terms acceptable to us.

Quantitative and Qualitative Disclosures About Market Risks

 Interest Rate Risk

   Our exposure to interest rate risk arises principally from the variable
rates associated with our primary revolving line of credit. On March 31, 2000,
we had total borrowings of $53.4 million under this line of credit, which
accrued interest at an effective rate of 10.3%. 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
$605,000 on an annual basis. As of March 31, 1999 an adverse change of one
percent in the interest rate would cause us to incur a change in interest
expense of approximately $103,000 on an annual basis for all borrowings
outstanding bearing interest at variable rates at March 31, 1999.

 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. For example, if there is an increase in
the rate at which a foreign currency is exchanged for U.S. dollars, it will
require more of the foreign currency to equal a specified amount of U.S.
dollars than before the rate increase. In such cases, and if we price our
products and services in the foreign currency, we will receive less in U.S.
dollars than we did before the rate increase went into effect. If we price our
products and services in U.S. dollars and competitors price their products in
local currency, an increase in the relative strength of the U.S. dollar could
result in our prices being uncompetitive in a market where business is
transacted in the local currency.

   The result of a uniform 10% strengthening in the value of the U.S. dollar
from March 31, 2000 and 1999 levels relative to each of the currencies in which
our revenues and expenses are denominated would result in a decrease in
operating income of approximately $148,000 and $110,000, respectively, for the
fiscal years ended March 31, 2000 and 1999.

                                       26
<PAGE>

   For the fiscal year ended March 31, 2000, the amount we consider
permanently invested in foreign subsidiaries and translated into dollars using
the year end exchange rate is $8,343,000 and the potential loss in fair value
resulting from a hypothetical 10% adverse change in foreign currency exchange
rate amounts to $758,000. For the fiscal year ended March 31, 1999, we did not
have any amounts permanently in foreign subsidiaries. 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.

Recently Issued Accounting Pronouncements

   In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or instruments at fair value. This
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000 and is therefore applicable to us beginning with our fiscal
quarter ending June 30, 2001. Based upon the nature of our financial
instruments and hedging activities in effect as of the date of this filing,
this pronouncement would not have a material impact on our financial position
or results of operations. We will adopt SFAS No. 133 effective April 1, 2001.

   In fiscal 2000, we adopted the American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
provides guidance on accounting for the costs of computer software developed
or obtained for internal use and for determining when specific costs should be
capitalized and when they should be expensed. The impact of adopting SOP 98-1
did not have a material impact on our financial position, results of
operations or cash flows.

   In fiscal 2000, we adopted AICPA SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires that all start-up costs related to new
operations be expensed as incurred. The impact of adopting SOP 98-5 did not
have a material impact on our financial position, results of operations or
cash flows.

                                      27
<PAGE>

                                    BUSINESS

Overview

   We are a leading EMS provider to OEMs in the communications, computing, data
storage, industrial and medical equipment markets. We offer our communications
industry customers substantial expertise and experience in wireless and optical
systems markets that are experiencing rapidly growing demand for specialized
engineering and manufacturing services. We provide a comprehensive range of
engineering, manufacturing and fulfillment services to our customers on a
global basis through nine facilities strategically located in the United
States, Mexico, Asia and Europe. Our comprehensive service offerings support
our customers' needs from product development and design through manufacturing
to worldwide distribution and aftermarket support. Since our founding in 1994,
we have experienced strong financial growth and consistent profitability, with
Manufacturing Market Insider ranking our revenue growth rate of 110% in fiscal
2000 the highest among the top twenty domestic EMS companies for their most
recent fiscal year.

   Our customers include industry leading OEMs such as 3M, Efficient Networks,
Electronics For Imaging, Fluke Corporation, Fujitsu, Hewlett Packard,
Honeywell, IBM, Motorola, Pinnacle, RSA, Seagate and Sony. We also have
leveraged our expertise in the wireless and optical systems markets to develop
strong relationships with a number of emerging wireless and optical systems
OEMs, including Ancor Communications, Interwave, Optical Networks, Optical
Solutions, Repeater Technologies and Western Multiplex.

   Over the past several years, we have completed a number of acquisitions and
established new operations in order to expand our geographic presence, enhance
our product and service offerings, diversify our customer base and increase our
production capacity. In June 1999, we acquired Quadrus Manufacturing, a
division of Bell Microproducts, located in San Jose, California, which
primarily serves the communication sector in North America. In May 1999, we
also acquired a European division of Fluke Corporation located in Almelo, the
Netherlands, which primarily serves the industrial equipment sector in Europe
and North America. Since 1994, we have established operations in Guadalajara,
Mexico; Tianjin, China; Singapore and Bangkok, Thailand, which have expanded
our manufacturing and distribution capabilities and further broadened our
customer base. We continue to actively pursue potential acquisitions to
complement our organic growth and to expand our business.

Industry Background

   EMS companies provide a broad range of engineering, manufacturing and
fulfillment services to OEMs worldwide. Growth in the EMS industry is primarily
being driven by the overall growth of the electronics industry, the increased
use of outsourcing among OEMs and the frequency of OEM asset divestitures to
EMS businesses. By outsourcing EMS, OEMs are able to focus on their core
competencies, including product development, sales, marketing and customer
service, while leveraging the expertise of EMS providers for design,
procurement, assembly and test operations and supply chain management. OEMs use
EMS providers to enhance their competitive position by:

  .  Accessing leading engineering technologies;
  .  Accessing advanced manufacturing and processing technologies;
  .  Reducing time to market;
  .  Reducing operating costs and invested capital;
  .  Improving supply chain management; and
  .  Improving access to global markets.

   According to TFI, the global EMS industry is expected to grow at an average
annual rate of 20% from $60 billion in revenues in 1998 to $149 billion in
2003. TFI estimates that the percentage of cost of goods sold in the
electronics industry that is outsourced for manufacture by OEMs will increase
from 9.5% in 1998 to

                                       28
<PAGE>

17.1% by 2003. We believe that OEMs will continue to increase their use of
outsourcing due to rapidly changing product technologies, shortening product
lifecycles and the increasing capability of EMS companies to manufacture more
complex products. A summary of the historical and projected growth of the EMS
industry is provided below.

                                  [Bar Chart]

                  Historical and Projected EMS Industry Growth

                               (BILLIONS)   % Outsourced
                               ----------   ------------
                         1998       $60           9.5%
                         1999       $73          10.9%
                         2000E      $88          12.4%
                         2001E     $106          14.0%
                         2002E     $126          15.5%
                         2003E     $149          17.1%

   Source: Technology Forecasters, Inc., Contract Manufacturing from a Global
                            Perspective-1999 Update.

   According to TFI, the EMS industry is extremely fragmented, with over 3,000
independent EMS companies in existence today. Additionally, the twenty largest
companies represented approximately 56% of the worldwide EMS market in 1998,
with the largest company in the industry representing 11.3% of total industry
revenues. The industry has experienced and is anticipated to continue to
experience significant consolidation.

   TFI indicates that OEMs of all sizes are embracing the outsourcing model,
with smaller OEMs, those with less than $1.0 billion of revenue in 1998, just
as likely to outsource as manufacture products in-house. This is due in part to
the advent of the "virtual corporation," in which companies evolve without
performing any manufacturing in-house, relying instead on long term
relationships with EMS companies. In addition, according to TFI, medium size
companies, those with $1.0 billion to $9.9 billion of revenue in 1998, are
expected to increase their use of outsourcing from approximately 10% of their
total cost of goods sold in 1998 to approximately 45% by 2003. As a result,
small and medium size OEMs have represented and will continue to represent a
large market opportunity for the EMS industry going forward.

   The EMS industry is highly diverse with companies serving OEMs in a broad
array of industry segments. Communications and computing are currently the
largest EMS markets based on 1998 total revenues having accounted for 34% and
39% of total EMS revenues in 1998, respectively. TFI also forecasts that the
communications market will be the fastest growing end market for EMS over the
next several years, with total EMS revenue from OEMs in the communications
sector expected to grow from $19.2 billion of revenues in 1998 to $55.5 billion
in 2003. We also believe that certain segments of the communications sector
offer particularly strong growth opportunities, including the wireless and
optical systems markets.

   As this outsourcing trend continues, many OEMs are increasingly evaluating
whether to outsource additional aspects of their business functions, including
design, logistics, procurement and test. For example, in a 1999 TFI survey,
OEMs indicated an increased willingness to outsource a broad spectrum of design
services, including product definition, product design, design for
manufacturability and design for test services. As a result, we believe EMS
companies that have core competencies in providing advanced engineering
services and in serving the communications markets are well positioned to
benefit from OEMs' accelerating demand for EMS.

                                       29
<PAGE>

Our Competitive Strengths

   We have established strong, long-term relationships with numerous OEMs, many
of which are leaders in their respective markets. Our business is built on
several specific strengths, including the following:

   World-Class Engineering Capabilities. Utilizing over 400 engineering
professionals worldwide, we differentiate ourselves in the EMS marketplace by
providing our customers with world-class engineering and product management
services. Our engineering capabilities enable us to conceptualize, create
specifications, design, prototype, validate and ramp our customers' products to
volume production. We offer our customers expertise in a variety of design
applications, including mechanical and electromechanical engineering, software,
firmware, application specific integrated circuit design, printed circuit board
design, industrial design and systems engineering and integration. In addition,
we offer extensive custom test and automation equipment design and build
services. These product design, custom test equipment and automation
capabilities enhance the design and manufacturability of our customers'
products, reduce time to market and allow us to provide customers with a
seamless transition to commercial volume production.

   Communications Focus with Specific Wireless and Optical Systems
Expertise. We focus substantial resources on the rapidly expanding
communications industry and have developed specific expertise in the high
growth wireless and optical market segments. Our wireless and optical service
offerings include adhesives, advanced printed circuit board assembly
technologies, such as chip on board, chip on flex and flip chip technologies,
lead-free soldering, conformal coating, laser welding, hybrid
optical/electrical printed circuit board assembly and test and sub-micron
alignment of optical sub-assemblies. We use these capabilities to build a wide
variety of advanced optical components and optical subsystems for existing and
emerging OEMs. We have been able to leverage our focus and expertise to
establish strong relationships with wireless and optical systems OEMs,
including Ancor Communications, Interwave, Optical Networks, Optical Solutions,
Repeater Technologies and Western Multiplex. We believe that this expertise and
our early entry into the wireless and optical systems markets will enable us to
continue to attract new customers and increase our sales to existing customers
in the communications marketplace.

   Comprehensive Manufacturing and Fulfillment Services.  We complement our
engineering capabilities with a comprehensive range of manufacturing and
fulfillment services that support our customers' products from initial design
and development through prototyping, assembly, test equipment build and
automation, final system build, supply chain management, packaging, worldwide
distribution, and aftermarket support. These capabilities enable us to provide
OEMs with a complete solution for all of their EMS needs.

   Global Scale and Infrastructure. We operate engineering and manufacturing
facilities in the United States, China, Mexico, the Netherlands, Singapore and
Thailand, all of which are in close proximity to the world's major electronics
markets. Our global presence allows us to shift manufacturing efforts to the
areas where our customers and their end markets are located, reduce the time
and cost required to bring our customers' products to market and simultaneously
introduce our customers' products in major global markets.

Strategy

   Our objective is to enhance our position as a leading EMS provider to OEMs
worldwide. We intend to achieve this objective by continuing to employ the
following strategies:

   Leverage Our World-Class Engineering Services. We are committed to providing
world-class engineering services to meet OEMs' increasing requirements to
outsource front-end product design, prototyping and test services. We intend to
leverage our engineering services to establish relationships with OEMs early in
the new product design and development process to give us an opportunity to
also provide integrated engineering, manufacturing and fulfillment services for
these new products. In addition, we provide engineering expertise in the design
and build of custom test equipment systems, which OEMs have traditionally been
unable to outsource. Our custom equipment design and build services provide us
with another opportunity to attract new customers and to introduce other
components of our comprehensive EMS solution to existing customers. We intend
to continue developing new advanced engineering, custom test equipment and
process automation services to meet the changing needs of our customers in a
cost efficient and timely manner.


                                       30
<PAGE>

   Provide Comprehensive Engineering, Manufacturing and Fulfillment Service
Offerings. We will continue to expand our service offerings to meet the
evolving needs of our customers who are increasingly requiring a wider range of
advanced services from EMS companies. We have developed the engineering,
manufacturing and fulfillment capabilities to provide comprehensive EMS
solutions that support our customers' products from initial product design and
development through prototyping, testing, manufacture and world-wide
distribution. We intend to use these capabilities to increase our services to
our existing customers and to expand the scope of services we provide to OEMs
launching new product programs.

   Focus on High Growth EMS Market Segments. We focus on establishing
profitable and strategic relationships with industry leaders in high growth
markets such as the wireless and optical segments of the communications
industry. We will continue to leverage our engineering and manufacturing
capabilities to develop relationships with established and emerging OEMs in
high growth markets to increase our customer base and increase our sales to
existing customers as they expand into new markets.

   Expand Our Global Scale and Infrastructure. Over the last several years, we
have expanded from one facility in North America to nine facilities across
North America, Europe and Asia. We intend to continue to expand our presence in
strategic locations to provide our customers with services in close proximity
to their own operations or their end customers. This strategy enhances our
ability to offer our customers timely delivery of products and cost effective
manufacturing solutions worldwide.

   Pursue Selective Acquisitions. We completed two acquisitions in fiscal 2000
and we will continue to pursue strategic acquisitions that enable us to expand
our geographic reach, add manufacturing capacity, secure key new customers,
diversify into complementary product markets and broaden our technological
capabilities and value-added service offerings. As part of our overall
strategy, we intend to capitalize on the growth opportunities presented by
OEMs' divestitures of their own engineering and manufacturing operations as
well as the consolidation of EMS companies, thereby maximizing our ability to
increase our service capabilities in strategic markets and locations.

   Focus on Quality Management. We are committed to excellence in the
engineering and manufacturing of our customers' products and have adopted an
extensive quality management system that focuses on continual process
improvement and achieving high customer satisfaction. Our facilities in
Rochester, Minnesota; San Jose, California; and Almelo, the Netherlands are ISO
9001 certified for quality assurance in design, development, production,
installation and servicing activities. Our facilities in Mexico and Thailand
are ISO 9002 certified for quality assurance in production, installation and
servicing activities. In addition, all of our facilities engaged in medical
product design and manufacture are FDA/QSR compliant, and our Rochester,
Minnesota facilities are QS 9000 certified. We will continue to utilize
advanced statistical engineering and metrics control techniques to achieve our
high quality standards and customer satisfaction objectives.

   Provide Superior Supply Chain Management. We are committed to maintaining a
leadership position in supply chain management to reduce our customers' total
costs and time to market and increase our flexibility to respond to changing
customer requirements. We are currently implementing Web-based supply chain
software products from AGILE Software Corporation and i2 Technologies that will
allow us to communicate with our supply chain partners to provide them real-
time information on specific orders, product demand, inventory and component
lead times. We will continue to utilize and develop advanced electronic data
interchange and Web-based e-business systems to manage all aspects of the
engineering, manufacturing and fulfillment processes and streamline the supply
chain system for our customers.

Services

   We offer a comprehensive range of engineering, manufacturing and fulfillment
services that support our customers' products from initial design through
prototyping, design validation, testing, ramp to volume production, worldwide
distribution and aftermarket support. We support all of our service offerings
with a comprehensive supply chain management system, superior quality
management program and sophisticated

                                       31
<PAGE>

information technology systems. Our comprehensive service offerings enable us
to provide a complete and solution for our customers' outsourcing requirements.
The following illustration highlights our comprehensive service offerings and
our value added support services:

[Illustration of customer circled by engineering, fulfillment and manufacturing
services.]

  Our Engineering Services

   New Product Design, Engineering, Prototype & Test. We offer a full spectrum
of new product design, prototype, test and related engineering services that
shorten product development cycles, resulting in faster time to market and
reduced costs for our customers. Our multi-disciplined engineering teams
provide expertise in a number of core competencies critical to serving OEMs in
our target markets, including industrial design, mechanical and electrical
hardware, firmware, software and systems integration and support. We create
specifications, design, prototype, validate and ramp our customers' products
into high volume manufacturing. Our technical expertise includes electronic
circuit design for analog, digital, radio frequency and microwave printed
circuit boards and application specific integrated circuits.

   Custom Test and Automation Equipment Design & Build Services. We provide our
customers with a comprehensive range of custom functional test equipment,
process automation and replication services. We have substantial expertise in
tooling, testers, equipment control, systems planning, automation, floor
control, systems integration, replication and programming. Our custom
functional test equipment, process automation and replication services are
available to OEMs as part of our full service product design and manufacturing
services package or on a stand-alone basis for products designed and
manufactured elsewhere. Our ability to provide these services allows us to
capitalize on OEMs' increasing needs for custom manufacturing solutions and
provide an additional opportunity to introduce customers to our comprehensive
engineering and manufacturing services.

  Our Manufacturing Services

   Printed Circuit Board Assembly & Test. We offer a wide range of printed
circuit board assembly and test services, including printed circuit board
assembly, assembly of subsystems, in-circuit and functional testing of printed
assemblies, board level functional testing, environmental and stress testing
and component reliability testing. Our multi-disciplined engineering
professionals have expertise in a variety of established and emerging
technologies, including surface mount technology, fine pitch, ball grid array,
flip chip, chip on board, micro chip, column ball grid array, direct chip
attach and wire bonding. All of our printed circuit boards are manufactured
using a continuous flow process, which minimizes process times for faster
delivery and reduces the overall costs to our customers.

   Flex Circuit Assembly & Test. We provide OEMs with a wide range of flexible
circuit assembly and test services, including surface mount technology, fine
pitch, ball grid array and flip chip attached to flexible circuits and ceramic
substrates. We utilize specialized tooling strategies and advanced procedures
to minimize circuit

                                       32
<PAGE>

handling and ensure that consistent processing parameters are maintained
throughout the assembly process. All of our manufacturing activities are
monitored to comply with strict environmental controls and to maintain our
product quality standards.

   Systems Assembly & Test. We offer a wide range of systems assembly and test
services that enhance product quality and product life cycles. Our
manufacturing capabilities include the design, development and building of test
strategies for specific products which utilize manual, mechanized or fully
automated production lines to improve product quality, reduce costs and improve
delivery time to customers. As OEMs seek to provide greater functionality in
smaller products, they require more sophisticated systems assembly technologies
and processes. Our expertise in advanced precision and electromechanical
technologies and our continued investment in technology enables us to meet our
customers' changing needs and gives our customers access to a wide variety of
advanced manufacturing solutions without having to make substantial capital
investments. In order to meet our customers' demand for systems assembly and
test services, we offer subassembly build, final assembly, functional test,
configuration and software installation and final packaging services.

   Precision Electromechanical Assembly & Test. We offer a full spectrum of
precision electromechanical assembly and test services that can be utilized in
a variety of advanced applications. We design, develop and build product
specific manufacturing processes utilizing manual, mechanized or fully
automated lines to meet our customers' product volume and quality requirements.
We provide OEMs with expertise in several core technologies that can be
utilized in a variety of applications, including optical systems assembly and
test, magnetics assembly and test, overmolding, precision metal joining, in-
process forming, vision-assisted assembly and precision alignment and assembly.
All of our assembly and test processes are developed according to customer
specifications and replicated within our facilities.

   Plastic Injection Molding. We provide our customers with plastic injection
molding services for the communications, computing, data storage and medical
device industries. All of our molding services can be performed with hands-free
robotic systems in a humidity and temperature controlled environment to
maximize product quality.

  Our Fulfillment Services

   Product Configuration and Distribution. We provide our customers with
product configuration and global distribution services that complement our
engineering and manufacturing services and enable our customers to be
responsive to changing market demands and reduce time to market. We utilize
sophisticated build-to-order software to configure our customers' products on a
customized basis. Our global distribution capabilities allow us to distribute
products to customers, distributors and end-users around the world. We provide
vendor-managed inventory programs, including customer-designated hubs where a
customer's inventory can be stored prior to distribution, to streamline the
distribution process and decrease delivery times.

   Aftermarket Services. We provide a range of aftermarket services, including
repair, replacement, refurbishment, remanufacturing, exchange, systems upgrade
and spare part manufacturing. These services are tracked and supported by
specific information technology systems that can be tailored to meet our
customers' individual requirements.

  Our Value-Added Support Systems

   We support our engineering, manufacturing and fulfillment services with an
efficient supply chain management system and a superior quality management
program. All of our value-added support services are implemented and managed
through sophisticated information technology systems, which enable us to
collaborate with our customers throughout all stages of the engineering,
manufacturing and order fulfillment processes.

                                       33
<PAGE>

 Supply Chain Management

   Our supply chain management system reduces our customers' total costs by
assisting them in the selection of components during the product design stage
to ensure advantageous sourcing and pricing from preferred suppliers and
distributors. We have strong relationships with a broad range of materials and
component suppliers and distributors, and our product design and volume
procurement capabilities enhance our ability to secure supplies of materials
and components at advantageous pricing. We employ a supplier certification
process to ensure that suppliers of key components have predictable and stable
manufacturing processes capable of supplying components that meet or exceed our
quality requirements.

   We utilize a full complement of electronic data interchange transactions, or
EDI, with our suppliers to coordinate forecasts, orders, reschedules, inventory
and component lead times. At our engineering facilities, we also utilize Web-
based products from AGILE Software Corporation to collaborate with our supply
chain partners in real-time on product content and engineering change
management. We are in the process of expanding our Web-based system by
implementing a suite of real-time supply chain management software products
from i2 Technologies across all of our facilities to enhance our ability to
rapidly scale operations to meet customer needs, shift capacity in response to
product demand fluctuations, reduce materials costs and effectively distribute
products to our customers or their end-customers.

 Quality Management

   We believe quality management is paramount to providing quality engineering
and manufacturing services to our customers. We employ several quality
management systems, which ensure the highest quality services and customer
satisfaction. Our facilities in Rochester, Minnesota; San Jose, California; and
Almelo, the Netherlands are ISO 9001 certified for quality assurance in design,
development, production, installation and servicing activities. Our
manufacturing facilities in Mexico and Thailand are ISO 9002 certified for
quality assurance in production, installation and servicing activities. In
addition, all of our facilities engaged in medical product design and
manufacture are FDA/QSR compliant and our Rochester facilities are QS 9000
certified. We are currently pursuing an ISO 14000 environmental certification
for all of our facilities. All of our assembly and test activities are
supported by advanced statistical engineering and metrics control techniques,
including yield management and failure analysis, which improve product and
service quality. Statistical information is regularly reviewed by each
facility's management team to ensure we are achieving our quality goals and
customer satisfaction. Our customers can access our quality data information
through our Web-based program management system and monitor our commitment to
quality assurance.

 Information Systems

   Information systems are a critical element for achieving our business
objectives. We believe that our significant investment in sophisticated
information systems will deliver competitive advantages for our customers by
improving product quality and operational flexibility. Our enterprise resource
planning systems, or ERP systems, provide product and production information to
our supply chain management and engineering change management systems. These
ERP systems also provide us with real-time financial and materials management
data. Our information systems also control serialization and quality data for
all of our facilities around the world utilizing state-of-the-art statistical
process control techniques for continuous process improvements. We will
continue to make significant investments in Web-based collaboration tools that
will leverage the speed and technology of the Internet to facilitate the flow
of information, both within Pemstar and with our customers and suppliers,
resulting in superior quality products, quicker response time for our clients
and reduced time to market.

Customers

   Our customers include established OEMs, including such industry leaders as
3M, Efficient Networks, Electronics For Imaging, Fluke Corporation, Fujitsu,
Hewlett Packard, Honeywell, IBM, Motorola, Pinnacle, RSA, Seagate and Sony. We
also have relationships with a number of emerging wireless and optical systems

                                       34
<PAGE>

OEMs, including Ancor Communications, Interwave, Optical Networks, Optical
Solutions, Repeater Technologies and Western Multiplex. Our customers include
established and emerging OEMs in the communications, computing, data storage,
industrial and medical equipment industries. The following table shows the
percentage of our sales in each of the markets we serve for the fiscal years
ended March 31, 1998, 1999 and 2000.

<TABLE>
<CAPTION>
                                                                  Fiscal Year
                                                                     Ended
                                                                   March 31,
                                                                 ----------------
      Markets                                                    1998  1999  2000
      -------                                                    ----  ----  ----
      <S>                                                        <C>   <C>   <C>
      Communications............................................  15%   16%   34%
      Computing.................................................  41    60    32
      Data Storage..............................................  39    18    20
      Industrial Equipment......................................   2     3    13
      Medical Equipment.........................................   3     3     1
                                                                 ---   ---   ---
        Total................................................... 100%  100%  100%
                                                                 ===   ===   ===
</TABLE>
   The following table indicates, for fiscal 2000, our ten largest customers in
terms of net sales, in alphabetical order and the primary products for which we
provided our services.

<TABLE>
<CAPTION>
      OEM Customers                                   End Products
      -------------                                   ------------
      <S>                               <C>
      Ancor Communications............. Communications switching equipment
      Efficient Networks............... Broadband access devices
      Electronics For Imaging.......... Networking equipment
      Fluke Corporation................ Industrial instrumentation
      IBM.............................. Computing, network and storage equipment
      Interwave........................ Wireless communications equipment
      Motorola......................... Wireless communications devices
      Pinnacle......................... Computer video equipment
      RSA.............................. Computer security devices
      Sony............................. Industrial equipment
</TABLE>

   In fiscal 2000, IBM represented approximately 37% of our net sales and
Motorola represented approximately 15% of our net sales.

Sales and Marketing

   We market our engineering, manufacturing and fulfillment services through a
sales force of fifteen full-time senior sales professionals located in North
America, Europe and Asia. Our North American sales force is assisted by six
manufacturers representative organizations. Our direct sales efforts in North
America are organized into four regions, Eastern, Central, Rocky Mountain and
Western. Sales in each region are managed by an experienced director of sales
with the assistance of a director of technical sales who coordinates
engineering sales across all four regions. Our direct sales personnel have
knowledge of local markets, which we believe is critical to identifying new
customers and developing new business opportunities. In excess of 95% of our
net sales in fiscal 2000 were generated through our internal sales force. Our
executive management team is integral to our sales efforts, with each member
being assigned to a North American, European or Asian region in which the
executive interfaces with customers to ensure customer satisfaction and
generate additional business opportunities.

   Our sales and marketing professionals target OEMs that require a
comprehensive outsourcing solution in the communications, computing, data
storage, industrial and medical equipment industries and whose outsourcing
requirements will utilize our global facilities and capabilities. Our marketing
strategy focuses on developing close working relationships with our customers
early in the design phase and throughout the lifecycle of a product. To
facilitate these relationships, a customer support team is assigned to each

                                       35
<PAGE>

customer to service all of the customer's needs throughout the outsourcing
process. Each customer support team consists of a dedicated program manager,
project buyer, production control planner, manufacturing engineer and quality
engineer. The program manager serves as the customer's single point of contact
for all of the customer's requirements on a worldwide basis and, with the
support of the team, has responsibility for managing all aspects of the
customer's project.

Intellectual Property

   We have developed proprietary processes and program management methodologies
that enable us to shorten time to market and to deliver superior quality
products in a cost-effective manner. Our intellectual property portfolio of
patents, patent applications, trade secrets and other proprietary information
consists primarily of unique processes that enable us to develop and
manufacture superior custom test equipment solutions for our customers. We
currently have one patent and fourteen patent applications filed for technology
and methodologies relating to process automation, test equipment, product
quality and reliability, manufacturing processes, failure analysis, process
control techniques and test equipment. These proprietary processes are grouped
into building blocks that can be applied in a variety of applications.

   Our multi-disciplined engineering teams continually seek to develop new
testing and manufacturing equipment and processes to meet our customers'
changing needs and provide custom solutions at an affordable cost. Our
engineers often incorporate custom built equipment into our own proprietary
manufacturing systems to maximize the equipment's functionality and optimize
manufacturability. Because these systems are based on our proprietary
technology, they can be quickly replicated in our facilities and provided to
our customers in a cost-efficient manner.

   To protect our proprietary rights, we rely largely upon a combination of
patents, trade secret laws, non-disclosure agreements with our customers and
our internal confidentiality procedures and employee confidentiality
agreements. Although we take steps to protect our proprietary information and
trade secrets, misappropriation may still occur. We believe that our
proprietary design and manufacturing processes do not infringe on the
proprietary rights of others.

   We license some technology from third parties that we use in providing
engineering and manufacturing services to our customers. We believe that these
licenses are generally available on commercial terms from a number of
licensors. Generally, the agreements governing this technology grant us non-
exclusive, worldwide licenses with respect to the subject technology and could
terminate upon a material breach by us.

Research and Development

   The market for our services is characterized by rapidly changing technology
and continuing process development. OEMs are demanding smaller, faster and
higher performance products. These demands require increasingly complex
engineering and manufacturing capabilities. We are committed to developing new
design and manufacturing technologies and enhancing our existing technologies.
Since our formation in 1994, we have made substantial investments in technology
and equipment to meet our customers' needs and maintain our competitive
advantage. Our expenditures for research and development in fiscal 2000 were
$410,000, and our expenditures in fiscal 1999 and 1998 were $387,000 and
$401,000, respectively.

   Our close relationships with customers in the early stages of product design
allows us to develop new products that utilize innovative technology in a
variety of engineering disciplines. These close relationships assist us in
identifying emerging products and related technologies in target markets, which
allows us to develop and expand our existing technology, or to develop or
obtain new technology that will enable us to remain a leading provider of EMS.
As a result of our commitment to maintaining superior technological
capabilities, we have developed substantial expertise in communications,
particularly in the areas of wireless and optical technologies, which we
believe gives us a competitive advantage over many other EMS providers.

                                       36
<PAGE>

Employees

   As of March 31, 2000, we had 2,715 full-time employees. In addition to our
full-time employees, we regularly hire part-time and temporary (contract)
employees. Given the variable nature of our project flow and the quick response
time required by our customers, it is critical that we be able to quickly ramp-
up and ramp-down our production capacities to maximize efficiency. To achieve
this, our strategy has been to employ a skilled temporary labor force, as
required. Except for our 218 employees located in Almelo, the Netherlands, none
of our employees are unionized. We believe our employee relations are good, and
we have not experienced any work stoppages at any of our facilities.

International Operations

   A key element in our business strategy is to expand our global presence to
provide engineering, manufacturing and fulfillment services in locations that
meet our customers' regional requirements. Consistent with this strategy, we
have established international design and manufacturing facilities in China,
Mexico, the Netherlands, Singapore and Thailand. We will continue to seek
strategic opportunities to acquire facilities throughout the world, especially
in low-cost regions, either through OEM divestitures or the acquisition of, or
strategic partnering with, regional engineering and manufacturing service
companies.

   In May 1999, we acquired a facility located in Almelo, the Netherlands from
Fluke Corporation. Acquisition of our Netherlands facility increased our
engineering design capabilities, particularly in the areas of electrical and
industrial design. This facility also gives us the ability to rapidly
distribute products for our European and North American customers. In
connection with this acquisition, we entered into a long-term supply agreement
to provide manufacturing and design services to Fluke.

   Our Mexican facility, located in Guadalajara, Mexico and our Chinese
facility located in Tianjin, China, represent greenfield operations established
in September 1997 and June 1998, respectively. Establishment of these
facilities has enabled us to provide low-cost manufacturing and order
fulfillment services for our customers on a global basis. Our facility in
Guadalajara is located in Mexico's emerging communications and computing
markets, and our expansion into this region has provided us with the
opportunity to attract new customers in those industries. Similarly, our
expansion into China has enabled us to reduce our customers' manufacturing
costs while giving us access to new customers in the communications, computing
and data storage industries.

   Our Bangkok, Thailand facility was initially a strategic partnership with
Italade Technology Holdings, Ltd. This facility, Pemstar Limited, is now a
wholly-owned subsidiary of Pemstar. Our Thailand operations are strategically
situated in the rapidly expanding Asian communications, computing and data
storage markets, giving us access to new customers in those industries.

   In October 1998, we formed a Singapore joint venture company called Pemstar-
Honguan Pte. Ltd. with a manufacturing services company called Honguan
Technologies. We own a controlling 51% interest in this joint venture. Our
facility in Singapore has significantly enhanced our service capabilities in
the data storage industry by adding specialized disk drive design and
manufacturing capabilities. This facility also provides critical sales support
for customers in the United States, Southeast Asia, the Philippines, Japan and
Korea.

                                       37
<PAGE>

Facilities

   Our executive offices are located in Rochester, Minnesota, where we also
have engineering and manufacturing facilities. We also have two other U.S.
facilities located in San Jose, California as well as facilities in China,
Mexico, the Netherlands, Singapore and Thailand. Information about these
facilities is set forth below:

<TABLE>
<CAPTION>
      Location                                        Square Feet  Leased/Owned
      --------                                        ----------- --------------
      <S>                                             <C>         <C>
      Rochester, Minnesota (2 facilities)............   225,000   Owned & Leased
      San Jose, California (2 facilities)............   179,000       Leased
      Almelo, the Netherlands........................   132,000       Leased
      Guadalajara, Mexico............................    60,000       Leased
      Bangkok, Thailand..............................    52,000       Leased
      Tianjin, China.................................    40,000       Leased
      Singapore......................................     8,000       Leased
</TABLE>

   We believe our facilities are well maintained and suitable for their
respective operations. We anticipate that as our business grows, we will need
to acquire, lease or build additional facilities. We may encounter unforeseen
difficulties, costs or delays in expanding our facilities.

Competition

   The EMS industry is highly competitive and we compete against numerous
domestic and foreign engineering and manufacturing service companies. We
believe that the principal competitive factors in our industry are:

  .  Service offerings;
  .  Technological capabilities;
  .  Scale of operations and financial strength;
  .  Geographic location and coverage;
  .  Pricing;
  .  Product quality;
  .  Meeting product delivery schedules; and
  .  Flexible and timely response to design and schedule changes.

   We believe that large, publicly-traded OEMs prefer to enter into outsourcing
relationships with other public EMS companies that present them with the
opportunity to build a long-term relationship because of their greater access
to capital and resulting financial stability. Many of our competitors are
substantially larger and have greater financial, operating, manufacturing and
marketing resources than we do. Some of our competitors have broader geographic
breadth and range of services than we do. In addition, some of our competitors
may have stronger relationships with our existing customers than we do. We
believe that we are a leading EMS provider and that we are well positioned to
compete against these larger competitors due to our world-class engineering,
product quality, flexibility and timeliness in responding to design and
schedule changes, reliability in meeting product delivery schedules, pricing,
the provision of value-added services and geographic location.

   We also face competition from the manufacturing operations of our current
and potential customers, who continually evaluate the relative benefits of
internal manufacturing compared to outsourcing. As more OEMs dispose of their
manufacturing assets and increase their use of outsourcing, we face increasing
competitive pressure to grow our business in order to maintain our competitive
position.

                                       38
<PAGE>

Governmental Regulation

   Our operations are subject to federal, state and local regulatory
requirements relating to environmental, waste management and health and safety
measures relating to the use, release, storage, treatment, transportation,
discharge, disposal and clean-up of hazardous substances and wastes, as well as
practices and procedures applicable to the construction and operation of our
plants. In addition, we are required to register with the United States Food
and Drug Administration as a medical device manufacturer. The FDA and various
state agencies inspect our facilities from time to time to determine whether we
are in compliance with the FDA's Quality Systems Regulation relating to medical
device manufacturing companies, including regulations concerning manufacturing,
testing, quality control and product labeling practices. The current costs of
compliance are not material to us, and we are not presently aware of any facts
or circumstances that would cause us to incur significant costs or liabilities
in the future related to environmental, health and safety law compliance.

Legal Proceedings

   To the best of our knowledge, there are no legal proceedings pending or
threatened against us.

                                       39
<PAGE>

                                   MANAGEMENT

Directors and Executive Officers

   The following table sets forth our directors and executive officers, their
ages as of May 15, 2000 and the positions currently held by them:

<TABLE>
<CAPTION>
 Name                     Age Position
 ----                     --- --------
 <C>                      <C> <S>
 Allen J. Berning........  45 Chairman, Chief Executive Officer and Director
 William J. Kullback.....  40 Vice President--Finance and Chief Financial
                              Officer
 William B. Leary........  58 Executive Vice President--Rochester Site
                              Operations and Director
 David L. Sippel(1)......  56 Executive Vice President--Engineering Services
                              and Chief Technology Officer and Director
 Robert R. Murphy(1).....  56 Executive Vice President--Corporate Operations
                              Treasurer and Director
 Gary L. Lingbeck........  54 Executive Vice President--North American Sales,
                              Secretary and Director
 Steve V. Petracca.......  44 Executive Vice President--Business Development
                              and Director
 Karl D. Shurson(1)......  60 Executive Vice President--Quality and Director
 Hargopal (Paul) Singh...  50 Executive Vice President--International
                              Operations and Director
 Robert J. Legendre......  43 Vice President--Worldwide Materials
 Robert D. Ahmann........  44 Executive Vice President--Manufacturing Systems
                              and Director
 Thomas A. Burton(1)(2)..  63 Director
 Michael J.                36
  Odrich(1)(2)...........     Director
 Bruce M. Jaffe(1)(2)....  56 Director
</TABLE>
--------
(1)Member of our executive compensation committee.
(2)Member of our audit committee.

   Allen J. Berning has served as our Chief Executive Officer, director and
Chairman of our Board since the founding of Pemstar in 1994. Prior to founding
Pemstar, Mr. Berning was employed by IBM for fifteen years, where he held
several engineering and management positions in process engineering,
manufacturing, cost engineering and resource planning, including most recently
as Operations Manager for IBM's Rochester Storage Systems facility. Mr. Berning
received a B.S.I.E. and an M.B.A. from St. Cloud State University. He is
currently serving as board member and past chair of the Greater Rochester Area
University Center. In 1999, Mr. Berning received the national Ernst & Young
Entrepreneur of the Year Award.

   William J. Kullback has served as our Vice President--Finance and Chief
Financial Officer since joining Pemstar in 2000. Prior to joining Pemstar, Mr.
Kullback served for five years as Chief Financial Officer of Crenlo, Inc., a
manufacturer of fabricated metal products. Prior to joining Crenlo, Mr.
Kullback worked in various positions with the Stant Corporation, a manufacturer
of automotive parts and tools, including Corporate Controller and Vice
President of Finance of Stant's Plews Tool subsidiary. From 1987 to 1990, Mr.
Kullback served as a consultant in the audit and manufacturing consulting
practices of Price Waterhouse. Mr. Kullback received a B.A. in Economics and
English and an M.B.A. in Accounting from the State University of New York at
Buffalo.

   William B. Leary has served as our Executive Vice President--Rochester Site
Operations and as a director since 1994. Prior to joining Pemstar, Mr. Leary
was employed by IBM from 1965 until 1994, where he held a variety of
engineering and management positions, including most recently as engineering
manager of storage production. Mr. Leary holds a B.S.E.E. from Marquette
University.

                                       40
<PAGE>

   David L. Sippel has served as our Executive Vice President--Engineering
Services and Chief Technology Officer and as a director since 1994. From 1970
until 1994, Dr. Sippel was employed by IBM, where he held several engineering
and management positions, including most recently as the manager of IBM's thin-
film disk development and manufacturing operations. Dr. Sippel holds a B.S. in
Aeronautics and Engineering Mechanics, an M.S. in Mechanics and Materials and a
Ph.D. in Mechanics and Materials from the University of Minnesota.

   Robert R. Murphy has served as Executive Vice President--Corporate
Operations since 2000 and as Treasurer and a director since 1994. Prior to
serving as our Executive Vice President--Corporate Operations, Mr. Murphy
served as our Chief Financial Officer from 1994 to 2000. From June 1962 to
1994, Mr. Murphy was employed by IBM, where he held several engineering and
management positions, including most recently as manager of magnetic head
development and production. Mr. Murphy holds a B.S. degree in Mathematics from
Winona State University.

   Gary L. Lingbeck has served as our Executive Vice President--North American
Sales since 1999, and as Secretary and a director since 1994. Prior to serving
as our Executive Vice President--North American Sales, Mr. Lingbeck served as
our Executive Vice President--World Wide Sales from 1994 to 1999. From 1964 to
1993, Mr. Lingbeck was employed by IBM in various technical and management
positions, including establishing OEM sales and marketing groups for IBM's
storage products and midrange systems groups.

   Steve V. Petracca has served as our Executive Vice President--Business
Development and as a director since joining Pemstar in 1999. From 1998 to 1999,
Mr. Petracca served as the Executive Vice President and General Manager of
Quadrus Manufacturing, a division of Bell Microproducts. From 1988 to 1997,
Mr. Petracca served as the Chief Executive Officer and President of Reply
Corporation, a venture backed computer start-up company that he founded, and
after acquisition of Reply Corporation by Radius Inc. in 1997, as its Senior
Vice President of engineering and operations until 1998. Prior to founding
Reply Corporation, Mr. Petracca worked in various positions with IBM. Mr.
Petracca holds a B.A. from the University of Colorado and an M.B.A. from Nova
University.

   Karl D. Shurson has served as our Executive Vice President--Operations and
Quality since 1998 and as a director since 1994. Mr. Shurson has also served as
our Corporate Manager of Human Resources since 1994 and as the site executive
for our Bangkok, Thailand operations since 1998. From 1962 to 1994, Mr. Shurson
was employed by IBM where he held several technical and management positions,
including most recently as production facility manager for storage products at
IBM's Rochester, Minnesota facility.

   Hargopal (Paul) Singh has served as our Executive Vice President--
International Operations and Wireless Communications since 1999 and as a
director since 1998. Mr. Singh has been employed by us since 1995 and also
serves as President of our Chinese and Mexican subsidiaries. From 1994 to 1995,
Mr. Singh was employed by Microsoft, and from 1979 to 1994, he was employed by
IBM. Mr. Singh holds a B.E. in Mechanical Engineering from Osmania University
in India and an M.S. in Engineering Management from Oklahoma State University.

   Robert J. Legendre has served as Vice President, World Wide Materials since
2000. Prior to joining Pemstar, Mr. Legendre was employed by Western Digital
Corporation from 1987 to 2000, most recently as Vice President of World Wide
Materials. Mr. Legendre holds a B.S. degree in Business from LaSalle
University.

   Robert D. Ahmann has served as our Executive Vice President--Manufacturing
Systems and a director since August 1999. Mr. Ahmann has worked for us in
various capacities since 1994. From 1977 to 1994, Mr. Ahmann was employed by
IBM where he held several engineering and management positions, including most
recently as manager of test and process engineering for storage products. Mr.
Ahmann holds a B.S.E.E. from North Dakota State University and a M.S.E.E. from
the University of Minnesota.

                                       41
<PAGE>

   Thomas A. Burton has served as a director since 1994. Mr. Burton has been an
independent consultant since 1995. Prior to joining Pemstar, Mr. Burton was
President and Chief Executive Officer of Waters Instruments Inc., a diversified
manufacturer of medical and agricultural products and a contract manufacturer
for the computing and telecommunications industries, from 1960 to 1990. From
1992 to 1997, Mr. Burton was appointed to serve on the Minnesota Public
Utilities Commission which regulates the electric gas and telephone industries
in Minnesota.

   Michael J. Odrich has served as a director of Pemstar since 1998. Since
1995, Mr. Odrich has been a Managing Director and head of the Lehman Brothers'
Venture Capital Fund. Prior to joining Lehman Brothers Private Equity, he
served as assistant to Lehman Brothers' Chairman and Chief Executive Officer
from 1993 until 1995. Mr. Odrich joined the Investment Banking Division of
Lehman Brothers in 1986. He is currently a director of Active Software, Inc.
and Regeneration Technologies, Inc. Mr. Odrich holds a B.A. degree from
Stanford University and an M.B.A. from Columbia University.

   Bruce M. Jaffe has served as a director of Pemstar since 2000. Mr. Jaffe,
currently a private investor, was Senior Vice President and Chief Financial
Officer of Bell Microproducts Inc., a distributor of storage and computer
products from 1997 to 1999. From 1967 to 1996, Mr. Jaffe was employed by Bell
Industries Inc., a distributor of electronic components, where he held several
management positions, most recently as President, Chief Operating Officer and a
member of the Board of Directors. From 1965 to 1967, Mr. Jaffe was employed as
an accountant by Price Waterhouse. Mr. Jaffe holds a B.S. in Business from the
University of Southern California and is a certified public accountant. Mr.
Jaffe currently serves on the Board of Advisors for the University of Southern
California School of Business.

Board of Directors

   Following the offering, our board of directors will consist of twelve
directors divided into three classes with each class serving for a term of
three years. At each annual meeting of shareholders, directors will be elected
by the holders of common stock to succeed those directors whose terms are
expiring. Gary L. Lingbeck, Karl D. Shurson, Robert D. Ahman and Bruce M. Jaffe
will be Class I directors whose terms will expire in 2001; William B. Leary,
Robert R. Murphy, Hargopal (Paul) Singh and Thomas A. Burton will be Class II
directors whose terms will expire in 2002; and Allen J. Berning, David L.
Sippel, Steve V. Petracca and Michael J. Odrich will be Class III directors
whose terms will expire in 2003. Following the offering, our bylaws will
provide that the number of directors shall be fixed by the board of directors.
The number of directors on our board will be fixed at a maximum of fifteen.

Director Compensation

   We pay our non-employee board members $1,000 for attendance at each board
meeting and $500 for attendance at each committee meeting. We also reimburse
our non-employee directors for reasonable expenses incurred in serving as a
director. All of our non-employee directors are entitled to participate in our
Stock Plans. The number of options granted to our non-employee directors is
determined by our Options Committee on an annual basis. In fiscal 2000, one of
our non-employee directors, Thomas A. Burton was awarded an option to purchase
3,000 shares of common stock under our 1999 Amended and Restated Option Plan.
See "Benefit Plans--Stock Option Plans."

Committees

   Our board of directors has authority to appoint committees to perform
certain management and administrative functions. We currently have two board-
appointed committees:

 Audit Committee

   The functions of the audit committee, which consists of Thomas A. Burton,
Michael J. Odrich and Bruce M. Jaffe, each a non-employee director, include:
reviewing the adequacy of our system of internal accounting controls; reviewing
the results of the independent auditors' annual audit, including any
significant adjustments, management judgments and estimates, new accounting
policies and disagreements with

                                       42
<PAGE>

management; reviewing our audited financial statements and discussing them with
management; reviewing the audit reports submitted by the independent auditors;
reviewing disclosures by independent auditors concerning relationships with our
company and the performance of our independent auditors and annually
recommending independent auditors; adopting and annually assessing our charter;
and preparing such reports or statements as may be required by Nasdaq or the
securities laws.

 Executive Compensation Committee

   The executive compensation committee consists of Thomas A. Burton, Michael
J. Odrich and Bruce M. Jaffe, each a non-employee director, and Robert R.
Murphy, Karl D. Shurson and David L. Sippel, each of whom is also a director.
The functions of the executive compensation committee currently include making
promotion and compensation recommendations for our executive officers and vice
presidents and reviewing our general compensation strategy.

Executive Compensation Committee Interlocks and Insider Participation

   During fiscal 2000, Robert R. Murphy, David L. Sippel and Karl D. Shurson,
each an executive officer of Pemstar, served on our executive compensation
committee. Mr. Murphy has an outstanding loan from us in the principal amount
of $67,650, excluding accrued interest. See "Related Party Transactions."

   No interlocking relationship exists between the board of directors or the
executive compensation committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.

Employment Agreements

   We currently do not have employment agreements with any of our executive
officers, although the terms of our change of control agreements with each
executive officer impose limitations on our ability to terminate an executive
officer. See "Executive Compensation--Change in Control Arrangements."

Change in Control Arrangements

   We have entered into change in control arrangements with each of our
executive officers. These agreements are designed to diminish the distractions
that could be caused by personal uncertainties and risks associated with
changes in control and other significant business combinations involving our
company by providing these individuals with assurances regarding their
compensation and benefits expectations under such circumstances.

   Under these agreements, we agree not to terminate any of these individuals
during the six month period prior to a "change in control" involving our
company and for the two year period following any change in control. If, during
the applicable period, we terminate any individual other than for "cause" or
"disability" or the individual terminates his employment for "good reason," the
individual is entitled to receive a severance payment from us in the amount of
110% of the individual's annual base salary in effect at the time of
termination or immediately prior to the change in control, whichever is
earlier. We may pay the severance payment in one lump sum or in twelve
consecutive monthly installments.

Limitation on Liability and Indemnification Matters

   Minnesota law and our articles of incorporation and bylaws provide that we
shall, under certain circumstances and subject to certain limitations,
indemnify any person made or threatened to be made a party to a proceeding by
reason of that person's former or present official capacity with us against
judgments, penalties, fines, settlements and reasonable expenses. Any such
person also is entitled, subject to limitations, to payment or reimbursement of
reasonable expenses in advance of the final disposition of the proceeding.


                                       43
<PAGE>

   Pursuant to provisions of the Minnesota Business Corporation Act, we have
adopted provisions in our articles of incorporation which provide that our
directors shall not be personally liable to us or our shareholders for monetary
damages for a breach of fiduciary duty as a director, subject to exceptions.

   At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for indemnification.

Executive Compensation

   The following table sets forth information regarding compensation received
during the fiscal year ended March 31, 2000 by our Chief Executive Officer and
the other four most highly compensated executive officers.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                         Annual        Long-Term
                                     Compensation(1)  Compensation
                                     -----------------------------
                                                       Securities   All Other
                                      Salary   Bonus   Underlying  Compensation
Name and Principal Position            ($)      ($)   Options (#)     ($)(2)
---------------------------           ------   ------------------- ------------
<S>                                  <C>       <C>    <C>          <C>
Allen J. Berning....................   156,346    --    216,000       4,656
 Chief Executive Officer
Steve V. Petracca...................   182,948    --    210,000       5,192
 Executive Vice President--Business
 Development
William B. Leary....................   126,154    --    135,000       2,360
 Executive Vice President--Rochester
 Site Operations
Hargopal (Paul) Singh...............   126,154    --    135,000       2,360
 Executive Vice President--
 International Operations
David L. Sippel.....................   126,154    --    135,000       2,390
 Executive Vice President--
 Engineering Services and Chief
 Technology Officer
</TABLE>
--------
(1) With respect to each of the named executive officers, the aggregate amount
    of prerequisites and other personal benefits, securities or property
    received was less than either $50,000 or 10% of the total annual salary and
    bonus reported for such named executive officer.
(2)  All other compensation consists of discretionary matching contributions to
     our 401(k) on behalf of each named executive officer. See "Benefits--
     401(k) Plan."

                                       44
<PAGE>

Stock Option Grants in Last Fiscal Year

   The following table sets forth information regarding grants of stock options
to each of the executive officers named in the Summary Compensation Table
during fiscal 2000. The percentage of total options set forth below is based on
an aggregate of 3,269,775 options granted to employees during fiscal 2000. All
options were granted at the fair market value of our common stock, as
determined by our board of directors, on the date of grant. Potential
realizable values are net of exercise price, but before taxes associated with
exercise. Amounts representing hypothetical gains are those that could be
achieved for the options if exercised at the end of the option term. The
assumed 5% and 10% rates of stock price appreciation are provided in accordance
with rules of the Securities and Exchange Commission based on a deemed common
stock value of $5.00 at the time of option grant, and do not represent our
estimate or projection of the future stock price.

               Option Grants in Fiscal Year Ended March 31, 2000
<TABLE>
<CAPTION>
                                                                          Potential
                                      Individual Grants               Realizable Value
                         -------------------------------------------- at Assumed Annual
                          Number of   % of Total                        Rate Of Stock
                          Shares of    Options                              Price
                         Common Stock Granted to                      Appreciation For
                          Underlying  Employees  Exercise                Option Term
                           Options    in FY 2000 Price Per Expiration -----------------
Name                      Granted(1)     (%)     Share ($)    Date    5% ($)   10% ($)
----                     ------------ ---------- --------- ---------- ------- ---------
<S>                      <C>          <C>        <C>       <C>        <C>     <C>
Allen J. Berning........   216,000       6.6       5.00     08/02/09  679,206 1,721,242
Steve V. Petracca.......   210,000       6.4       5.00     08/02/09  660,339 1,673,429
William B. Leary........   135,000       4.1       5.00     08/02/09  424,504 1,075,776
Hargopal (Paul) Singh...   135,000       4.1       5.00     08/02/09  424,504 1,075,776
David L. Sippel.........   135,000       4.1       5.00     08/02/09  424,504 1,075,776
</TABLE>

--------
(1)  All options granted to the named executive officers in fiscal 2000 are
     fully vested and exercisable.

Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

   The table below sets forth the number of shares of common stock acquired
upon the exercise of options in the fiscal year ended March 31, 2000 and the
value and the number of shares of common stock subject to exercisable and
unexercisable options held as of March 31, 2000, by each of the executive
officers named in the Summary Compensation Table.

                   Aggregate Option Exercises in Fiscal 2000
                       and Fiscal Year-End Option Values

<TABLE>
<CAPTION>
                                                   Number of Shares      Value of Unexercised In-
                                                Underlying Unexercised     the-Money Options at
                         Number of              Options at Year-End(2)          Year-End(3)
                          Shares      Value    ------------------------- -------------------------
Name                     Acquired  Realized(1) Exercisable Unexercisable Exercisable Unexercisable
----                     --------- ----------- ----------- ------------- ----------- -------------
<S>                      <C>       <C>         <C>         <C>           <C>         <C>
Allen J. Berning........  187,500   $470,250     150,000        --          $ --         $ --
Steve V. Petracca.......      --         --      210,000        --            --           --
William B. Leary........   82,500    344,850     135,000        --            --           --
Hargopal (Paul) Singh...  285,000    670,800         --         --            --           --
David L. Sippel.........   82,500    344,850     143,100        --            --           --
</TABLE>
--------
(1) Based on an estimated fair market value of $5.00 per share of our common
    stock.
(2)  As of March 31, 2000, all outstanding options are exercisable as a result
     of a board action accelerating the vesting dates of all options granted
     prior to December 13, 1999.
(3) There is no value of the unexercised in-the-money options at year end
    because the exercise price of all outstanding options is equal to the fair
    market value of the shares as determined by the board of directors.

                                       45
<PAGE>

Benefit Plans

 Stock Option Plans

   We currently maintain five stock option plans: (1) the Pemstar Inc. 1994
Stock Option Plan (the "1994 Option Plan"), (2) the Pemstar Inc. 1995 Stock
Option Plan (the "1995 Option Plan"), (3) the Pemstar Inc. 1997 Stock Option
Plan (the "1997 Option Plan"), (4) the Pemstar Inc. Amended and Restated 1999
Stock Option Plan (the "1999 Amended and Restated Option Plan") and (5) the
Pemstar Inc. 2000 Stock Option Plan (the "2000 Option Plan") (collectively
referred to as the "Option Plans"). Our Option Plans provide for the grant of
options to purchase shares of our common stock to any of our full or part-time
employees, including officers and directors who are also employees, and any of
our subsidiaries. Such options may qualify as incentive stock options under the
Internal Revenue Code of 1986. Members of our board of directors, consultants
or independent contractors providing valuable services to us or one of our
subsidiaries who are not employees are eligible to receive options which do not
qualify as incentive stock options.

   We have reserved 900,000 shares of common stock for issuance under our 1994
Option Plan, 600,000 shares of common stock under our 1995 Option Plan,
1,500,000 shares of common stock under the 1997 Option Plan, 3,000,000 shares
of common stock under our 1999 Amended and Restated Option Plan and 1,500,000
shares of common stock under our 2000 Option Plan.

   Our Option Plans are administered by our options committee. Our options
committee has the discretion to determine the purchase price of the common
shares covered by each option, select the people to whom options are granted
and to establish the terms and conditions of each stock option, subject to the
provisions of our Option Plans and the approval of our board of directors.

   Our 1999 Amended and Restated Option Plan and our 2000 Option Plan allow our
options committee to establish special rules for employees located in our
foreign subsidiaries. Such rules may not increase the number of shares that may
be issued under our 1999 Amended and Restated Option Plan.

   The exercise price of an incentive stock option granted under our Option
Plans must not be less than 100% of fair market value of the common stock on
the date the option is granted. In the event that a proposed optionee owns more
than 10% of our common stock, any incentive stock option granted must have an
exercise price not less than 110% of the fair market value of our common stock
on the grant date.

   The term of each option is determined by our options committee, but in any
event the term of an incentive stock option may not exceed 10 years from the
date of grant and the term of a non-qualified stock option may not exceed 15
years from the date of grant. In the case of an incentive stock option granted
to an owner of more than 10% of our common stock, the term may not exceed five
years from the date of grant.

   The Option Plans are subject to amendment or discontinuance by our board of
directors, except that the board may not, without the approval of our
shareholders, increase the number of shares that may be issued under our plans,
decrease the minimum exercise price, extend the maximum option term or
materially modify the eligibility requirements for participation.

 Employee Stock Purchase Plan

   Prior to completion of this offering, we expect our board of directors and
shareholders to approve an employee stock purchase plan covering an aggregate
of 500,000 shares of common stock. The purchase plan will provide a means by
which employees may purchase our common stock through payroll deductions. The
purchase plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Internal Revenue Code of 1986, as amended.

 401(k) Plan

   In 1995, we adopted a 401(k) plan to provide eligible employees with a tax
preferential savings and investment program. Employees become eligible to
participate in the 401(k) plan on the first day of the first

                                       46
<PAGE>

month after they become employed by us, at which point we classify them as
participants. Employees may elect to reduce their current compensation by not
less than 1% nor more than 15% of eligible compensation or the statutorily
prescribed annual limit, currently $10,500, and have this reduction contributed
to the 401(k) plan. Our board of directors may change the minimum and maximum
contribution levels, subject to the statutorily prescribed limit. The 401(k)
plan permits, but does not require, us to make discretionary matching
contributions and discretionary profit sharing contributions to the 401(k) plan
on behalf of eligible participants. In 1997, our board approved a discretionary
matching contribution of 3% of an employee's contributions to the plan. All
contributions made by and on behalf of participants are subject to a maximum
contribution limitation currently equal to the lesser of 25% of their
compensation or $30,000 per year. At the direction of each participant, the
trustee of the 401(k) plan invests the assets of the 401(k) plan in selected
investment options. Contributions by participants or by us to the 401(k) plan
and income earned on plan contributions, are generally not taxable to the
participants until withdrawn, and contributions by us, if any, are generally
deductible by us when made. In fiscal 2000, we made $412,800 in matching
contributions to the plan on behalf of participants.

                           RELATED PARTY TRANSACTIONS

Loans to Executive Officers

   In connection with the purchase of shares of common stock and exercise of
options in fiscal 2000, we accepted as payment from certain executive officers,
notes bearing interest at 6.5% per annum. These notes are secured by a security
interest in the shares purchased or issued upon exercise of the options. As of
March 31, 2000, the following executive officers had outstanding loan balances
in excess of $60,000 which are due and payable within ninety days: Allen J.
Berning--$75,030, William B. Leary--$67,650, Gary L. Lingbeck--$77,650, Robert
R. Murphy--$67,650 and Hargopal (Paul) Singh--$379,200. As of March 31, 2000,
the following executive officers had outstanding loan balances in excess of
$60,000 which are due and payable within two years: Allen J. Berning--$375,000,
William J. Kullback--$225,000, Robert J. Legendre--$150,000, Steve V.
Petracca--$450,000 and Hargopal (Paul) Singh--$375,000.

Financing Transactions

   In fiscal 1998, we sold 569,966 shares of Series A preferred stock
convertible into 1,709,898 shares of common stock for an aggregate purchase
price of $8.5 million, or $15.00 per share to affiliates of Lehman Brothers
Inc. In fiscal 2000, we sold 1,000,000 shares of Series B preferred stock
convertible into 3,000,000 shares of common stock for an aggregate purchase
price of $18.0 million, or $18.00 per share to affiliates of Lehman Brothers
Inc. Upon the automatic conversion of the Series A and Series B preferred stock
upon consummation of this offering, Lehman Brothers Inc. will be the beneficial
owner of more than 5% of our outstanding shares of common stock. Michael
Odrich, one of our non-employee directors, is an affiliate of Lehman Brothers
Inc. See "Principal Shareholders" for information relating to the beneficial
ownership of shares and identification of affiliates of Lehman Brothers Inc.

                                       47
<PAGE>

                             PRINCIPAL SHAREHOLDERS

   The table below sets forth information known to us regarding the beneficial
ownership of our common stock as of March 31, 2000, as adjusted to reflect the
automatic conversion of outstanding shares of preferred stock into common
stock, and to reflect the sale of the common stock offered by this prospectus,
by:

  .  Each shareholder known by us to be the owner of more than 5% of our
     outstanding common stock;
  .  Each of our executive officers listed on the Summary Compensation Table
     under "Management";
  .  Each of our directors; and
  .  All executive officers and directors as a group.

   Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes generally voting power and/or
investment power with respect to securities. Shares of common stock subject to
options currently exercisable or exercisable within sixty days of March 31,
2000 are deemed outstanding for purposes of computing the percentage
beneficially owned by the person holding such options but are not deemed
outstanding for purposes of computing the percentage beneficially owned by any
other person. Except as otherwise noted, the persons or entities named have
sole voting and investment power with respect to all shares shown as
beneficially owned by them. Unless otherwise indicated, the principal address
of each of the shareholders below is c/o Pemstar Inc., 3535 Technology Drive
N.W., Rochester, Minnesota 55901.

<TABLE>
<CAPTION>
                                    Number of        Percentage of Shares
                                      Shares          Beneficially Owned
                                   Beneficially ------------------------------
Beneficial Owner                      Owned     Before Offering After Offering
----------------                   ------------ --------------- --------------
<S>                                <C>          <C>             <C>
5% Shareholders:
Lehman Brothers Inc.(1)...........   4,959,903       26.77%
Italade Technology Holdings
 Limited(2).......................   2,610,000       14.09
Executive Officers and Directors:
Allen J. Berning(3)...............   1,110,900        5.95
Steve V. Petracca(4)..............     300,000        1.60
William B. Leary(5)...............     682,500        3.66
David L. Sippel(6)................     995,640        5.33
Robert R. Murphy(7)...............   1,003,500        5.38
Gary L. Lingbeck(8)...............     592,500        3.17
Karl D. Shurson(9)................     510,310        2.73
Hargopal Singh(10)................     491,400        2.65
Robert D. Ahmann(11)..............     462,000        2.47
Thomas A. Burton..................       6,000           *
Michael J. Odrich(12).............   4,959,903       26.77
Bruce M. Jaffe....................         --          --
All directors and executive
 officers as a group (13
 persons)(13).....................  11,189,613       56.74%
</TABLE>
--------
*  Shares represent less than 1% of total shares outstanding.
(1)  Shares beneficially owned by Lehman Brothers Inc. include shares held by
     the following wholly-owned subsidiaries of Lehman Brothers Inc.: (a) LBI
     Group Inc.--3,580,416; (b) Lehman Brothers Venture Capital Partners I,
     L.P.--366,906; (c) Lehman Brothers Venture Partners L.P.--613,158; (d)
     Lehman Brothers VC Partners L.P.--300,000; (e) Lehman Brothers MBG Venture
     Capital Partners 1998 (A) L.P.--87,807; (f) Lehman Brothers MBG Venture
     Capital Partners 1998 (B) L.P.--1,620; (g) Lehman Brothers MBG Venture
     Capital Partners 1998 (C) L.P.--9,996. The shares beneficially owned by
     Lehman Brothers Inc. and its wholly-owned subsidiaries include 553,301
     shares of our Series A preferred stock and 1,000,000 shares of our Series
     B preferred stock, which shares automatically convert into shares of our
     common stock upon consummation of this offering. The address of Lehman
     Brothers Inc. is 3 World Financial Center, New York, New York 10285.

                                       48
<PAGE>

(2) On March 31, 2000, the shares reflected as owned by Italade Technology
    Holdings Limited were transferred to the following persons: (a) Chi Ming
    Gabriel Xu--200,000; (b) Rose Beauty Limited--211,697; (c) Lai Ngor Chan--
    200,000; (d) Kar Chun Nicky Lor--42,369; and (e) Sing Cheong Tien and Lian
    Imm Tien--211,671. The address of Italade Technology Holdings Limited is
    29/F The Center, 99 Queen's Road Central, Hong Kong.
(3)  The shares of common stock included in this table include 764,400 shares
     held jointly by Mr. Berning and his spouse and 150,000 shares that can be
     acquired upon the exercise of outstanding options.
(4)  The shares of common stock included in this table include 210,000 shares
     that can be acquired upon the exercise of outstanding options.
(5)  The shares of common stock included in this table include 240,000 shares
     held by Mr. Leary's spouse and 135,000 shares that can be acquired upon
     the exercise of outstanding options.
(6)  The shares of common stock included in this table include 385,020 shares
     held by Mr. Sippel's spouse and 143,100 shares that can be acquired upon
     the exercise of outstanding options.
(7)  The shares of common stock included in this table include 777,000 shares
     held jointly by Mr. Murphy and his spouse and 135,000 shares that can be
     acquired upon the exercise of outstanding options.
(8)  The shares of common stock included in this table include 135,000 shares
     that can be acquired upon the exercise of outstanding options.
(9)  The shares of common stock included in this table include 318,000 shares
     held jointly by Mr. Shurson and his spouse and 141,600 shares that can be
     acquired upon the exercise of outstanding options.
(10)  Includes 71,400 shares held jointly by Mr. Singh and his spouse and
      75,000 shares held by Mr. Singh's spouse.
(11)  The shares of common stock included in this table include 141,000 shares
      that can be acquired upon the exercise of outstanding options.
(12)  Mr. Odrich is a Managing Director of Lehman Brothers Inc. and may be
      considered to have beneficial ownership of Lehman Brothers Inc.'s
      interest in us. Mr. Odrich disclaims beneficial ownership of all such
      shares. The address of Mr. Odrich is c/o Lehman Brothers Inc., is 3 World
      Financial Center, New York, New York 10285.
(13)  See Notes (2) through (11). Includes an aggregate of 1,190,700 shares
      issuable upon the exercise of currently exercisable options held by our
      executive officers and directors.

   We have granted the underwriters an option to purchase up to an aggregate of
      shares of our common stock (equal to at least two-thirds of the over-
allotment option) to cover over-allotments, if any. The following selling
shareholders have also granted the underwriters an option to purchase up to an
aggregate of        shares of common stock (equal to no more than one-third of
the over-allotment option) to cover over-allotments, if any.      ,       and
      who currently own     ,      and      shares, respectively. These
shareholders are offering up to     ,      and      shares in the offering. If
the underwriters exercise their over-allotment option in full      will
beneficially own      shares, or   % of our outstanding common stock;
will own      shares or   %; and       will own      shares or   %.


                                       49
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

General Matters

   Upon the closing of this offering, our authorized capital stock will consist
of 150,000,000 shares of common stock, par value $0.01 per share, and 5,000,000
shares of preferred stock, par value $0.01 per share.

   The following is a summary of the material terms of our common stock. Please
see our amended and restated articles of incorporation filed as an exhibit to
the registration statement of which this prospectus is a part.

Common Stock

   As of March 31, 2000, there were 13,819,260 shares of common stock
outstanding, held by approximately 293 shareholders of record.

   Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders, including the
election of directors, and do not have cumulative voting rights. Subject to
preferences that may be applicable to any then outstanding preferred stock,
holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by the board of directors out of funds legally available
therefore. See "Dividend Policy." Upon a liquidation, dissolution or winding up
of Pemstar, the holders of common stock will be entitled to share ratably in
the net assets legally available for distribution to shareholders after the
payment of all of our debts and other liabilities, subject to the prior rights
of any preferred stock then outstanding. Holders of common stock have no
preemptive or conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and the common stock to be outstanding
upon completion of this offering will be, fully paid and nonassessable.

Preferred Stock

   We currently have two classes of preferred stock, Series A preferred stock
and Series B preferred stock. As of March 31, 2000, there were 569,966 shares
of Series A preferred stock outstanding and 1,000,000 shares of Series B
preferred stock outstanding. Upon closing of this offering, all of the
outstanding shares of preferred stock will automatically convert into 4,709,898
shares of common stock and no shares of preferred stock will be outstanding.
Our board of directors has the authority, without action by the shareholders,
to designate and issue preferred stock in one or more series and to designate
the rights, preferences and privileges of each series, any of which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock on the rights of
holders of common stock until the board of directors determines the specific
rights of the preferred stock. However, the effects might include, among other
things, restricting dividends on the common stock, diluting the power of the
common stock, impairing liquidation rights of the common stock and delaying or
preventing a change of control or the removal of our existing management
without further action by the shareholders. We have no present plans to issue
any shares of preferred stock.

Registration Rights

   As of March 31, 2000, the holders of common stock issuable upon conversion
of the preferred shares of our outstanding shares of preferred stock are
entitled to rights with respect to the registration of 4,709,898 shares under
the Securities Act. The holders of registration rights are those investors that
purchased shares of our mandatorily redeemable, convertible Series A and Series
B preferred stock. Under the terms of the agreement between us and the holders
of these registrable securities, the holders of at least 35% of the registrable
securities may require that we file a registration statement under the
Securities Act with respect to their shares of common stock after the earlier
of February 12, 2001, or the six month anniversary of the

                                       50
<PAGE>

effective date of this offering, so long as the total offering price of the
shares to the public under such registration statement is at least $10 million.
We will only be required to file two registration statements in response to a
request for registration by the holders of registrable securities. We may
postpone the filing of a registration statement for up to ninety days in any
twelve month period if we determine that the filing would be seriously
detrimental to us and our shareholders. Further, holders of the registrable
securities may require us on two occasions within any twelve month period to
file additional registration statements on Form S-3 at our expense. In
addition, in the event that we decide to register our securities, we are
required to include in our registration statement the registrable securities of
any holder who so requests. These rights are subject to the right of the
underwriters of an offering to limit the number of shares included in that
registration under certain circumstances. The expenses incurred in such
registrations will be borne by us.

   The registration rights described above will expire with respect to any
holder of registrable securities if such holder can sell all of its shares in a
three month period under Rule 144 of the Securities Act. In any event, the
registration rights described above will expire five years after this offering
is completed. Holders of registrable securities have agreed not to exercise
their registration rights for a period of 180 days following the date of this
prospectus.

Shareholder Rights Plan

   Prior to completion of this offering, the board of directors will declare a
dividend of one preferred share purchase right for each outstanding share of
common stock outstanding on the business day immediately preceding the date of
this prospectus to the shareholders of record on that date. Each right entitles
the registered holder to purchase one one-hundredth of a share of Series A
junior participating preferred stock, par value $0.01 per share, at a price of
$       per one one-hundredth of a preferred share, subject to adjustment. The
description and terms of the share purchase rights will be set forth in a
rights agreement between Pemstar and a rights agent, a copy of the form of
which is filed as an exhibit to the registration statement of which this
prospectus is a part.

   Initially, the certificates for shares of common stock then outstanding will
evidence the rights and we will not distribute separate rights certificates.
The rights will separate from the common stock on the share purchase rights
distribution date, which is the earlier of:

  .  The first date of public announcement that a person or group of
     affiliated or associated persons has become the beneficial owner of 15%
     or more of the outstanding common stock, subject to certain exceptions;
     and
  .  The close of business on the tenth day, or such later date as may be
     determined by the board of directors prior to such time as any person
     becomes the beneficial owner of 15% or more of the outstanding common
     stock, following the commencement or public announcement of a tender
     offer or exchange offer, the consummation of which would result in a
     person or group of affiliated or associated persons becoming the
     beneficial owner of 15% or more of the outstanding common stock.

   The board of directors, after receiving such advice as it deems necessary
and giving due consideration to all relevant factors, may elect to approve a
tender offer or an exchange offer for all of our outstanding common stock if
the board determines the offer to be in our best interest and the best
interests of our stockholders. If the board does approve a tender offer or
exchange offer, the rights will expire.

   Until the share purchase rights distribution date,

  .  The rights will be evidenced by the certificates for shares of common
     stock and will be transferred with and only with the common stock;
  .  Any common stock certificates issued after the business day immediately
     preceding the date of this Prospectus upon transfer or new issuance of
     the common stock will contain a notation incorporating the rights
     agreement by reference; and
  .  The transfer of any common stock will also constitute the transfer of
     the rights associated with the common stock.

                                       51
<PAGE>

   As promptly as practicable following the share purchase rights distribution
date, we will mail separate certificates evidencing the share purchase rights
to holders of record of the common stock as of the close of business on that
date, and such separate certificates alone will evidence the share purchase
rights.

   The holders of our common stock and the share purchase rights cannot
exercise the rights until the share purchase rights distribution date. The
rights will expire on the date that is ten years after the business day
immediately preceding the date of this Prospectus, unless we extend or earlier
redeem or exchange the rights as described below. We will not issue fractions
of a preferred share, other than fractions in integral multiples of one one-
hundredth of a share, and, in lieu thereof, we will make a cash adjustment on
the closing price on the last trading date prior to the date of exercise.

   We will adjust the purchase price payable and the number of preferred shares
issuable upon exercise of the rights from time to time to prevent dilution:

  .  In the event of a stock dividend on, or a subdivision, combination or
     reclassification of, the preferred shares;
  .  Upon the grant to holders of the preferred shares of certain rights,
     options or warrants to subscribe for or purchase preferred shares or
     convertible securities at less than the then current market price of the
     preferred shares; or
  .  Upon the distribution to holders of the preferred shares of any evidence
     of indebtedness or assets, excluding regular periodic cash dividends or
     dividends payable in preferred shares, or of subscription rights or
     warrants, other than those described in clause (2) of this paragraph.

   With certain exceptions, we are not required to adjust the purchase price
until cumulative adjustments require an adjustment of at least 1% in the
purchase price. We also will adjust the number of outstanding share purchase
rights and the number of preferred shares issuable upon exercise of the rights
in the event of a stock split of the common stock or a stock dividend on the
common stock payable in common stock or subdivisions, consolidations or
combinations of the common stock occurring, in any such case, prior to the
distribution date.

   We cannot redeem the preferred shares purchasable upon exercise of the
rights. Each preferred share will be entitled to a minimum preferential
quarterly dividend payment of $     per share but will be entitled to an
aggregate dividend of 100 times the dividend declared per share of common
stock. In the event of liquidation, the holders of the preferred shares will be
entitled to a minimum preferential liquidation payment of $         per share
but will be entitled to an aggregate payment of 100 times the payment made per
share of common stock. Each preferred share will have 100 votes, voting
together with the common stock. Finally, in the event of any merger,
consolidation or other transaction in which common stock is exchanged, each
preferred share will be entitled to receive 100 times the amount received per
share of common stock. These rights are subject to adjustment in the event of a
stock dividend on the common stock or a subdivision, combination or
consolidation of the common stock.

   In the event any person becomes the beneficial owner of 15% or more of the
outstanding common stock, each holder of a share purchase right shall
thereafter have a right to receive, upon exercise thereof at the then current
aggregate exercise price, in lieu of preferred shares, such number of shares of
our common stock having a current aggregate market price equal to twice the
current aggregate exercise price. In the event that at any time after there is
a beneficial owner of 15% or more of the outstanding common stock, we are
acquired in certain mergers or other business combination transactions or 50%
or more of our assets or earning power and our subsidiaries, taken as a whole,
are sold, holders of the rights will thereafter have the right to receive, upon
exercise thereof at the then current aggregate exercise price, such number of
shares of common stock of the acquiring company or, in certain cases, one of
its affiliates, having a current aggregate market price equal to twice the
current aggregate exercise price.

   At any time after a person becomes the beneficial owner of 15% or more of
the outstanding common stock, subject to certain exceptions, and prior to the
acquisition by a person of 50% or more of the outstanding

                                       52
<PAGE>

common stock, the board of directors may exchange all or part of the rights for
common stock at an exchange ratio of one share of common stock per right,
subject to adjustment.

   At any time before a person has become the beneficial owner of 15% or more
of the outstanding common stock, the board of directors may redeem the rights
in whole, but not in part, at a price of $0.01 per right, subject to
adjustment. The redemption of the rights may be made effective at such time, on
such basis and with such conditions as the board of directors in its sole
discretion may establish.

   Until a right is exercised, the holder thereof, as such, will have no rights
as a stockholder, including without limitation, the right to vote or to receive
dividends.

   The rights have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire us pursuant
to an offer that is not approved by the board of directors, unless the rights
have been redeemed. However, the rights should not interfere with any tender
offer or merger approved by the board because the board of directors may redeem
the rights or approve an offer at any time prior to such time as any person
becomes the beneficial owner of 15% or more of the outstanding common stock.

   Provisions of our Articles of Incorporation and Bylaws and State Law
Provisions with Potential Antitakeover Effects

   Some provisions of our articles of incorporation and amendments to our
articles of incorporation and bylaws we intend to adopt prior to completion of
this offering could make it more difficult to acquire control of our company
and to remove existing management. These provisions include:

  .  Our articles of incorporation do not provide for cumulative voting for
     directors;

  .  We will have a classified board of directors with each class serving a
     staggered three-year term;

  .  The board of directors fixes the size of the board of directors, may
     create new directorships and may elect new directors to serve for the
     full term of the class of directors in which the new directorship was
     created. The board of directors (or its remaining members, even though
     less than a quorum) also may fill vacancies on the board of directors
     occurring for any reason for the remainder of the term of the class of
     director in which the vacancy occurred;

  .  The board of directors may issue preferred stock without any vote or
     further action by the shareholders;

  .  The board of directors may adopt, amend, alter or repeal the bylaws
     without a vote of the shareholders;

  .  All shareholder actions must be taken at a regular or special meeting of
     the shareholders and cannot be taken by written consent without a
     meeting; and

  .  We require advance notice procedures with respect to shareholder
     proposals and the nomination of candidates for election as directors.

   These provisions are intended to discourage coercive takeover practices and
inadequate takeover bids. They are also designed to encourage persons seeking
to acquire control of us to first negotiate with our board. We believe that the
benefits of increased protection give us the potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure us and outweigh the disadvantages of discouraging such proposals.
Negotiating with the proponent could result in an improvement of the terms of
the proposal.

 The Minnesota Business Corporations Act

   Section 302A.671 of the Minnesota Business Corporation Act, or MBCA,
applies, with certain exceptions, to any acquisition of our voting stock (from
a person other than us and other than in connection with certain

                                       53
<PAGE>

mergers and exchanges to which we are a party) resulting in the acquiring
person owning 20% or more of our voting stock then outstanding. The MBCA
requires approval of any such acquisitions by a majority vote of our
shareholders prior to its consummation. In general, shares acquired without
such approval lose their voting rights and are redeemable by us at their then
fair market value within thirty days after the acquiring person failed to give
us timely information regarding the acquisition of the shares or the date the
shareholders voted not to grant voting rights to the acquiring person's shares.

   Section 302A.673 of the MBCA generally prohibits us, or any of our
subsidiaries, from entering into any transaction with a shareholder under which
the shareholder purchases 10% or more of our voting shares (an "interested
shareholder") within four years following the date the person became an
interested shareholder, unless the transaction is approved by a committee of
all of the disinterested members of our board of directors before the
interested shareholder acquires the shares.

Transfer Agent and Registrar

   The transfer agent and registrar for our common stock is     .

                        SHARES ELIGIBLE FOR FUTURE SALE

   Sales of substantial amounts of our common stock in the public market after
the offering could cause the market price of our common stock to fall and could
affect our ability to raise equity capital in the future on terms favorable to
us.

   Upon the closing of this offering, we will have        shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options to purchase common stock. Of
these shares, the       shares of common stock being sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, except that any shares held by our "affiliates," as such term
is defined in Rule 144 under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 described below.

   The remaining shares that were issued and sold by us in private
transactions, are restricted securities and may be sold in the public market
only if registered under the Securities Act or if they qualify for an exemption
from registration under Rules 144, 144(k) or 701 under the Securities Act,
which rules are summarized below. Subject to the lock-up agreements described
below and the provisions of Rules 144, 144(k) and 701, additional shares will
be available for sale in the public market, subject in the case of shares held
by affiliates to compliance with certain volume restrictions, as follows:

  .       shares will be available for immediate sale in the public market on
     the date of this prospectus; and
  .       shares will be available for sale upon the expiration of lock-up
     agreements 180 days after the date of this prospectus.

Rule 144

   In general, under Rule 144 as currently in effect, beginning ninety days
after the date of this prospectus, a person who has beneficially owned shares
of our common stock for at least one year is entitled to sell, within any
three-month period, a number of shares that is not more than the greater of:

  .  1% of the number of shares of common stock then outstanding, which will
     equal approximately                shares immediately after this
     offering; or
  .  The average weekly trading volume of our common stock on the Nasdaq
     National Market during the four calendar weeks before a notice of the
     sale on Form 144 is filed.

                                       54
<PAGE>

   Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us.

   Under Rule 144(k), a person who has not been one of our affiliates at any
time during the three months before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.

Rule 701

   In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchase shares from us under a
stock option plan or other written agreement can resell those shares ninety
days after the effective date of this offering in reliance on Rule 144, but
without complying with some of the restrictions, including the holding period,
contained in Rule 144.

   We intend to file a Form S-8 registration statement under the Securities Act
to register all shares of common stock issuable under our stock option plans.
See "Management--Stock Option Plans." Such registration statement is expected
to become effective immediately upon filing and shares covered by that
registration statement will thereupon be eligible for sale in the public
markets, subject to Rule 144 limitations applicable to affiliates.

   Prior to this offering there has been no public market for our common stock,
and no predictions can be made regarding the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of our
common stock in the public market could adversely affect the prevailing market
price.

   All of our directors, executive officers and shareholders have agreed that
they will not, without the prior written consent of the representatives of the
underwriters, sell or otherwise dispose of any shares of common stock or
options to acquire shares of common stock during the 180-day period following
the closing of this offering. See "Underwriting."

   After the closing of this offering, the holders of shares of our common
stock will be entitled to certain rights with respect to the registration of
such shares under the Securities Act. See "Description of Capital Stock-
Registration Rights." Registration of such shares under the Securities Act
would result in such shares, except for shares purchased by affiliates,
becoming freely tradable without restriction under the Securities Act
immediately upon the effectiveness of such registration.

                                       55
<PAGE>

                                  UNDERWRITING

   Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, Lehman Brothers Inc.,
FleetBoston Robertson Stephens Inc., Chase Securities Inc., CIBC World Markets
Corp. and Fidelity Capital Markets, a division of National Financial Services
Corporation are acting as representatives of each of the underwriters named
below. Under the underwriting agreement, each of the underwriters has agreed to
purchase from us the respective number of shares of common stock shown opposite
its name below:

<TABLE>
<CAPTION>
                                                                     Number of
Underwriters                                                           Shares
------------                                                         ----------
<S>                                                                  <C>
Lehman Brothers Inc. ..............................................
FleetBoston Robertson Stephens Inc.................................
Chase Securities Inc...............................................
CIBC World Markets Corp............................................
Fidelity Capital Markets, a division of National Financial Services
 Corporation.......................................................
                                                                     ----------
  Total............................................................
                                                                     ==========
</TABLE>

   The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement and that, if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, all of the shares of common stock that the underwriters have agreed
to purchase under the underwriting agreement, must be purchased. The conditions
contained in the underwriting agreement include the requirement that the
representations and warranties made by us to the underwriters are true, that
there is no material change in the financial markets and that we deliver to the
underwriters customary closing documents.

   The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares described below. Assuming full exercise of the
underwriters' over-allotment option, $     of the underwriting fee will be paid
by us and $     will be paid by the selling shareholders. The underwriting fee
is the difference between the public offering price and the amount the
underwriters pay to us to purchase the shares from us. On a per share basis,
the underwriting fee is    % of the initial public offering price.

<TABLE>
<CAPTION>
                                                                  No      Full
                                                               Exercise Exercise
                                                               -------- --------
      <S>                                                      <C>      <C>
      Per share............................................... $        $
      Total................................................... $        $
</TABLE>

   The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the initial public
offering price set forth on the cover page of this prospectus, and to dealers,
who may include the underwriters, at this public offering price less a selling
concession not in excess of $    per share. The underwriters may allow, and the
dealers may reallow, a concession not in excess of $    per share to brokers
and dealers. After the offering, the underwriters may change the offering price
and other selling terms.

   We estimate that the total expenses of this offering, including
registration, filing and listing fees, printing fees and legal and accounting
expenses, but excluding underwriting discounts, will be approximately $1.0
million.

   We and the selling shareholders have granted to the underwriters an option
to purchase up to an aggregate of            additional shares of common stock,
exercisable to cover over-allotments, if any, at the initial public offering
price less the underwriting discounts shown on the cover page of this
prospectus. The underwriters may exercise this option any time until thirty
days after the date of the underwriting agreement. If this option is exercised,
each underwriter will be committed, so long as the conditions of the
underwriting agreement are satisfied, to purchase a number of additional shares
of common stock proportionate to the

                                       56
<PAGE>

underwriter's initial commitment as indicated in the table above and we will be
obligated, under the over-allotment option, to sell the shares of common stock
to the underwriters.

   We have agreed that, without the consent of Lehman Brothers Inc., we will
not, directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities that may be converted into or exchanged for any
shares of common stock for a period of 180 days from the date of this
prospectus. All of our executive officers, directors and shareholders holding
all of the shares of our capital stock have agreed under lock-up agreements
that, without the prior written consent of Lehman Brothers Inc., they will not,
directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities that may be converted into or exchanged for any
shares of common stock for the period ending 180 days after the date of this
prospectus. See "Shares Eligible for Future Sale."

   Prior to the offering, there has been no public market for the shares of our
common stock. The initial public offering price has been negotiated between the
representatives and us. The material factors considered in determining the
initial public offering price of the common stock, in addition to prevailing
market conditions, were:

  .  Our historical performance and capital structure;
  .  Estimates of our business potential and earning prospects;
  .  An overall assessment of our management; and
  .  The above factors in relation to market valuation of companies in
     related businesses.

   Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter of this offering and will be
facilitating electronic distribution through the Internet.

   We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "PMTR."

   We and the selling shareholders have agreed to indemnify the underwriters
against liabilities under the Securities Act and liabilities arising from
breaches of the representations and warranties contained in the underwriting
agreement, and to contribute to payments that the underwriters may be required
to make for these liabilities.

   Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.

   The underwriters may create a short position in the common stock in
connection with this offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create
a short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option.

   The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position
or to stabilize the price of the common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members who sold
those shares as part of the offering.

   In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.

   Neither we, nor the selling shareholders or any of the underwriters makes
any representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the

                                       57
<PAGE>

common stock. In addition, neither we nor any of the selling shareholders or
the underwriters make any representation that the representatives will engage
in these transactions or that these transactions, once commenced, will not be
discontinued without notice.

   Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.

   Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
page of this prospectus.

   The representatives have informed us that they do not intend to confirm the
sales of shares of common stock offered by this prospectus to any accounts over
which they exercise discretionary authority without the prior written approval
of the customer.

   At our request, the underwriters have reserved up to        shares or     %
of the common stock offered by this prospectus for sale to our directors,
employees and other persons having an established business relationship with us
at the initial public offering price set forth on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares.

   Affiliates of Lehman Brothers Inc., one of the representatives of the
underwriters, hold shares of our Series A and Series B preferred stock which
will automatically convert into 4,709,898 shares of our common stock upon
closing of this offering. In addition, Michael J. Odrich, one of our directors,
is a Managing Director of Lehman Brothers Inc. Because of this relationship
between us and Lehman Brothers Inc., the offering is being conducted in
accordance with Rule 2720 of the National Association of Securities Dealers, or
NASD. This rule requires that the initial public offering price for our shares
cannot be higher than the price recommended by a "qualified independent
underwriter," as defined by the NASD. FleetBoston Robertson Stephens Inc. is
serving as a qualified independent underwriters and will perform the due
diligence investigations and review and participate in the preparation of the
registration statement of which this prospectus is a part.

                                 LEGAL MATTERS

   The validity of the shares of common stock offered hereby will be passed
upon for us by Dorsey & Whitney LLP, Minneapolis, Minnesota. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Kirkland & Ellis (a partnership that includes professional
corporations), Chicago, Illinois.

                                    EXPERTS

   Ernst & Young LLP, independent auditors have audited our consolidated
financial statement as of and for the year ended March 31, 2000, as set forth
in their report. McGladrey & Pullen, LLP, independent auditors, have audited
our consolidated financial statements as of and for the years ended March 31,
1999 and 1998, as set forth in their report. We have included our financial
statements in the prospectus in reliance on the reports of Ernst & Young LLP
and McGladrey & Pullen, LLP, given on their authority as experts in accounting
and auditing.

   McGladrey & Pullen, LLP, independent auditors, have audited the financial
statements of Quadrus Manufacturing, a division of Bell Microproducts, Inc., as
of and for the years ended December 31, 1998, 1997 and 1996, as set forth in
their report. We have included the Quadrus Manufacturing financial statements
in the registration statement in reliance on the report of McGladrey & Pullen,
LLP, given on their authority as experts in accounting and auditing.


                                       58
<PAGE>

   On February 11, 2000, upon the recommendation of the audit committee, the
board of directors engaged Ernst & Young LLP to audit our consolidated
financial statements for the year ended March 31, 2000. There were no
disagreements between us and our prior accountants, McGladrey & Pullen, LLP, on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. The audit opinion of McGladrey &
Pullen, LLP for the fiscal years March 31, 1999 and 1998 did not contain an
adverse option or disclaimer of opinion, nor were they qualified as to
uncertainty, audit scope or accounting principles.

                      WHERE YOU CAN FIND MORE INFORMATION

   We have filed with the SEC a registration statement on Form S-1 with respect
to the shares offered hereby. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information set forth in
the registration statement or the exhibits and schedules which are part of the
registration statement. For further information with respect to Pemstar and the
shares, reference is made to the registration statement and exhibits and
schedules thereto. You may read and copy any document we file at the SEC's
public reference room in Washington, DC. Please call the SEC at 1-800-SEC-0330
for further information on the public reference room. Our SEC filings are also
available to the public from the SEC's website at http://www.sec.gov.

   Upon completion of this offering, Pemstar will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
and, in accordance therewith, will file periodic reports, proxy statements and
other information with the SEC. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the SEC's
public reference rooms, Pemstar's website at www.pemstar.com and the website of
the SEC referred to above. Information on our website does not constitute a
part of this prospectus.

                                       59
<PAGE>

                                  PEMSTAR INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Pemstar Inc.:
<S>                                                                        <C>
Report of Independent Auditors--Ernst & Young LLP........................   F-2
Report of Independent Auditors--McGladrey & Pullen, LLP..................   F-3
Consolidated Balance Sheets as of March 31, 1999 and 2000................   F-4
Consolidated Statements of Income for the Years Ended March 31, 1998,
 1999 and 2000...........................................................   F-5
Consolidated Statements of Shareholders' Equity for the Years Ended March
 31, 1998, 1999 and 2000.................................................   F-6
Consolidated Statements of Cash Flows for the Years Ended March 31, 1998,
 1999 and 2000...........................................................   F-7
Notes to Consolidated Financial Statements...............................   F-8
Quadrus Manufacturing, a Division of Bell Microproducts, Inc.:
Report of Independent Auditors--McGladrey & Pullen, LLP..................  F-22
Balance Sheets as of December 31, 1998, 1997 and 1996....................  F-23
Statements of Cash Flows and Divisional Equity for the Years Ended March
 31, 1998, 1997 and 1996.................................................  F-24
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
 1996....................................................................  F-25
Notes to Financial Statements............................................  F-26
</TABLE>

                                      F-1
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Directors of Pemstar Inc.

   We have audited the accompanying consolidated balance sheet of Pemstar Inc.
as of March 31, 2000, and the related consolidated statement of income,
shareholders' equity, and cash flows for the year then ended. 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 audit.

   We conducted our audit 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 audit provides 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, 2000, and the consolidated results of their operations and their
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States.

                                          /s/ ERNST & YOUNG LLP

Minneapolis, Minnesota
May 5, 2000

                                      F-2
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Directors of Pemstar Inc.

   We have audited the accompanying consolidated balance sheet of Pemstar Inc.
as of March 31, 1999, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the two years in the period
ended March 31, 1999. 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 generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Pemstar Inc. as of March 31, 1999, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
March 31, 1999, in conformity with generally accepted accounting principles.

                                          /s/ McGLADREY & PULLEN, LLP

Rochester, Minnesota
May 10, 1999

                                      F-3
<PAGE>

                                  PEMSTAR INC.

                          CONSOLIDATED BALANCE SHEETS
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                  March 31,
                                               -----------------
                                                1999      2000
                                               -------  --------
<S>                                            <C>      <C>       <C>
Assets
Current assets:
 Cash and cash equivalents.................... $   827  $  2,727
 Restricted cash..............................     411       528
 Accounts receivable, net.....................  21,681    60,061
 Inventories, net.............................  16,449    64,437
 Recoverable income taxes.....................     415       --
 Deferred income taxes........................     --      2,232
 Prepaid expenses and other...................   2,116     3,458
                                               -------  --------
   Total current assets.......................  41,899   133,443
 Property and equipment, net..................  17,561    34,933
 Goodwill, net................................   3,794    20,691
 Other assets, net............................   1,336     1,384
 Deferred income taxes........................     393       --
                                               -------  --------
   Total Assets............................... $64,983  $190,451
                                               =======  ========
<CAPTION>
                                                                    Pro Forma
                                                  March 31,       Shareholders'
                                               -----------------  Equity March
                                                1999      2000      31, 2000
                                               -------  --------  -------------
                                                                  (See Note 1)
<S>                                            <C>      <C>       <C>
Liabilities and Shareholders' Equity
Current liabilities:
 Bank overdrafts.............................. $ 1,644  $ 10,213
 Accounts payable.............................  19,935    47,138
 Accrued expenses and other...................   2,208     9,740
 Income taxes payable.........................     207     1,474
 Deferred income taxes........................     357       --
 Current maturities of long-term debt.........   4,471    12,930
 Current maturities of capital lease
  obligations.................................     294     2,299
                                               -------  --------
   Total current liabilities..................  29,116    83,794
Long-term debt, less current maturities.......   7,000    51,114
Capital lease obligations, less current
 maturities...................................      90     4,067
Deferred grant income.........................   1,808     1,713
Deferred revenue..............................   1,017       350
Deferred income taxes.........................     --         17
Minority interest in consolidated
 subsidiaries.................................     848       174
Redeemable stock:
 Series A preferred stock, $0.01 par value;
  570 shares issued and outstanding in 1999
  and 2000; pro forma--none...................   8,549     8,549     $   --
 Series B preferred stock, $0.01 per share;
  2000--1,000 shares issued and outstanding;
  pro forma--none.............................     --     18,000         --
Shareholders' equity:
 Common stock, $0.01 par value; 150,000
  shares authorized; shares issued and
  outstanding--1999--11,270; 2000--13,819
  shares; pro forma issued and outstanding--
  18,529 shares...............................     113       138         185
 Additional paid-in capital...................   7,949    15,395      41,897
 Accumulated other comprehensive loss.........     (32)     (772)       (772)
 Retained earnings............................   8,525    11,170      11,170
 Loans to shareholders........................     --     (3,258)     (3,258)
                                               -------  --------     -------
   Total shareholders' equity.................  16,555    22,673     $49,222
                                               -------  --------     =======
   Total liabilities and shareholders'
    equity.................................... $64,983  $190,451
                                               =======  ========
</TABLE>

                            See accompanying notes.

                                      F-4
<PAGE>

                                  PEMSTAR INC.

                       CONSOLIDATED STATEMENTS OF INCOME
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                     Year Ended March 31,
                                                  ----------------------------
                                                    1998      1999      2000
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Net sales.......................................  $165,049  $187,381  $393,842
Cost of goods sold..............................   147,962   172,219   363,974
                                                  --------  --------  --------
Gross profit....................................    17,087    15,162    29,868
Selling, general and administrative expenses....     8,328    10,955    21,576
Amortization....................................        54       190     1,281
                                                  --------  --------  --------
Operating income................................     8,705     4,017     7,011
Other income (expense)--net.....................       455      (438)      (74)
Interest expense................................      (746)     (640)   (3,588)
                                                  --------  --------  --------
Income before income taxes......................     8,414     2,939     3,349
Income tax expense..............................     3,097     1,273       698
                                                  --------  --------  --------
Net income......................................  $  5,317  $  1,666  $  2,651
                                                  ========  ========  ========
Net income per common share:
  Basic.........................................  $   0.55  $   0.15  $   0.23
  Diluted.......................................      0.49      0.12      0.15
Shares used in computing net income per common
 share:
  Basic.........................................     9,653    10,897    11,503
  Diluted.......................................    10,874    14,143    17,167
Unaudited pro forma net income per share (see
 Note 1):
  Basic.........................................                      $   0.17
  Diluted.......................................                          0.15
Shares used in computing unaudited pro forma net
 income per share (see Note 1):
  Basic.........................................                        15,647
  Diluted.......................................                        17,167
</TABLE>


                            See accompanying notes.

                                      F-5
<PAGE>

                                  PEMSTAR INC.

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>
                                                     Accumulated
                          Common Stock   Additional     Other
                          --------------  Paid-In   Comprehensive Retained    Loans to
                          Shares  Amount  Capital       Loss      Earnings  Shareholders  Total
                          ------  ------ ---------- ------------- --------  ------------ -------
<S>                       <C>     <C>    <C>        <C>           <C>       <C>          <C>
Balance, March 31,
 1997...................   8,366   $ 84   $ 1,371       $ --      $ 1,554     $   --     $ 3,009
Issuance of common stock
 upon exercise of stock
 options................     273      3        81         --          --          --          84
Issuance of common
 stock..................   1,765     17     2,567         --          --          --       2,584
Net income..............     --     --        --          --        5,317         --       5,317
                          ------   ----   -------       -----     -------     -------    -------
Balance, March 31,
 1998...................  10,404    104     4,019         --        6,871         --      10,994
Issuance of common stock
 upon exercise of stock
 options................     111      1        45         --          --          --          46
Issuance of common
 stock..................     783      8     3,907         --          --          --       3,915
Repurchase of common
 stock..................     (28)   --        (22)        --          (12)        --         (34)
Comprehensive income:
Net income..............     --     --        --          --        1,666         --       1,666
Foreign currency
 translation
 adjustment.............     --     --        --          (32)        --          --         (32)
                                                                                         -------
Comprehensive income....     --     --        --          --          --          --       1,634
                          ------   ----   -------       -----     -------     -------    -------
Balance, March 31,
 1999...................  11,270    113     7,949         (32)      8,525         --      16,555
Issuance of common stock
 upon exercise of stock
 options................   1,565     15     2,410         --          --       (1,855)       570
Issuance of common
 stock..................     985     10     4,913         --          --       (1,403)     3,520
Repurchase of common
 stock..................      (1)   --        --          --           (6)        --          (6)
Comprehensive income:
Net income..............     --     --        --          --        2,651         --       2,651
Foreign currency
 translation
 adjustment.............     --     --        --         (740)        --          --        (740)
                                                                                         -------
Comprehensive income....     --     --        --          --          --          --       1,911
Other...................     --     --        123         --          --          --         123
                          ------   ----   -------       -----     -------     -------    -------
Balance, March 31,
 2000...................  13,819   $138   $15,395       $(772)    $11,170     $(3,258)   $22,673
                          ======   ====   =======       =====     =======     =======    =======
</TABLE>


                            See accompanying notes.

                                      F-6
<PAGE>

                                  PEMSTAR INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                     Year Ended March 31,
                                                   ---------------------------
                                                     1998     1999      2000
                                                   --------  -------  --------
<S>                                                <C>       <C>      <C>
Cash flows from operating activities:
 Net income....................................... $  5,317  $ 1,666  $  2,651
 Adjustments to reconcile net income to net cash
  (used in) provided by operating activities:
 Depreciation.....................................    1,929    3,331     7,455
 Amortization.....................................       54      190     1,281
 Deferred grant income recognized.................     (193)    (222)      (95)
 Deferred revenue.................................      962     (725)     (667)
 Deferred income taxes............................     (185)     151    (2,179)
 (Gain) loss on sale of property and equipment....      --       377       (42)
 Equity in income of affiliate....................     (169)     --        --
 Minority interest................................      --       277       191
 Issuance of stock options for services...........      --       --        150
 Changes in operating assets and liabilities:
  Accounts receivable.............................  (15,052)     439   (23,828)
  Inventories.....................................  (15,382)   2,418   (22,962)
  Recoverable income taxes........................      628   (1,214)    1,889
  Prepaid expenses and other......................     (492)  (1,127)     (343)
  Accounts payable................................   20,516   (5,733)   15,404
  Accrued expenses and other......................      693      237       870
                                                   --------  -------  --------
   Net cash (used in) provided by operating
    activities....................................   (1,374)      65   (20,225)
Cash flows from investing activities:
 (Increase) decrease in restricted cash...........   (1,447)     583       155
 Business acquisitions, net of cash acquired......      --       --    (39,473)
 Increase of intangibles..........................     (286)    (556)     (878)
 Proceeds from sale of property and equipment.....      --     3,085       122
 Purchases of property and equipment..............   (8,393)  (8,657)  (13,415)
                                                   --------  -------  --------
   Net cash used in investing activities..........  (10,126)  (5,545)  (53,489)
Cash flows from financing activities:
 Bank overdrafts..................................    2,364   (1,273)    8,569
 Proceeds from grants.............................      836      --        --
 Net (payments on) proceeds from short-term
  borrowings......................................   (3,206)     --        --
 Proceeds from sale/exercise of stock options.....      335       46       802
 Repurchase of common stock.......................      --       (34)       (6)
 Proceeds from private placement offering.........    9,920      --     18,000
 Proceeds from minority interest shareholder......      --       296       --
 Principal payments on long-term borrowings.......   (1,453)  (1,879)   (4,645)
 Proceeds from long-term borrowings...............    5,865    5,956    52,892
                                                   --------  -------  --------
   Net cash provided by financing activities......   14,661    3,112    75,612
Effect of exchange rate changes on cash...........      --       --          2
                                                   --------  -------  --------
Net increase (decrease) in cash and cash
 equivalents......................................    3,161   (2,368)    1,900
Cash and cash equivalents:
 Beginning of year................................       34    3,195       827
                                                   --------  -------  --------
 End of year...................................... $  3,195  $   827  $  2,727
                                                   ========  =======  ========
</TABLE>

                            See accompanying notes.

                                      F-7
<PAGE>

                                  PEMSTAR INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (in thousands, except per share amounts)

Note 1. Nature of Business and Significant Accounting Policies

   Business--Pemstar Inc. (the "Company") is a leading provider of electronics
manufacturing services to original equipment manufacturers in the
communications, computing, data storage, industrial and medical equipment
sectors. The Company provides its services to customers on a global basis
through manufacturing facilities located in the United States, Mexico, Europe
and Asia. The Company considers its business activities as a single segment.

   Basis of presentation--The accompanying financial statements include the
accounts of Pemstar Inc., its majority-owned subsidiaries and the Company's
share of net earnings or losses of fifty 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 sale of products is recognized when
the product is shipped to the customer. Revenue from design, development and
engineering services is recognized when the services are performed and
collectibility is reasonably certain.

   Cash and cash equivalents--The Company considers all highly liquid debt
investments 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 and equipment--Property and equipment is stated at cost.
Depreciation is computed using the straight-line method over the following
estimated useful lives:

<TABLE>
<CAPTION>
                                                                       Number of
                                                                         Years
                                                                       ---------
   <S>                                                                 <C>
   Buildings and improvements.........................................  4 to 40
   Machinery and equipment............................................        4
   Furniture and fixtures.............................................  2 to 10
   Computer hardware and software.....................................        4
</TABLE>

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

   Goodwill and other intangible assets--Goodwill represents the excess of the
purchase price over the fair value of the net assets acquired and is being
amortized on a straight-line basis over 20 years. Other intangible assets
principally consist of debt financing costs that are being amortized over the
terms of the applicable agreement.

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


                                      F-8
<PAGE>

                                  PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

   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, 1999 and 2000.

   Foreign currency--Foreign currency denominated assets and liabilities are
translated into United States dollars using the exchange rates in effect at the
balance sheet date. Results of operations are translated using the average
exchange rates throughout the period. The effect of exchange rate fluctuations
on translation of assets and liabilities is recorded as a component of
shareholders' equity. Gains and losses from foreign currency transactions are
included in net other income or expense.

   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.

   Deferred grant income--The Company recognizes revenue related to grants
received from various sources over the life of the property and equipment to
which the funding relates or during the period in which the expense occurs for
which grants were received.

   Research and development--Research and development costs are expensed when
incurred and totaled $401, $387 and $410 for the years ended March 31, 1998,
1999 and 2000, respectively.

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

   Segment information--The Company follows the provisions of SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 replaces the "industry segment" approach with the "management" approach of
reporting segment information. The management approach designates the internal
organization used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments. The Company
derives its revenue from one industry segment, the electronics manufacturing
services industry. Until such time as the Company diversifies its operations,
this pronouncement has no significant impact on the reporting practices of the
Company. Refer to Note 15 for geographic and significant customer disclosures.

   Comprehensive income--The Company follows the provisions of SFAS No. 130,
"Reporting Comprehensive Income," which established standards for reporting and
display of comprehensive income and its components. Comprehensive income
reflects the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. For the
Company, comprehensive income represents net income adjusted for foreign
currency translation adjustments. In accordance with SFAS No. 130, the Company
has chosen to disclose comprehensive income in the consolidated statement of
shareholders' equity.

   Stock-based compensation--The Company 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

                                      F-9
<PAGE>

                                  PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

current fair value of the underlying stock exceeds the exercise price of the
option. The Company has provided the pro forma disclosures required by SFAS No.
123, "Accounting for Stock-Based Compensation."

   Net income per common share--The Company follows the provisions of SFAS No.
128, "Earnings Per Share." Basic net income per share is computed based upon
the weighted average number of common shares issued and outstanding during each
year. Diluted net income per share amounts assume conversion, exercise or
issuance of all potential common stock instruments (stock options as discussed
in Note 16 and convertible preferred stock as discussed in Note 14) unless the
effect is to reduce a loss or increase net income per share. The following
table reflects the components of common shares outstanding in accordance with
SFAS No. 128:

<TABLE>
<CAPTION>
                                                          Year Ended March 31,
                                                          --------------------
                                                           1998   1999   2000
                                                          ------ ------ ------
<S>                                                       <C>    <C>    <C>
Weighted average common shares outstanding--basic........  9,653 10,897 11,503
Effect of dilutive securities:
  Preferred stock conversion.............................    198  1,710  4,144
  Stock options..........................................  1,023  1,536  1,520
                                                          ------ ------ ------
Shares used in computing net income per common share--
 diluted................................................. 10,874 14,143 17,167
                                                          ====== ====== ======
</TABLE>

   Pro forma shareholders' equity--Upon the closing of an initial public
offering, all outstanding shares of Series A and Series B preferred stock will
automatically convert into 4,710 shares of common stock. The pro forma effects
of these transactions are unaudited and have been reflected in the accompanying
pro forma shareholders' equity section at March 31, 2000.

   Pro forma net income per share--Pro forma basic net income per share is
computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of the Company's
redeemable Series A and Series B preferred stock into shares of the Company's
common stock as if such conversion occurred at the date of original issuance.
The resulting pro forma adjustments include an increase in the weighted average
shares used to compute basic net income per share of 4,144 shares for the year
ended March 31, 2000. The pro forma effects of these transactions are
unaudited.

   Stock split--In May 2000, the Company's Board of Directors declared a 3-for-
1 stock split payable in the form of a stock dividend. Accordingly, all share,
per share, weighted average share and stock option information for periods
prior to the split, have been restated to reflect the split.

   New accounting pronouncements--In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires an entity recognize all derivatives as either assets or liabilities at
fair value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 and is therefore effective for the Company
beginning April 1, 2001. Based upon the nature of the financial instruments and
hedging activities in effect as of March 31, 2000, this pronouncement would not
have a material impact on the Company's financial position or results of
operations.

   In fiscal 2000, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." SOP
98-1 provides guidance on accounting for the costs of computer software
developed or obtained for internal use and for determining when specific costs
should be capitalized and when they should be expensed. The impact of adopting
SOP 98-1 was not significant to the Company's financial position, results of
operations or cash flows.

                                      F-10
<PAGE>

                                  PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)


   In fiscal 2000, the Company adopted SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities," issued by the AICPA. SOP 98-5 requires costs associated
with certain start-up activities be expensed as incurred versus capitalizing
and expensing them over a period of time. The impact of adopting SOP 98-5 was
not significant to the Company's financial position, results of operations, or
cash flows.

   Reclassification--Certain prior year amounts have been reclassified to
conform with the current year presentation.

Note 2. Acquisitions

   In June 1999, the Company acquired Quadrus, Inc., a division of Bell
Microproducts, Inc. Quadrus is a provider of electronic manufacturing services
to original equipment manufacturers. The purchase price of $34,966 was funded
through the issuance of Series B preferred stock in the aggregate amount of
$18,000 to certain of the Company's existing investors, with the remaining
amount funded by borrowings under the Company's operating line of credit. The
transaction was accounted for as a purchase. Accordingly, the net assets and
operating results have been included in the Company's financial statements from
the date of acquisition. The excess of the purchase price over the estimated
fair value of the net assets acquired of $12,346 has been recorded as goodwill
and is being amortized over an estimated useful life of 20 years. The following
unaudited pro forma combined summary statement of income for the years ended
March 31, 1999 and 2000 was prepared in accordance with Accounting Principles
Board Opinion No. 16 and assumes the acquisition had occurred at the beginning
of the periods presented. The following pro forma data reflect adjustments for
interest expense, amortization of goodwill 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 Income

<TABLE>
<CAPTION>
                                                              Year Ended March
                                                                     31,
                                                              -----------------
                                                                1999     2000
                                                              -------- --------
   <S>                                                        <C>      <C>
   Revenue................................................... $273,480 $407,972
   Net income................................................    3,926      348
   Net income per share--basic............................... $   0.36 $   0.03
   Net income per share--diluted.............................     0.28     0.02
</TABLE>

   In May 1999, the Company acquired a division of Fluke Corporation located in
Almelo, the Netherlands, which provides electronic manufacturing services to
the industrial equipment sector in Europe and North America. The purchase price
of $7,663 was funded through various credit facilities. 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, including certain employee
termination costs, over the estimated fair value of the net assets acquired of
$3,325 has been recorded as goodwill and is being amortized over an estimated
useful life of 20 years.

   During fiscal 2000, the Company's management approved a plan to reduce
headcount of the acquired operations. The formulation of such plans had begun
as of the date of acquisition, with all affected employees being notified by
March 2000. Costs associated with the planned workforce reductions totaling
$1,439 were recorded as liabilities in the purchase price allocation. The plans
contemplate completion of the workforce reduction by March 2001.


                                      F-11
<PAGE>

                                  PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

   Pursuant to the acquisition, the Company assumed all assets and liabilities
associated with a pension plan administered by Fluke Corporation for the
acquired division. As of March 31, 2000, the fair value of plan assets and
projected benefit obligation were $3,997 and $3,932, respectively. Expense
associated with the plan totaled $62 for the year ended March 31, 2000.

Note 3. Accounts Receivable

   Accounts receivable consists of the following:

<TABLE>
<CAPTION>
                                                                  March 31,
                                                               ----------------
                                                                1999     2000
                                                               -------  -------
   <S>                                                         <C>      <C>
   Accounts receivable........................................ $21,734  $60,614
   Less allowance for doubtful accounts.......................     (53)    (553)
                                                               -------  -------
                                                               $21,681  $60,061
                                                               =======  =======
</TABLE>

Note 4. Inventories

   Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                   March 31,
                                                                ---------------
                                                                 1999    2000
                                                                ------- -------
   <S>                                                          <C>     <C>
   Raw materials............................................... $14,961 $49,948
   Work in process.............................................     566   8,675
   Finished goods..............................................     922   6,387
   Less allowance for inventory obsolescence...................     --     (573)
                                                                ------- -------
                                                                $16,449 $64,437
                                                                ======= =======
</TABLE>

Note 5. Property and Equipment

   Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                 March 31,
                                                              -----------------
                                                               1999      2000
                                                              -------  --------
   <S>                                                        <C>      <C>
   Land...................................................... $   812  $  1,022
   Buildings and improvements................................   7,451    11,818
   Machinery and equipment...................................  13,733    27,388
   Computer hardware and software............................   2,351     7,595
   Construction in progress..................................     132     1,131
                                                              -------  --------
                                                               24,479    48,954
   Less accumulated depreciation.............................  (6,918)  (14,021)
                                                              -------  --------
                                                              $17,561  $ 34,933
                                                              =======  ========
</TABLE>

                                      F-12
<PAGE>

                                  PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)


Note 6. Goodwill

   Goodwill consists of the following:

<TABLE>
<CAPTION>
                                                                  March 31,
                                                                ---------------
                                                                 1999    2000
                                                                ------  -------
   <S>                                                          <C>     <C>
   Goodwill.................................................... $3,940  $21,717
   Less accumulated amortization...............................   (146)  (1,026)
                                                                ------  -------
                                                                $3,794  $20,691
                                                                ======  =======
</TABLE>

Note 7. Other Assets

   Other assets consist of the following:

<TABLE>
<CAPTION>
                                                                     March 31,
                                                                   -------------
                                                                    1999   2000
                                                                   ------ ------
   <S>                                                             <C>    <C>
   Restricted cash................................................ $  454 $  182
   Other intangible assets, net of accumulated amortization -
    1999--$107; 2000--$299........................................    882  1,055
   Other..........................................................    --     147
                                                                   ------ ------
                                                                   $1,336 $1,384
                                                                   ====== ======
</TABLE>

Note 8. Financing Arrangements

   Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                  March 31,
                                                                ---------------
                                                                 1999    2000
                                                                ------  -------
   <S>                                                          <C>     <C>
   Revolving credit facilities................................  $3,957  $56,557
   Notes payable, non-interest bearing, due in March 2007--
    $200 and April 2007--$150. Notes totalling $200 are
    collateralized by domestic equipment and real estate......     350      350
   Notes payable bearing interest at 5.00%, due in monthly
    payments of principal and interest of $75 through February
    2001 and annual payments of principal and interest of $58
    through July 2008. Notes are collateralized by domestic
    property and equipment....................................   1,164    1,627
   Bonds payable to the City of Rochester with variable
    interest rates ranging from 4.20% to 6.25% at March 31,
    2000, interest due monthly. Annual principal payments
    ranging from $75 to $285 are due through June 2018........   6,000    5,510
                                                                ------  -------
                                                                11,471   64,044
   Less current maturities....................................  (4,471) (12,930)
                                                                ------  -------
                                                                $7,000  $51,114
                                                                ======  =======
</TABLE>

   Payment of the bonds is secured by irrevocable letters of credit in favor of
the trustee in the amount of $5,609 expiring August 2003. The Company is
required to maintain letters of credit sufficient to pay all outstanding
principal and interest under the bonds. Interest on the bonds is variable and
is payable monthly until, at the option of the Company with the consent of US
Bank, the rate is fixed (conversion date). In the event the Company exercises
its option to convert the interest rate on the bonds from a variable rate to a
fixed

                                      F-13
<PAGE>

                                  PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

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 date 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. Proceeds from the bonds, to the extent unused, are
reported as restricted cash.

   Aggregate maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
   Year Ending March 31:
   <S>                                                                   <C>
     2001............................................................... $12,930
     2002...............................................................  45,648
     2003...............................................................     678
     2004...............................................................     258
     2005...............................................................     272
     Thereafter.........................................................   4,258
                                                                         -------
                                                                         $64,044
                                                                         =======
</TABLE>

   The Company has two Revolving Credit Facilities totaling $65,000 ($55,000--
"Revolver A" and $10,000--"Revolver B") for revolving credit loans and letters
of credit which expire on Revolver A in August 2002 and Revolver B at the
earlier of October 2000 or the closing of an initial public offering. Advances
under the Revolving Credit Facilities bear interest at the Company's option at
a rate equal to either (1) 3.75% per annum plus the applicable LIBOR rate or
(2) 2.00% per annum plus prime. In addition, the Company is required to pay a
fee of 0.25% on the average unused commitment under the Revolving Credit
Facilities. The Company had $500 reserved against the Revolving Credit
Facilities for letters of credit at March 31, 2000. As of March 31, 2000, the
Company had elected the LIBOR rate (6.20% at March 31, 2000) for advances
totaling $37,400, and the prime rate (8.5% at March 31, 2000) for advances
totaling $16,000.

   On May 5, 2000, Revolver A was amended to reduce the available credit
facility from $55,000 to $45,000. In addition, the index rate for Revolver B
loans was amended to increase on a periodic basis to a maximum rate at October
1, 2000 of (1) 6.75% per annum plus the applicable LIBOR rate or (2) 5.00% per
annum plus the bank's reference rate. Concurrent with this amendment, the
Company entered into a new Revolving Credit Facility with another lender
totaling $40,000. Advances under the new Revolving Credit Facility bear
interest at prime plus 1.00%. In addition, the Company is required to pay a
monthly fee of 0.25% on the unused portion of the facility. Borrowings under
the new Revolving Credit Facility and Revolver A are collateralized by
substantially all domestic non-real estate assets of the Company. Borrowings
under Revolver B are unsecured.

   The Company also has, through one of its subsidiaries, a separate line of
credit totaling $3,257. Advances under the line of credit bear interest at the
bank's base rate (4.25% at March 31, 2000) plus 1.5%. The line of credit is
secured by the inventory and receivables of the subsidiary and the corporate
guarantee of the Company.

   Notes payable totaling $1,225 are subordinated to the Revolving Credit
Facilities. The financing arrangements are subject to certain covenants that
require the Company to maintain certain financial ratios, including minimum
liquidity and debt coverage, and limit investments and cash distributions.

                                      F-14
<PAGE>

                                  PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)


Note 9. Other Income (Expense)--Net

   The other income and expense consists of the following:

<TABLE>
<CAPTION>
                                                                March 31,
                                                             ----------------
                                                             1998 1999   2000
                                                             ---- -----  ----
   <S>                                                       <C>  <C>    <C>
   Grant income............................................. $193 $ 222  $ 95
   Equity in earnings of affiliate..........................  170   --    --
   Minority interest in net income of consolidated
    subsidiaries............................................  --   (277) (191)
   Net other income (expense)...............................   92  (383)   22
                                                             ---- -----  ----
                                                             $455 $(438) $(74)
                                                             ==== =====  ====
</TABLE>

Note 10. Fair Value of Financial Instruments

   The carrying values of cash, accounts receivable and payable, and accrued
liabilities approximate fair value due to the short-term maturity of these
instruments. The carrying amount of the Company's revolving line of credit
approximates fair value because of the variability of the interest cost
associated with these instruments. The fair value of the Company's long-term
notes approximated fair value because the majority of the amounts outstanding
accrue interest at variable rates which approximate market. The fair value of
the Company's preferred stock approximated $23,500 at March 31, 2000 based upon
the assumed conversion of the preferred stock into common stock.

Note 11. Commitments and Contingencies

   The Company has various capital and operating leases which expire on various
dates through 2012. Future minimum payments under both capital leases and
operating leases are as follows:

<TABLE>
<CAPTION>
                                                              Capital  Operating
                                                              Leases    Leases
                                                              -------  ---------
   <S>                                                        <C>      <C>
   Fiscal Year Ending March 31:
     2001.................................................... $ 2,899   $ 3,753
     2002....................................................   1,932     3,394
     2003....................................................   1,451     2,936
     2004....................................................     901     2,701
     2005....................................................      18     2,734
     Thereafter..............................................     --      7,618
                                                              -------   -------
   Total minimum lease payments..............................   7,201   $23,136
                                                                        =======
   Less amount representing interest.........................    (835)
                                                              -------
   Present value of minimum lease payment....................   6,366
   Less current portion......................................  (2,299)
                                                              -------
                                                              $ 4,067
                                                              =======
</TABLE>

                                      F-15
<PAGE>

                                  PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)


   Property and equipment includes the following amounts for capitalized
leases:

<TABLE>
<CAPTION>
                                                                    March 31,
                                                                   ------------
                                                                   1999   2000
                                                                   ----  ------
   <S>                                                             <C>   <C>
   Machinery and equipment........................................ $125  $5,189
   Furniture and fixtures.........................................   84      84
   Computer hardware and software.................................  644   2,019
                                                                   ----  ------
                                                                    853   7,292
   Less accumulated depreciation.................................. (269)   (719)
                                                                   ----  ------
                                                                   $584  $6,573
                                                                   ====  ======
</TABLE>

   Total rent expense recognized under operating leases for the years ended
March 31, 1998, 1999 and 2000 totaled $579, $1,567 and $3,027, respectively.

Note 12. Income Taxes

   Income before income taxes consisted of the following:

<TABLE>
<CAPTION>
                                                            Year Ended March 31,
                                                            --------------------
                                                             1998   1999   2000
                                                            ------ ------ ------
   <S>                                                      <C>    <C>    <C>
   Domestic................................................ $8,206 $1,837 $2,485
   Foreign.................................................    208  1,102    864
                                                            ------ ------ ------
                                                            $8,414 $2,939 $3,349
                                                            ====== ====== ======
</TABLE>

   The provision for income taxes consisted of the following:

<TABLE>
<CAPTION>
                                                         Year Ended March 31,
                                                         ----------------------
                                                          1998    1999   2000
                                                         ------  ------ -------
   <S>                                                   <C>     <C>    <C>
   Current:
     Domestic........................................... $3,282  $  624 $ 2,378
     Foreign............................................    --      498     499
                                                         ------  ------ -------
                                                          3,282   1,122   2,877
   Deferred:
     Domestic...........................................   (185)    151  (1,678)
     Foreign............................................    --      --     (501)
                                                         ------  ------ -------
                                                           (185)    151  (2,179)
                                                         ------  ------ -------
                                                         $3,097  $1,273 $   698
                                                         ======  ====== =======
</TABLE>

                                      F-16
<PAGE>

                                  PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)


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

<TABLE>
<CAPTION>
                                                        Year Ended March 31,
                                                        ----------------------
                                                         1998    1999    2000
                                                        ------  ------  ------
   <S>                                                  <C>     <C>     <C>
   Computed "expected" tax rate.......................  $2,861  $  999  $1,139
   Increase (decrease) in income taxes resulting from:
     State taxes, net of credits and federal income
      tax benefit.....................................     319      80    (289)
     Permanent differences............................     (77)    (46)    148
     Foreign taxes....................................     (71)    108    (296)
     Other............................................      65     132      (4)
                                                        ------  ------  ------
                                                        $3,097  $1,273  $  698
                                                        ======  ======  ======
</TABLE>

   A summary of deferred tax assets (liabilities) is as follows:

<TABLE>
<CAPTION>
                                                                 March 31,
                                                               ---------------
                                                                1999     2000
                                                               -------  ------
   <S>                                                         <C>      <C>
   Deferred tax assets:
     Deferred revenue......................................... $ 1,087  $  794
     Expenses accelerated for financial reporting purposes....      94   1,135
     Foreign net operating losses.............................     --      492
     State tax credits........................................     --      523
     Other....................................................      25     139
                                                               -------  ------
   Total deferred tax assets..................................   1,206   3,083
   Deferred tax liabilities:
     Unbilled services........................................    (475)   (495)
     Accounting basis of assets in excess of tax basis........    (695)   (373)
                                                               -------  ------
   Total deferred tax liabilities.............................  (1,170)   (868)
                                                               -------  ------
   Net deferred tax asset..................................... $    36  $2,215
                                                               =======  ======
</TABLE>

   No provision has been made for U.S. income taxes related to undistributed
earnings of foreign subsidiaries that are intended to be permanently
reinvested. The Company had approximately $1,991 of foreign net operating loss
carryforwards, $1,539 of which expire in 2010, with the remaining amount having
an unlimited carryforward period. The state tax credit carryforwards of $792
expire at varying dates through 2015.

Note 13. Deferred Grant Income

   The Company has received grant monies pursuant to certain Development
Assistance and Redevelopment Assistance Agreements (the Agreements) which
provide primarily for the funding of certain development costs associated
primarily with property and equipment acquisitions. The Agreements require,
among other things, that the Company maintain certain levels of employment. If
the Company does not maintain the levels of employment, the Company must repay
the grant monies plus accrued interest at various rates up to 5%, or pay a
penalty of $8 per employee according to the terms of the Agreements. Deferred
grant income is being recognized over the life of the related property and
equipment acquired with the grant proceeds. Grant income for each of the years
ended March 31, 1998, 1999 and 2000 totaled $193, $222 and $95, respectively.

                                      F-17
<PAGE>

                                  PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)


Note 14. Mandatory Redeemable and Convertible Preferred Stock

   The Company has authorized 5,000 shares of $0.01 par value preferred stock,
667 shares of which are designated as Series A preferred stock (Series A) of
which 570 shares were issued and outstanding as of March 31, 1999 and 2000.
Additionally, 1,000 shares have been designated as Series B preferred stock
(Series B) of which 1,000 shares were issued and outstanding as of March 31,
2000. Dividends are $0.40 and $0.48 per share per year, non-cumulative, for the
Series A and Series B, respectively. After paying the preferred dividend, the
preferred shareholders share ratably with the common shareholders in any
additional dividends. The Series A and Series B preferred shareholders are
entitled to liquidation preferences of $5.00 and $6.00 per share, respectively.
Upon completion of the distribution of the liquidation preferences, the Series
A and Series B preferred shareholders are entitled to receive ratable
distributions with the common shareholders up to $2.50 per share and up to
$3.00 per share, respectively.

   Any time after February 12 and September 15, 2002, the holders of a majority
of the Series A and Series B preferred stock, respectively, can demand
redemption. The purchase price is the original issue price plus declared unpaid
dividends payable in three equal annual installments. The amount of the
potential redemption requirement excluding dividends, subsequent to February
12, 2002 is $8,549 for the Series A preferred stock and subsequent to September
15, 2002 is $18,000 for the Series B preferred stock.

   Each share of preferred stock is convertible into common stock at conversion
prices of $5.00 per share for Series A and $6.00 per share for Series B as of
March 31, 2000. The conversion ratio is adjusted upon the issuance of
additional common shares with certain exceptions.

   Each share of preferred stock is automatically converted into shares of
common stock upon the earlier of (1) an initial public offering at not less
than $6.67 per share for Series A and $8.00 per share for Series B and $15,000
in the aggregate or (2) by written consent of two-thirds of the holders of the
outstanding Series A and Series B preferred shares.

   In connection with the sale of the preferred stock, the founding
shareholders and preferred shareholders entered into a "Shareholders
Agreement." The agreement stipulates the Company has the right of first refusal
on the proposed transfer of stock by any founding shareholder with payment due
in ten days. In the event the Company does not exercise its right, the
preferred shareholders have the same right of first refusal.

   In the event less than all of the shares of stock proposed to be transferred
by a founding shareholder are acquired by the Company and/or preferred
shareholders pursuant to the right of first refusal, each preferred shareholder
shall have the right to participate in such sale (co-sale rights) of stock on
the same terms and conditions. To the extent one or more of the preferred
shareholders exercises such right of participation, the number of shares of
stock the founding shareholder may sell in the transaction shall be
correspondingly reduced.

   The rights of first refusal and the co-sale rights terminate upon the
occurrence of specific events, including the effective date of a bona fide firm
commitment underwritten public offering of the Company's common stock.

                                      F-18
<PAGE>

                                  PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

Note 15. Geographic and Concentration of Credit Risk Information

   The following is a summary of net sales and long-lived assets by geographic
location:

<TABLE>
<CAPTION>
                                                              March 31,
                                                      --------------------------
                                                        1998     1999     2000
                                                      -------- -------- --------
   <S>                                                <C>      <C>      <C>
   Net sales:
     United States................................... $165,049 $176,373 $318,616
     Asia............................................      --    11,008   44,314
     Europe..........................................      --       --    30,912
                                                      -------- -------- --------
                                                      $165,049 $187,381 $393,842
                                                      ======== ======== ========
   Long-lived assets:
     United States................................... $ 16,497 $ 19,546 $ 42,463
     Asia............................................      --     3,538   10,421
     Europe..........................................      --       --     4,124
                                                      -------- -------- --------
                                                      $ 16,497 $ 23,084 $ 57,008
                                                      ======== ======== ========
</TABLE>

   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 than 10% of consolidated net sales are as
follows:

<TABLE>
<CAPTION>
                                                                    March 31,
                                                                  ----------------
                                                                  1998  1999  2000
                                                                  ----  ----  ----
   <S>                                                            <C>   <C>   <C>
   Customer A....................................................  36%   64%   37%
   Customer B....................................................  12    11    15
   Customer C....................................................  26    --    --
</TABLE>

   As of March 31, 1999 and 2000, receivables from these customers represented
59% and 33% of total accounts receivable.

Note 16. Stock Option Plans

   The Company has reserved 1,327 shares of common stock for issuance to board
members and employees under incentive stock option and purchase plans approved
by shareholders. Current exercisable options are granted at prices equal to the
fair market value on the dates of grant. All options are exercisable over a
ten-year period.

   Grants under stock option plans are accounted for using APB No. 25 and
related interpretations. Accordingly, no compensation cost has been recognized
for grants under these stock option plans as the exercise price equaled the
fair market value of the stock on the date of grant. Had compensation cost for
stock option grants been based on the grant date fair values of awards (the
method described in SFAS No. 123), reported net income would have been reduced
to the pro forma amounts reported below.

                                      F-19
<PAGE>

                                  PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                               March 31,
                                                          --------------------
                                                           1998   1999   2000
                                                          ------ ------ ------
<S>                                                       <C>    <C>    <C>
Net income (loss):
  As reported............................................ $5,317 $1,666 $2,651
  Pro forma..............................................  5,279  1,499 (5,059)
Basic earnings (loss) per share:
  As reported............................................ $ 0.55 $ 0.15 $ 0.23
  Pro forma..............................................   0.55   0.14  (0.44)
Diluted earnings (loss) per share:
  As reported............................................ $ 0.49 $ 0.12 $ 0.15
  Pro forma..............................................   0.49   0.11  (0.44)
</TABLE>

   The fair value of each option grant has been estimated at the grant date
using the minimum-value method with the following weighted average assumptions:
dividend rate of 0% for all years; risk-free interest rates of 6.13%, 5.53% and
5.73% for 2000, 1999 and 1998, respectively and expected lives of ten years.

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

<TABLE>
<CAPTION>
                                 1998             1999              2000
                            ---------------- ---------------- -----------------
                                    Weighted         Weighted          Weighted
                                    Average          Average           Average
                                    Exercise         Exercise          Exercise
                            Shares   Price   Shares   Price   Shares    Price
                            ------  -------- ------  -------- -------  --------
   <S>                      <C>     <C>      <C>     <C>      <C>      <C>
   Outstanding, beginning
    of year................    963   $0.32    1,866   $0.65     2,173   $1.40
   Granted.................  1,176    0.83      418    4.52     3,269    4.39
   Exercised/forfeited.....   (273)   0.31     (111)   0.39    (1,597)   1.47
                            ------           ------           -------
   Outstanding, end of
    year...................  1,866    0.65    2,173    1.40     3,845    4.35
                            ======           ======           =======
   Exercisable, end of
    year...................    901    0.53      937    0.57     3,029    4.18
   Weighted average fair
    value per share of
    options granted during
    the year............... $ 0.37           $ 2.29           $  2.35
</TABLE>

   At March 31, 2000, the options outstanding have average remaining
contractual lives and exercise prices as follows:

<TABLE>
<CAPTION>
                                      Average
            Shares                Contractual Life                           Exercise Price
            ------                ----------------                           --------------
            <S>                   <C>                                        <C>
              262                      6 years                                   $0.33
               71                    7.5 years                                    0.50
              195                    7.5 years                                    0.82
            3,317                    9.5 years                                    5.00
</TABLE>

Note 17. Sale-Leaseback

   During the year ended March 31, 1999, the Company sold its manufacturing and
office space facility. The Company subsequently leased this facility back from
the new owner. The gain realized on this sale is being deferred and recognized
over the term of the new building lease. The remaining deferred gain, which is
included in the deferred revenue balance, as of March 31, 1999 and 2000 was
$272 and $250, respectively. The amount of gain recognized during the years
ended March 31, 1999 and 2000 was $14 and $22, respectively.

                                      F-20
<PAGE>

                                  PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)


Note 18. Employee Benefit Plans

Retirement Savings Plans

   The Company sponsors various employee retirement savings plans that allow
qualified employees to provide for their retirement on a tax-deferred basis. In
accordance with the terms of the retirement savings plans, the Company is
required to match certain of the participants' contributions and/or provide
employer contributions based on the Company's performance and other factors.
Employer contributions for the years ended March 31, 1998, 1999 and 2000
totaled $126, $295 and $413, respectively.

Note 19. Supplemental Cash Flow Information

<TABLE>
<CAPTION>
                                                          Year Ended March 31,
                                                          --------------------
                                                           1998   1999   2000
                                                          ------ ------ ------
   <S>                                                    <C>    <C>    <C>
   Supplemental disclosures for cash flow information:
     Cash payments for:
       Interest.......................................... $  817 $  643 $3,555
       Income taxes......................................  2,658  2,332  1,197
   Supplemental schedule of non-cash investing and
    financing activities:
     Land acquired through tax increment financing....... $  456 $  --  $  --
     Property and equipment acquired through capital
      lease agreements...................................    683     71  2,514
     Purchase of minority interest in consolidated
      subsidiary through issuance of common stock........    963  3,915  3,263
</TABLE>

                                      F-21
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

To the Board of Directors
Pemstar Inc.
Rochester, Minnesota

   We have audited the accompanying balance sheets of Quadrus Manufacturing, a
Division of Bell Microproducts, Inc. as of December 31, 1998, 1997 and 1996,
and the related statements of income, divisional equity, and cash flows for the
years then ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 presents fairly,
in all material respects, the financial position of Quadrus Manufacturing, a
Division of Bell Microproducts, Inc. as of December 31, 1998, 1997 and 1996,
and the results of its operations and its cash flows for the years then ended
in conformity with generally accepted accounting principles.

                                          /s/ McGLADREY & PULLEN, LLP

Rochester, Minnesota
January 13, 2000

                                      F-22
<PAGE>

         QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.

                                 BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                             December 31,
                                                        -----------------------
                                                         1998    1997    1996
                                                        ------- ------- -------
<S>                                                     <C>     <C>     <C>
Assets
Current assets:
  Cash................................................. $   --  $    71 $   513
  Receivables, less allowance for doubtful accounts
   1998 $113; 1997 $107; 1996 $119 (Note 9)............  13,618  10,274  11,345
  Inventories (Note 2).................................  24,059  16,553  18,867
  Prepaid expenses.....................................     576     561     527
  Income tax receivable, home office...................   1,975   1,775     --
                                                        ------- ------- -------
    Total current assets...............................  40,228  29,234  31,252
Other assets
  Deposits.............................................     126     132     123
Property and equipment (Notes 3 & 6)...................   9,411   8,654   7,952
                                                        ------- ------- -------
    Total assets....................................... $49,765 $38,020 $39,327
                                                        ======= ======= =======
Liabilities and Net Assets
Current liabilities:
  Checks in excess of bank balance..................... $ 1,121 $   --  $   --
  Current maturities of long-term debt.................   2,232   1,728   1,375
  Accounts payable.....................................   8,238   4,587   3,871
  Accrued expenses.....................................   1,234     720     728
  Income tax payable, home office......................     --      --    1,746
                                                        ------- ------- -------
    Total current liabilities..........................  12,825   7,035   7,720
                                                        ------- ------- -------
Long-term debt, net of current portion (Note 4)........   4,530   4,442   4,985
                                                        ------- ------- -------
Commitments and contingencies (Note 5)
  Divisional equity (Note 7)...........................  32,410  26,543  26,622
                                                        ------- ------- -------
                                                        $49,765 $38,020 $39,327
                                                        ======= ======= =======
</TABLE>


                            See accompanying notes.

                                      F-23
<PAGE>

         QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.

                              STATEMENTS OF INCOME
                                 (in thousands)

<TABLE>
<CAPTION>
                                                          December 31,
                                                    ---------------------------
                                                      1998      1997     1996
                                                    --------  --------  -------
<S>                                                 <C>       <C>       <C>
Net sales (Note 9)................................. $ 86,099  $ 73,221  $92,131
Cost of sales......................................   84,030    70,344   80,203
                                                    --------  --------  -------
Gross profit.......................................    2,069     2,877   11,928
Corporate allocation...............................    1,761     2,367    1,618
Operating expenses.................................    3,566     3,459    4,818
                                                    --------  --------  -------
Operating income (loss)............................   (3,258)   (2,949)   5,492
Nonoperating income (expenses):
Loss on disposal of assets.........................      (20)      (2)      --
Interest expense...................................     (515)     (528)    (507)
Corporate allocations-interest.....................     (911)     (747)    (829)
                                                    --------  --------  -------
Income (loss) before income taxes..................   (4,704)   (4,226)   4,156
Allocation for income taxes (Note 5)...............   (1,975)   (1,775)   1,746
                                                    --------  --------  -------
Net income (loss).................................. $ (2,729) $ (2,451) $ 2,410
                                                    ========  ========  =======
</TABLE>

                        STATEMENTS OF DIVISIONAL EQUITY

<TABLE>
<CAPTION>
                                                          December 31,
                                                     -------------------------
                                                      1998     1997     1996
                                                     -------  -------  -------
<S>                                                  <C>      <C>      <C>
Balance, beginning.................................. $26,543  $26,622  $35,429
  Net income (loss).................................  (2,729)  (2,451)   2,410
  Long-term working capital advanced from (repaid
   to) the home office..............................   8,596    2,372  (11,217)
                                                     -------  -------  -------
Balance, ending..................................... $32,410  $26,543  $26,622
                                                     =======  =======  =======
</TABLE>


                            See accompanying notes.

                                      F-24
<PAGE>

         QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.

                            STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                          December 31,
                                                    --------------------------
                                                     1998     1997      1996
                                                    -------  -------  --------
<S>                                                 <C>      <C>      <C>
Cash flows from operating activities:
  Net income (loss)................................ $(2,729) $(2,451) $  2,410
  Adjustments to reconcile net income (loss) to net
   cash provided
   by (used in) operating activities:
    Depreciation and amortization..................   2,844    2,472     1,973
    Loss on sale of equipment......................      20        2       --
    Change in assets and liabilities:
      (Increase) decrease in trade receivables.....  (3,344)   1,071     6,176
      (Increase) decrease in inventories...........  (7,506)   2,314     1,838
      Increase in prepaid expenses.................     (15)     (34)     (195)
      Increase in income taxes receivable, home
       office......................................    (200)  (1,775)      --
      (Increase) decrease in deposits..............       6      (9)       (98)
      Increase (decrease) in accounts payable......   3,651      716      (244)
      Increase (decrease) in accrued expenses......     514      (8)       271
      Increase (decrease) in income taxes payable,
       home office.................................     --    (1,746)    1,746
                                                    -------  -------  --------
        Net cash provided by (used in) operating
         activities................................  (6,759)     552    13,877
Cash flows from investing activities:
  Purchase of property and equipment...............  (1,105)  (1,829)   (1,108)
  Proceeds from sale of property and equipment.....       3      --        375
                                                    -------  -------  --------
        Net cash used in investing activities......  (1,102)  (1,829)     (733)
Cash flows from financing activities:
  Working capital advance from (repayments to) the
   home office.....................................   8,596    2,372   (11,217)
  Principal payments on long-term borrowings.......  (1,927)  (1,537)   (1,600)
  Increase in checks in excess of bank balance.....   1,121      --        --
                                                    -------  -------  --------
        Net cash provided by (used in) financing
         activities................................   7,790      835   (12,817)
        Net increase (decrease) in cash............     (71)    (442)      327
Cash:
  Beginning........................................      71      513       186
                                                    -------  -------  --------
  Ending........................................... $   --   $    71  $    513
                                                    =======  =======  ========
  Cash payments for interest....................... $   515  $   528  $    507
                                                    =======  =======  ========
Supplementary schedule of noncash investing and
 financing activities;
  Capital lease obligations incurred for purchase
   of property and equipment....................... $ 2,519  $ 1,347  $  2,280
                                                    =======  =======  ========
</TABLE>

                            See accompanying notes.

                                      F-25
<PAGE>

         QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                                 (in thousands)

Note 1. Nature of Business and Significant Accounting Policies

   Nature of business--The Division's operations consist principally of
contract manufacturing. The Division also provides a variety of manufacturing
and value-added services to its customers, including the manufacturing of
board-level and systems products to customer specifications, and certain types
of component kits to customer specification.

   Significant accounting policies are as follows:

   Basis of presentation--The accompanying Divisional financial statements have
been prepared from the books and records maintained by Bell Microproducts, Inc.
The statements of income may not necessarily be indicative of the results of
operations that would have been obtained if the division had been operated as
an independent entity. The statements of income include allocation of certain
expenses which are material in amount. Such expenses are allocations for
corporate services, interest expense, and federal and state income taxes.

   Financial statement estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and 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. Actual results could differ from those estimates.

   Fair value of financial instruments--The fair value of cash, accounts
receivable, accounts payable and home office advance approximate the carrying
amount because of the short maturity of those instruments.

   Cash--The Division maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Division has not experienced
any losses in such accounts.

   Inventories--Inventories are stated at the lower of standard cost which
approximates actual cost on a first-in, first-out basis or market. Market is
based on estimated net realizable value. Work in process and finished goods
include materials, labor and allocated overhead.

   Property and equipment--Property and equipment is carried at cost.
Depreciation on property and equipment is computed by the straight line method
over the following estimated useful lives:

<TABLE>
<CAPTION>
                                                                          Years
                                                                          ------
       <S>                                                                <C>
       Manufacturing equipment........................................... 3 to 5
       Office furniture and fixtures.....................................      5
       Computer hardware and software.................................... 3 to 5
</TABLE>

   Leasehold improvements are depreciated over the shorter of the term of the
lease or their estimated useful lives. The amortization of assets acquired
under capital leases is included with depreciation expense on owned assets.

Note 2. Inventories

   Inventories consist of the following:

<TABLE>
<CAPTION>
                                                              December 31,
                                                         -----------------------
                                                          1998    1997    1996
                                                         ------- ------- -------
<S>                                                      <C>     <C>     <C>
Raw materials........................................... $12,644 $ 7,833 $ 9,721
Work in process.........................................  10,713   7,853   8,234
Finished goods..........................................     702     867     912
                                                         ------- ------- -------
Total inventories....................................... $24,059 $16,553 $18,867
                                                         ======= ======= =======
</TABLE>

                                      F-26
<PAGE>

         QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)
                                 (in thousands)


Note 3. Property and Equipment

   Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                             December 31,
                                                        -----------------------
                                                         1998    1997    1996
                                                        ------- ------- -------
   <S>                                                  <C>     <C>     <C>
   Asset Description:
     Leasehold improvements............................ $ 1,660 $ 1,568 $   332
     Manufacturing equipment...........................  13,353  10,435   9,604
     Office furniture and fixtures.....................     667     651     230
     Computer hardware and software....................   1,824   1,461   1,109
                                                        ------- ------- -------
       Total cost......................................  17,504  14,115  11,275
     Less: accumulated depreciation....................   8,093   5,461   3,323
                                                        ------- ------- -------
   Total property and equipment........................ $ 9,411 $ 8,654 $ 7,952
                                                        ======= ======= =======
</TABLE>

Note 4. Long-Term Debt

   The Division has $6,762 of leases with various banks. Due to the terms of
the leases, they are all considered capital lease obligations. The Division has
the following capital lease obligations:

<TABLE>
<CAPTION>
                                                                December 31,
                                                            --------------------
                                                             1998   1997   1996
                                                            ------ ------ ------
   <S>                                                      <C>    <C>    <C>
   Capital lease obligations due in monthly payments of
    approximately $223 through October 2003, discounted at
    rates of 6.9% to 9.8%.................................  $6,762 $6,170 $6,360
     Less: current maturities.............................   2,232  1,728  1,375
                                                            ------ ------ ------
   Total long-term debt...................................  $4,530 $4,442 $4,985
                                                            ====== ====== ======
</TABLE>

   Aggregate maturities required on long-term debt at December 31, 1998 are due
as follows:

<TABLE>
<CAPTION>
            <S>                                   <C>
            1999................................. $ 2,232
            2000.................................   2,180
            2001.................................   1,116
            2002.................................     706
            2003.................................     528
</TABLE>

Note 5. Income Taxes

   The following table reconciles the expected amount from applying the
statutory federal income tax rate to income before income taxes.

<TABLE>
<CAPTION>
                                                           December 31,
                                                     --------------------------
                                                       1998      1997     1996
                                                     --------  --------  ------
   <S>                                               <C>       <C>       <C>
   Computed "expected' income tax expense
    (benefit)......................................  $ (1,646) $ (1,437) $1,455
   State income taxes, net of federal tax benefit..      (193)     (177)    237
   Other...........................................      (136)     (161)     54
                                                     --------  --------  ------
   Total income taxes..............................  $ (1,975) $ (1,775) $1,746
                                                     ========  ========  ======
</TABLE>

                                      F-27
<PAGE>

         QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)
                                 (In thousands)


Note 6. Lease or Other Commitments

   The Division leases a building under a 10 year triple net lease agreement.
Rental expense for the years ending December 31, 1998, 1997 and 1996 were
$1,046; $891 and $-0-, respectively. The total minimum rental commitment as of
December 31, 1998 is due in future years as follows:

<TABLE>
      <S>                                                                <C>
      Years ending December 31,
      1999.............................................................. $  969
      2000..............................................................    989
      2001..............................................................    989
      2002..............................................................  1,110
      2003..............................................................  1,120
      Thereafter........................................................  2,429
                                                                         ------
                                                                         $7,606
                                                                         ======
</TABLE>

   The Division leases manufacturing equipment under various leases which,
because of their terms, are recorded as capital leases.

   The following is a schedule by years of the future minimum lease payments
under the capital leases together with the present value of the minimum lease
payments as of December 31, 1998:

<TABLE>
      <S>                                                                <C>
      Years ending December 31,
      1999.............................................................. $2,689
      2000..............................................................  2,455
      2001..............................................................  1,255
      2002..............................................................    773
      2003..............................................................    536
                                                                         ------
        Total minimum lease payments....................................  7,708
        Less the amount representing interest...........................    946
                                                                         ------
        Present value of minimum lease payments......................... $6,762
                                                                         ======
</TABLE>

   At December 31, 1998, 1997 and 1996, property and equipment includes amounts
for assets acquired under capital leases of $12,561, $10,042 and $8,695,
respectively. Accumulated depreciation for the same periods includes amounts of
$6,036, $4,001 and $2,253, respectively.

Note 7. Divisional Equity

   Divisional equity balance was comprised of the following elements:

<TABLE>
<CAPTION>
                                                            December 31,
                                                       ------------------------
                                                        1998     1997    1996
   (In thousands)                                      -------  ------- -------
   <S>                                                 <C>      <C>     <C>
   Intercompany liability............................. $32,130  $21,759 $21,133
   Investment by home office..........................   1,759    1,759   1,759
   Retained earnings (deficit)........................  (1,479)   3,025   3,730
                                                       -------  ------- -------
                                                       $32,410  $26,543 $26,622
                                                       =======  ======= =======
</TABLE>

                                      F-28
<PAGE>

         QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)
                                 (in thousands)


Note 8. Sale of Division

   On June 7, 1999 Bell Microproducts, Inc. sold the Quadrus Manufacturing
division to Pemstar Inc. Pemstar Inc. bought certain assets and assumed certain
liabilities as of that date. The adjusted sales price was $34,966. The
acquisition was funded through the increase in Pemstar Inc.'s operating line of
credit and from the sale of Pemstar Inc. preferred stock.

Note 9. Major Customers

   Net sales include sales to the following customers which accounted for 10%
or more of the total net sales of the Division. Information relating to these
customers is as follows:

<TABLE>
<CAPTION>
                                                              Trade Receivable
                                     Net Sales for the Year    Balance as of
                                       Ended December 31,       December 31,
                                     ----------------------- -------------------
                                      1998    1997    1996    1998  1997   1996
                                     ------- ------- ------- ------ ----  ------
   <S>                               <C>     <C>     <C>     <C>    <C>   <C>
   Customer A....................... $   --  $14,537 $38,165 $  --  $362  $5,999
   Customer B.......................     --      --   16,345    --   --    1,882
   Customer C.......................  10,986  20,315     --   1,235  (20)    --
   Customer D.......................  24,464     --      --   4,074  --      --
                                     ------- ------- ------- ------ ----  ------
                                     $35,450 $34,852 $54,510 $5,309 $342  $7,881
                                     ======= ======= ======= ====== ====  ======
</TABLE>

   Because of the nature of the Division's business, the major customers may
vary between years.


                                      F-29
<PAGE>

                              [LOGO OF WATERMARK]
                                        Shares


                                  Common Stock

                                  -----------

                                   PROSPECTUS
                                        , 2000

                                  -----------

                                Lehman Brothers

                               Robertson Stephens

                                   Chase H&Q

                               CIBC World Markets

                            Fidelity Capital Markets
             a division of National Financial Services Corporation
<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   Except as set forth below the following fees and expenses will be paid by
Pemstar in connection with the issuance and distribution of the securities
registered hereby and do not include underwriting commissions and discounts.
All such expenses, except for the SEC registration, NASD filing and Nasdaq
listing fees, are estimated.

<TABLE>
      <S>                                                            <C>
      SEC registration fee.......................................... $   30,360
      NASD filing fee............................................... $   12,000
      Nasdaq National Market listing fee............................ $   95,000
      Legal fees and expenses....................................... $     *
      Accounting fees and expenses.................................. $     *
      Transfer Agent's and Registrar's fees......................... $     *
      Printing and engraving expenses............................... $     *
      Miscellaneous................................................. $     *
                                                                     ----------
      Total......................................................... $1,000,000
                                                                     ==========
</TABLE>
--------
*  To be provided by amendment.

Item 14. Indemnification of Directors and Officers

   Section 302A.521 of the Minnesota Statutes provides that a corporation shall
indemnify any person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of such person against
judgments, penalties, fines (including, without limitation, excise taxes
assessed against such person with respect to any employee benefit plan),
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person (1) has not been indemnified therefore by another
organization or employee benefit plan for the same judgments, penalties or
fines; (2) acted in good faith; (3) received no improper personal benefit and
Section 302A.255 (with respect to director conflicts of interest), if
applicable, has been satisfied; (4) in the case of a criminal proceeding, had
no reasonable cause to believe the conduct was unlawful; and (5) in the case of
acts or omissions in such person's official capacity for the corporation,
reasonably believed that the conduct was in the best interests of the
corporation, or in the case of acts or omissions in such person's official
capacity for other affiliated organizations, reasonably believed that the
conduct was not opposed to the best interests of the corporation. Section
302A.521 also requires payment by a corporation, upon written request, of
reasonable expenses in advance of final disposition of the proceeding in
certain instances. A decision as to required indemnification is made by a
disinterested majority of the Board of Directors present at a meeting at which
a disinterested quorum is present, or by a designated committee of the Board,
by special legal counsel, by the shareholders or by a court.

   Provisions regarding indemnification of officers and directors of Pemstar to
the extent permitted by Section 302A.521 are contained in Pemstar's articles of
incorporation and bylaws.

Item 15. Recent Sales of Unregistered Securities

   During the past three years, the registrant sold the following securities
that were not registered under the Securities Act. No underwriting commission
or discount was paid in connection with any of the sales.

  (1)  Between May 16, 1997 and May 16, 2000, we sold 1,664,358 shares of
       common stock to various employees, directors, consultants and advisors
       pursuant to the exercise of outstanding options for an aggregate of
       $1,133,452.26 cash in reliance upon Rule 701 of the Securities Act.

                                      II-1
<PAGE>

  (2) On May 19, 1997 we sold 15,000 shares of common stock for $7,500 cash
      to one employee in reliance upon the exemption contained in Section
      4(2) of the Securities Act for transactions not involving a public
      offering.

  (3) In 1997 we entered into a joint venture with Italade Technology of
      Thailand to form Italade Pemstar Limited. Pursuant to the terms of the
      joint venture agreement, we acquired Italade Technology's joint venture
      interest in Italade Pemstar Limited in exchange for 2,610,000 shares of
      our common stock. The sales were made in reliance upon the exemptions
      contained in Regulation S of the Securities Act for sales to non U.S.
      persons and in Section 4(2) of the Securities Act for transactions not
      involving a public offering.

  (4) On September 30, 1997, we sold 270,000 shares of common stock for
      $221,400 cash to eight officers (who were also directors of the
      registrant) and to one other accredited investor in reliance upon the
      exemption contained in Section 4(2) of the Securities Act for
      transactions not involving a public offering.

  (5) In February 1998, we sold 285,102 shares of common stock for $1,425,510
      cash to various accredited investors in a private placement in reliance
      upon the exemptions contained in Section 4(2) of the Securities Act and
      Rule 506 of Regulation D thereunder.

  (6) In February and March 1998, we sold 569,966 shares of Series A
      preferred stock for $8,549,490 cash to two accredited investors in a
      private placement in reliance upon the exemptions contained in Section
      4(2) of the Securities Act and Rule 506 of Regulation D thereunder.

  (7) In June 1999, we sold 1,000,000 shares of Series B preferred stock for
      $18,000,000 cash to three accredited investors in a private placement
      in reliance upon the exemptions contained in Section 4(2) of the
      Securities Act and Rule 506 of Regulation D thereunder.

  (8)  In September 1999, we sold 300 shares of common stock for $1500 cash
       upon the exercise of a stock option previously granted to one employee
       in reliance upon the exemption contained in Section 4(2) of the
       Securities Act for transactions not involving a public offering.

  (9) In March 2000, we sold 332,250 shares of common stock for $348,750 cash
      and $1,312,500 in promissory notes to four officers and 11 managerial
      level employees in reliance upon the exemption contained in Section
      4(2) of the Securities Act for transactions not involving a public
      offering. The registrant believes that the Section 4(2) exemption was
      available based on the financial and other information provided to (or
      made available to) the purchasers and the representations made by the
      purchasers in their subscription agreements as to their knowledge and
      experience in financial and business matters, their ability to evaluate
      the risks and merits of the prospective investment, the suitability of
      the investment for them and their ability to bear the risks of the
      investment. All purchasers represented that they purchased for
      investment purposes only and received share certificates that were
      legended to restrict transferability except in compliance with the
      Securities Act.

  (10) In March 2000, we sold 296,298 shares of common stock for $1,481,490
       cash upon the exercise of stock options previously granted to four
       officers and eight managerial level employees in reliance upon the
       exemption contained in Section 4(2) of the Securities Act for
       transactions not involving a public offering. The registrant believes
       that the Section 4(2) exemption was available based on the financial
       and other information provided to (or made available to) the
       purchasers and based on the purchasers' position at the registrant.
       All purchasers represented that they purchased for investment purposes
       only and received share certificates that were legended to restrict
       transferability except in compliance with the Securities Act.

                                      II-2
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

(a)  Exhibits

<TABLE>
<CAPTION>
   Number Description
   ------ -----------
   <C>    <S>
    1.1*  Underwriting Agreement.
    3.1   Articles of Incorporation of the Company.
    3.2   Bylaws of the Company.
    4.1   Form of Certificate of Common Stock of the Company.
    4.2*  Rights Agreement, dated as of      , 2000, between the Company and
                  , as Rights Agent.
    4.3   Credit Agreement between the Company and U.S. Bank National
          Association, as amended on August 31, 1999, October 14, 1999,
          November 23, 1999, December 20, 1999, March 13, 2000 and May 5, 2000.
    4.4   Revolving Credit Agreement, dated as of May 5, 2000, between the
          Company and IBM Credit Corporation.
    4.5   ING Bank District Oost Nederland Credit Facility, dated May 26, 1999.
    4.6   The Company agrees to furnish supplementally to the Securities and
          Exchange Commission upon request a copy of any instrument defining
          the rights of holders of long-term debt not being filed as an exhibit
          in reliance on Item 601(b)(4)(iii)(A) of Regulation S-K.
    5.1*  Opinion of Dorsey & Whitney LLP.
   10.1   Joint Venture Agreement dated September 25, 1998, between the Company
          and Hongguan Technologies (S) Pte. Ltd.
   10.2   Asset Purchase Agreement dated as of April 30, 1999, by and between
          the Company and Bell Microproducts, Inc.
   10.3   Supply Agreement dated April 30, 1999, between the Company, Fluke
          Corporation and Fluke Industrial B.V.
   10.4   Form of Change in Control Agreement.
   10.5   Form of Promissory Note.
   10.6   Form of Promissory Note.
   10.7   Series A Stock Purchase Agreement, dated as of February 12, 1998,
          between the Company and the parties names therein.
   10.8   First Amendment to Series A Stock Purchase Agreement, dated as of
          March 27, 1998, between the Company and the parties named therein.
   10.9   Series B Stock Purchase Agreement, dated as of June 7, 1999, between
          the Company and the parties named therein.
   10.10  First Amended and Restated Investor Rights Agreement, dated as of
          June 7, 1999 between the Company and certain shareholders.
   10.11  First Amended and Restated Shareholders' Agreement dated June 7,
          1997, between the Company and certain shareholders.
   10.12  Pemstar Inc. 1994 Stock Option Plan.
   10.13  Pemstar Inc. 1995 Stock Option Plan.
   10.14  Pemstar Inc. 1997 Stock Option Plan.
   10.15  Pemstar Inc. Amended and Restated 1999 Stock Option Plan.
   10.16  Pemstar Inc. 2000 Stock Option Plan.
   10.17  Supplementary Contract, dated March 24, 2000, between Pemstar
          (Tianjin) Enterprise Co. Ltd. and Tianjin Yat-Sen Scientific-
          Industrial Park International, Inc.
   10.18  Lease Agreement, dated June 4, 1997, between Italade Technology
          (Thailand) Limited and Italade-Pemstar Limited.
   10.19  Lease, dated June 29, 1998, between the Company and Leslie E. Nelson
          as Trustee of the Leslie E. Nelson Revocable Trust dated December 20,
          1994, as amended.
</TABLE>

                                      II-3
<PAGE>

<TABLE>
<CAPTION>
   Number Description
   ------ -----------
   <C>    <S>
   10.20  Sub-Lease Agreement, dated February 3, 1999, between Hongguan
          Technologies (S) Pte. Ltd. and Pemstar-Hongguan Pte. Ltd.
   10.21  Lease Agreement dated September 30, 1998, between Guadalajara
          Industrial Technologico, S.A. de C.V. and Pemstar de Mexico S.A. de
          C.V.
   10.22  Sublease for Office Premises, dated May 1, 1999, between Pemstar B.V.
          and Fluke Industrial B.V.
   10.23  Sublease Assignment Agreement dated June 8, 1999 between the Company
          and Bell Microproducts, Inc.
   10.24* Employee Stock Purchase Plan.
   16.1   Statement Regarding Change in Certifying Accountant.
   21.1   Subsidiaries of the Company.
   23.1   Consent of McGladrey & Pullen, LLP.
   23.2   Consent of Ernst & Young LLP.
   23.2   Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
   24.1   Powers of Attorney (included on signature page).
   27.1   Financial Data Schedule.
</TABLE>
--------
*  To be filed by amendment.

(b)  Financial Statement Schedules

   The following financial statement schedules are filed herewith:


  Schedule II: Report of Independent Auditors--Ernst & Young LLP
  Schedule II: Report of Independent Auditors--McGladrey & Pullen, LLP
  Schedule II: Valuation and Qualifying Accounts

Item 17. Undertakings

   The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

   Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

   The undersigned registrant hereby undertakes that:

     (1) For purposes of determining any liability under the Securities Act
  of 1933, the information omitted from the form of prospectus filed as part
  of this registration statement in reliance upon Rule 430A and contained in
  a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
  (4) or 497(h) under the Securities Act shall be deemed to be part of this
  registration statement as of the time it was declared effective.

     (2) For the purpose of determining any liability under the Securities
  Act of 1933, each post-effective amendment that contains a form of
  prospectus shall be deemed to be a new registration statement relating to
  the securities offered therein, and the offering of such securities at that
  time shall be deemed to be the initial bona fide offering thereof.

                                      II-4
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all if the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Rochester, State of Minnesota, on May 16, 2000.

                                          PEMSTAR INC.

                                                   /s/ Allen J. Berning
                                          By: _________________________________
                                             Allen J. Berning
                                             Chairman and Chief Executive
                                              Officer

   Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                  Signature                           Title                Date
                  ---------                           -----                ----

 <C>                                         <S>                       <C>
            /s/ Allen J. Berning             Chairman, Chief           May 16, 2000
                                             Executive Officer and
                                             Director (principal
                                             executive officer)
 ___________________________________________
              Allen J. Berning
           /s/ William J. Kullback           Chief Financial Officer   May 16, 2000
                                             (principal financial
                                             officer and principal
                                             accounting officer)
 ___________________________________________
             William J. Kullback

            /s/ William B. Leary             Director                  May 16, 2000
 ___________________________________________
              William B. Leary

            /s/ Robert R. Murphy             Director                  May 16, 2000
 ___________________________________________
              Robert R. Murphy

            /s/ Gary L. Lingbeck             Director                  May 16, 2000
 ___________________________________________
              Gary L. Lingbeck

             /s/ Karl D. Shurson             Director                  May 16, 2000
 ___________________________________________
               Karl D. Shurson

            /s/ Robert D. Ahmann             Director                  May 16, 2000
 ___________________________________________
              Robert D. Ahmann

            /s/ Thomas A. Burton             Director                  May 16, 2000
 ___________________________________________
              Thomas A. Burton

               /s/ Paul Singh                Director                  May 16, 2000
 ___________________________________________
            Hargopal (Paul) Singh
</TABLE>

                                      II-5
<PAGE>

<TABLE>
<CAPTION>
                  Signature                    Title        Date
                  ---------                    -----        ----

 <C>                                         <S>        <C>
            /s/ Michael J. Odrich            Director   May 16, 2000
 ___________________________________________
              Michael J. Odrich

            /s/ Steve V. Petracca            Director   May 16, 2000
 ___________________________________________
              Steve V. Petracca

             /s/ Bruce M. Jaffe              Director   May 16, 2000
 ___________________________________________
               Bruce M. Jaffe
             /s/ David L. Sippel             Director   May 16, 2000
 ___________________________________________
               David L. Sippel
</TABLE>

                                      II-6
<PAGE>

                                                                     SCHEDULE II

                         REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Directors of Pemstar Inc.

   We have audited the consolidated financial statements of Pemstar Inc. as of
March 31, 2000, and for the year then ended, and have issued our report thereon
dated May 5, 2000 (included elsewhere in this Registration Statement). Our
audit also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.


                                          /s/ ERNST & YOUNG LLP

Minneapolis, Minnesota
May 5, 2000

                                      S-1
<PAGE>

                                                                     SCHEDULE II

                         REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Directors of Pemstar Inc.

   Our audits were made for the purpose of forming an opinion on the 1999 and
1998 basic consolidated financial statements taken as a whole. The consolidated
supplemental schedule listed as Item 16(b) of the registration statement is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic consolidated financial
statements. The information for the years ended 1999 and 1998 in this schedule
has been subjected to the auditing procedures applied in our audits of the
basic consolidated financial statements and, in our opinion, is fairly stated
in all material respects in relation to the basic consolidated financial
statements taken as a whole.

                                          /s/ McGLADREY & PULLEN, LLP

Rochester, Minnesota
May 10, 1999

                                      S-2
<PAGE>

Schedule II--Valuation and Qualifying Accounts

Pemstar Inc.

<TABLE>
<CAPTION>
        Col. A            Col. B          Col. C           Col. D     Col. E
        ------          ---------- --------------------- ----------- --------
                                         Additions
                                   ---------------------
                                              Charge to              Balance
                        Balance at Charged to   Other                 at End
                        Beginning  Costs and  Accounts-- Deductions     of
      Description       of Period   Expenses  Described  Described--  Period
      -----------       ---------- ---------- ---------- ----------- --------
<S>                     <C>        <C>        <C>        <C>         <C>
YEAR ENDED MARCH 31,
 2000
Reserve and allowances
 deducted from
 accounts:
  Allowance for
   uncollectible
   accounts............  $53,136   $  545,079    $--     $   45,215  $553,000
  Allowance for
   inventory
   obsolescence........      --       572,656     --            --    572,656
YEAR ENDED MARCH 31,
 1999
Reserve and allowances
 deducted from
 accounts:
  Allowance for
   uncollectible
   accounts............    6,000       73,801     --         26,665    53,136
YEAR ENDED MARCH 31,
 1998
Reserve and allowances
 deducted from
 accounts:
  Allowance for
   uncollectible
   accounts............   12,000    1,546,244     --      1,552,244     6,000
</TABLE>

                                      S-3
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Number Description
 ------ -----------
 <C>    <S>
  1.1*  Underwriting Agreement.
  3.1   Articles of Incorporation of the Company.
  3.2   Bylaws of the Company.
  4.1   Form of Certificate of Common Stock of the Company.
  4.2*  Rights Agreement, dated as of      , 2000, between the Company and
                , as Rights Agent.
  4.3   Credit Agreement between the Company and U.S. Bank National
        Association, as amended on August 31, 1999, October 14, 1999, November
        23, 1999, December 20, 1999, March 13, 2000 and May 5, 2000.
  4.4   Revolving Credit Agreement, dated as of May 5, 2000, between the
        Company and IBM Credit Corporation.
  4.5   ING Bank District Oost Nederland Credit Facility dated May 26, 1999.
  4.6   The Company agrees to furnish supplementally to the Securities and
        Exchange Commission upon request a copy of any instrument defining the
        rights of holders of long-term debt not being filed as an exhibit in
        reliance on Item 601(b)(4)(iii)(A) of Regulation S-K.
  5.1*  Opinion of Dorsey & Whitney LLP.
 10.1   Joint Venture Agreement dated September 25, 1998, between the Company
        and Hongguan Technologies (S) Pte. Ltd.
 10.2   Asset Purchase Agreement dated as of April 30, 1999, by and between the
        Company and Bell Microproducts, Inc.
 10.3   Supply Agreement dated April 30, 1999, between the Company, Fluke
        Corporation and Fluke Industrial B.V.
 10.4   Form of Change in Control Agreement.
 10.5   Form of Promissory Note.
 10.6   Form of Promissory Note.
 10.7   Series A Stock Purchase Agreement, dated as of February 12, 1998,
        between the Company and the parties names therein.
 10.8   First Amendment to Series A Stock Purchase Agreement, dated as of March
        27, 1998, between the Company and the parties named therein.
 10.9   Series B Stock Purchase Agreement, dated as of June 7, 1999, between
        the Company and the parties named therein.
 10.10  First Amended and Restated Investor Rights Agreement, dated as of June
        7, 1999 between the Company and certain shareholders.
 10.11  First Amended and Restated Shareholders' Agreement dated June 7, 1997,
        between the Company and certain shareholders.
 10.12  Pemstar Inc. 1994 Stock Option Plan.
 10.13  Pemstar Inc. 1995 Stock Option Plan.
 10.14  Pemstar Inc. 1997 Stock Option Plan.
 10.15  Pemstar Inc. Amended and Restated 1999 Stock Option Plan.
 10.16  Pemstar Inc. 2000 Stock Option Plan.
 10.17  Supplementary Contract, dated March 24, 2000, between Pemstar (Tianjin)
        Enterprise Co. Ltd. and Tianjin Yat-Sen Scientific-Industrial Park
        International, Inc.
 10.18  Lease Agreement, dated June 4, 1997, between Italade Technology
        (Thailand) Limited and Italade-Pemstar Limited.
 10.19  Lease, dated June 29, 1998, between the Company and Leslie E. Nelson as
        Trustee of the Leslie E. Nelson Revocable Trust dated December 20,
        1994, as amended.
 10.20  Sub-Lease Agreement, dated February 3, 1999, between Hongguan
        Technologies (S) Pte. Ltd. and Pemstar-Hongguan Pte. Ltd.
 10.21  Lease Agreement dated September 30, 1998 between Guadalajara Industrial
        Technologico, S.A. de C.V. and Pemstar de Mexico S.A. de C.V.
</TABLE>

                                       1
<PAGE>

<TABLE>
<CAPTION>
 Number Description
 ------ -----------
 <C>    <S>
 10.22  Sublease for Office Premises, dated May 1, 1999, between Pemstar B.V.
        and Fluke Industrial B.V.
 10.23  Sublease Assignment Agreement dated June 8, 1999 between the Company
        and Bell Microproducts, Inc.
 10.24* Employee Stock Purchase Plan.
 16.1   Statement Regarding Change in Certifying Accountant.
 21.1   Subsidiaries of the Company.
 23.1   Consent of McGladrey & Pullen, LLP.
 23.2   Consent of Ernst & Young LLP.
 23.3   Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
 24.1   Powers of Attorney.
 27.1   Financial Data Schedule.
</TABLE>
--------
*  To be filed by amendment.


                                       2
[{"type": "S-1", "sequence": "1", "description": "FORM S-1 REGISTRATION STATEMENT", "secsgml_size_bytes": 361770}]
{"company-data": {"conformed-name": "PEMSTAR INC", "cik": "0000924829", "assigned-sic": "", "irs-number": "411771227", "state-of-incorporation": "MN", "fiscal-year-end": "0331"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-37162", "film-number": "637923"}, "business-address": {"street1": "3535 TECHNOLOGY DR NW", "city": "ROCHESTER", "state": "MN", "zip": "55901", "phone": "5072886720"}, "mail-address": {"street1": "3535 TECHNOLOGY DR NW", "city": "ROCHESTER", "state": "MN", "zip": "55901"}}
As filed with the Securities and Exchange Commission on May 16, 2000
                                                         Registration No.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                ---------------

                                    FORM S-1
                             REGISTRATION STATEMENT
                                     under
                           The Securities Act of 1933

                                ---------------

                                  PEMSTAR INC.
             (Exact name of registrant as specified in its charter)

                                     3672                  41-1771227
      Minnesota               (Primary Standard         (I.R.S. Employer
   (State or other                Industrial         Identification Number)
   jurisdiction of            Classification Code
   incorporation or                 Number)
    organization)

                           3535 Technology Drive N.W.
                           Rochester, Minnesota 55901
                                 (507) 288-6720
         (Address, including zip code, and telephone number, including
            area code, of registrant's principal executive offices)

                                Allen J. Berning
                                  Pemstar Inc.
                           3535 Technology Drive N.W.
                           Rochester, Minnesota 55901
                                 (507) 288-6720
      (Name, address, including zip code, and telephone number, including
                        area code, of agent for service)

                                ---------------

                                   Copies to:

        Jonathan B. Abram                           Dennis M. Myers
       Dorsey & Whitney LLP                         Kirkland & Ellis
      220 South Sixth Street                    200 East Randolph Drive
Minneapolis, Minnesota 55402-1498               Chicago, Illinois 60601
          (612) 340-2600                             (312) 861-2000

                                ---------------

        Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.

                                ---------------

   If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [_]
   If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [_]
   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering: [_]
   If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]

                        CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Maximum Aggregate
 Titles of Each Class of Securities to be    Offering Price      Amount of
                Registered                         (1)        Registration Fee
------------------------------------------------------------------------------
Common Stock, par value $.01 per share
 (2).......................................   $115,000,000        $30,360
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1)  Estimated solely for purposes of calculating the registration fee pursuant
     to Rule 457(o).
(2)  Includes certain associated preferred stock rights that will be issued to
     each shareholder pursuant to a rights agreement.

                                ---------------

   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities, and it is not soliciting an offer to buy      +
+these securities, in any jurisdiction where the offer or sale in not          +
+permitted.                                                                    +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                   Subject to Completion, dated May 16, 2000

PROSPECTUS

                                         Shares

                                    PEMSTAR

                                  Common Stock

--------------------------------------------------------------------------------

  This is our initial public offering of common stock. We are offering up to
           shares of common stock. No public market currently exists for our
shares.

  We propose to list our common stock on the Nasdaq National Market under the
symbol "PMTR." The anticipated price range is $      to $      per share.

    Investing in the shares involves risks. "Risk Factors" begin on page 8.
Per
                                                                     Share Total
                                                                     ----- -----
Public Offering Price............................................... $     $
Underwriting Discount...............................................
Proceeds to Pemstar.................................................
We and certain selling shareholders have granted the underwriters a 30-day
option to purchase up to       additional shares of common stock on the same
terms and conditions as set forth above to cover over-allotments, if any.

  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.

Lehman Brothers, on behalf of the underwriters, expects to deliver the shares
on or about              , 2000.

--------------------------------------------------------------------------------

Lehman Brothers                                               Robertson Stephens

           Chase H&Q

                      CIBC World Markets

                                                        Fidelity Capital Markets
                           a division of National Financial Services Corporation

       , 2000
TABLE OF CONTENTS
Page
                                      ----
Prospectus Summary..................    3
Risk Factors........................    8
Use of Proceeds.....................   14
Dividend Policy.....................   14
Capitalization......................   15
Dilution............................   16
Unaudited Pro Forma Consolidated
 Financial Data.....................   17
Selected Consolidated Financial
 Data...............................   20
Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations......................   21
Page
                                   ----
Business.........................   28
Management.......................   40
Related Party Transactions.......   47
Principal Shareholders...........   48
Description of Capital Stock.....   50
Shares Eligible for Future Sale..   54
Underwriting.....................   56
Legal Matters....................   58
Experts..........................   58
Where You Can Find More
 Information.....................   59
Index to Financial Statements....  F-1
ABOUT THIS PROSPECTUS

   You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it
is unlawful. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.

   This preliminary prospectus is subject to completion prior to this offering.

   Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are forward-looking statements. These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"anticipates," "believe," "continue," "could," "estimate," "expects,"
"intends," "may," "plans," "seeks," "should," or "will" or the negative of
these terms or similar expressions are generally intended to identify forward-
looking statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including the factors discussed under "Risk Factors."

   PEMSTAR(R) is a registered trademark of Pemstar Inc. Other trademarks and
trade names appearing in this prospectus are the property of their respective
holders.

   Until           , 2000, all dealers selling shares of the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

                                       2
PROSPECTUS SUMMARY

   This summary highlights information we present in greater detail elsewhere
in this prospectus. This prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those discussed in the forward-looking statements as a result of factors
described under "Risk Factors" and elsewhere in this prospectus.

                                  Pemstar Inc.

   We are a leading provider of electronics manufacturing services, or EMS, to
original equipment manufacturers, or OEMs, in the communications, computing,
data storage, industrial and medical equipment markets. We offer our
communications industry customers substantial expertise and experience in the
wireless and optical systems markets that are experiencing rapidly growing
demand for specialized engineering and manufacturing services. We provide a
comprehensive range of engineering, manufacturing and fulfillment services to
our customers on a global basis through nine facilities strategically located
in the United States, Mexico, Asia and Europe. Our comprehensive service
offerings support our customers' needs from product development and design
through manufacturing to worldwide distribution and aftermarket support. Since
our founding in 1994, we have experienced strong financial growth and
consistent profitability, with Manufacturing Market Insider ranking our revenue
growth rate of 110% in fiscal 2000 the highest among the top twenty domestic
EMS companies for their most recent fiscal year.

   The EMS industry is experiencing dramatic growth primarily driven by the
overall growth of the electronics industry, increased use of outsourcing among
OEMs and frequent OEM asset divestitures to EMS businesses. By outsourcing EMS,
OEMs are able to focus on their core competencies, such as product development,
sales, marketing and customer service, while leveraging the expertise of EMS
providers in assembly and test operations and supply chain management. OEMs are
increasingly outsourcing a broad spectrum of design services, including product
definition, design for manufacturability and design for test. Technology
Forecasters, Inc., or TFI, projects that the global EMS industry will grow at
an average annual rate of 20%, from $60 billion of revenues in 1998 to $149
billion in 2003. TFI also projects that the communications segment, which
represented $19 billion of revenues in 1998, will be the fastest growing EMS
market through 2003. Additionally, the EMS industry is highly fragmented, with
over 3,000 independent EMS companies in existence and the twenty largest
companies accounting for only 56% of the worldwide market in 1998 based on
revenues.

   Our customers include industry leading OEMs such as 3M, Efficient Networks,
Electronics For Imaging, Fluke Corporation, Fujitsu, Hewlett Packard,
Honeywell, IBM, Motorola, Pinnacle, RSA, Seagate and Sony. We also have
leveraged our expertise in the wireless and optical systems markets to develop
strong relationships with a number of emerging wireless and optical systems
OEMs, including Ancor Communications, Interwave, Optical Networks, Optical
Solutions, Repeater Technologies and Western Multiplex.

   Over the past several years, we have completed a number of acquisitions and
established new operations in order to expand our geographic presence, enhance
our product and service offerings, diversify our customer base and increase our
production capacity. In June 1999, we acquired Quadrus Manufacturing, a
division of Bell Microproducts, located in San Jose, California, which
primarily serves the communications sector in North America. In May 1999, we
also acquired a division of Fluke Corporation located in Almelo, the
Netherlands, which primarily serves the industrial equipment sector in Europe
and North America. Since 1994, we have established operations in Guadalajara,
Mexico; Tianjin, China; Singapore and Bangkok, Thailand, which have expanded
our manufacturing and distribution capabilities and further broadened our
customer base. We continue to actively pursue potential acquisitions to
complement our organic growth and to expand our business.

                                       3
Our Competitive Strengths

   We have established strong, long-term relationships with numerous OEMs, many
of which are leaders in their respective markets. Our business is built on
several specific strengths, including the following:

  .  World-Class Engineering Capabilities. Utilizing over 400 engineering
     professionals worldwide, we differentiate ourselves in the EMS
     marketplace by providing our customers with world-class engineering and
     product management services. Our engineering capabilities enable us to
     design and enhance the manufacturability of our customers' products,
     thereby increasing product quality, reducing both time to market and
     manufacturing costs as well as improving our customers' overall
     profitability.

  .  Communications Focus with Specific Wireless and Optical Systems
     Expertise. We focus substantial resources on the rapidly expanding
     communications industry and have developed specific expertise in the
     high growth wireless and optical systems market segments. As a result,
     revenues from communications OEMs increased to approximately 34% of our
     total revenues in fiscal 2000 from 16% in fiscal 1999.

  .  Comprehensive Manufacturing and Fulfillment Services. We complement our
     engineering capabilities with a comprehensive range of manufacturing,
     value-added assembly, final systems build-to-order, worldwide
     distribution and aftermarket services. These capabilities enable us to
     provide OEMs with a complete solution for all of their EMS needs.

  .  Global Scale and Infrastructure. We have established a network of
     facilities in the world's major electronics markets--North America,
     Europe and Asia--to serve the increasing outsourcing needs of both
     multinational and regional OEMs. As a result, we are able to reduce the
     time and cost required to bring our customers' products to market.

                                  Our Strategy

   Our objective is to enhance our position as a leading EMS provider to OEMs
worldwide. We intend to achieve this objective by continuing to employ the
following strategies:

  .  Leverage our world-class engineering services;

  .  Provide comprehensive engineering, manufacturing and fulfillment service
     offerings;

  .  Focus on high growth EMS market segments;

  .  Expand our global scale and infrastructure;

  .  Pursue selective acquisitions;

  .  Focus on quality management; and

  .  Provide superior supply chain management.

                                ----------------

   Pemstar is a Minnesota corporation incorporated in 1994. Our principal
executive office is located at 3535 Technology Drive N.W., Rochester, Minnesota
55901. Our telephone number is (507) 288-6720. We maintain a website on the
Internet at www.pemstar.com. Our website, and the information contained
therein, is not a part of this prospectus.

                                       4
The Offering

Common stock offered by Pemstar.....          shares

Common stock to be outstanding
 after the offering.................
                                              shares

Use of proceeds.....................    We intend to use the net proceeds from
                                        this offering to repay existing
                                        indebtedness and for general corporate
                                        purposes, including working capital,
                                        capital expenditures and possible
                                        acquisitions. See "Use of Proceeds."

Proposed Nasdaq National Market         "PMTR"
symbol..............................

   The number of shares that will be outstanding after the offering is based on
the number of shares outstanding as of March 31, 2000, and excludes:

  .  3,845,232 shares of common stock issuable upon exercise of stock options
     outstanding as of March 31, 2000, with a weighted average exercise price
     of $4.35 per share; and

  .  1,327,362 additional shares reserved for issuance under our stock option
     plans as of March 31, 2000.

   Our fiscal year ends on March 31 of each year and fiscal years are
identified in this prospectus according to the calendar year in which they end.
For example, the fiscal year ended March 31, 2000, is referred to as "fiscal
2000." Except as otherwise indicated, all information in this prospectus
assumes that the underwriters do not exercise the option granted by us and
certain selling shareholders to purchase additional shares in this offering and
that all of our outstanding preferred stock is converted into common stock upon
the consummation of this offering and reflects a 3-for-1 stock split, which was
effective in May 2000.

                                       5
Summary Consolidated 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 elsewhere in this prospectus.
Year Ended March 31,
                                ----------------------------------------------
                                 1996     1997      1998      1999      2000
                                -------  -------  --------  --------  --------
                                  (in thousands, except per share data)
Consolidated Statements of
 Income Data:
Net sales.....................  $22,021  $31,895  $165,049  $187,381  $393,842
Costs of goods sold...........   18,724   27,347   147,962   172,219   363,974
                                -------  -------  --------  --------  --------
Gross profit..................    3,297    4,548    17,087    15,162    29,868
Selling, general and
 administrative expenses......    2,309    2,976     8,328    10,955    21,576
Amortization..................       --       --        54       190     1,281
                                -------  -------  --------  --------  --------
Operating income..............      988    1,572     8,705     4,017     7,011
Other income (expense) -net...      187      247       455      (438)      (74)
Interest expense..............     (255)    (315)     (746)     (640)   (3,588)
                                -------  -------  --------  --------  --------
Income before income taxes....      920    1,504     8,414     2,939     3,349
Income tax expense............      289      554     3,097     1,273       698
                                -------  -------  --------  --------  --------
Net income....................  $   631  $   950  $  5,317  $  1,666  $  2,651
                                =======  =======  ========  ========  ========
Net income per share:
  Basic.......................  $  0.08  $  0.12  $   0.55  $   0.15  $   0.23
  Diluted.....................     0.08     0.12      0.49      0.12      0.15
Weighted average number of
 common shares outstanding
 (1):
  Basic.......................    7,645    8,009     9,653    10,897    11,503
  Diluted.....................    7,758    8,039    10,874    14,143    17,167
Other Financial Data:
Depreciation..................  $   600  $   911  $  1,929  $  3,331  $  7,455
Capital expenditures..........    1,587    2,887     8,393     8,657    13,415
Supplemental Data:
EBITDA (2)....................  $ 1,775  $ 2,730  $ 11,143   $ 7,100  $ 15,673
Net cash provided by (used in)
 operating activities.........      150      776    (1,374)       65   (20,225)
Net cash provided by (used in)
 investing activities.........   (1,576)  (2,938)  (10,126)   (5,545)  (53,489)
Net cash provided by (used in)
 financing activities.........    1,343    2,133    14,661     3,112    75,612
6
The as adjusted consolidated balance sheet data gives effect to the
automatic conversion of all of our outstanding shares of preferred stock into
shares of common stock upon consummation of this offering and the consummation
of this offering and the application of the net proceeds as described under
"Use of Proceeds," as if each had occurred on March 31, 2000.
As of March 31, 2000
                                                      ------------------------
                                                               As Adjusted (3)
                                                       Actual    (unaudited)
                                                      -------- ---------------
                                                           (in thousands)
Consolidated Balance Sheet Data:
Unrestricted cash and cash equivalents............... $  2,727     $41,427
Working capital......................................   49,649      96,749
Total assets.........................................  190,451     229,151
Long-term debt and capital lease obligations less
 current maturities..................................   55,181      10,031
Total shareholders' equity...........................   22,673     141,472
--------
(1)  For an explanation of the determination of the weighted average number of
     common shares outstanding used in computing net income per share, see Note
     1 of the notes to consolidated financial statements.

(2)  EBITDA means earnings before net interest expense, income taxes,
     depreciation and amortization. EBITDA is presented because we believe it
     is an indicator of our ability to incur and service debt and a similar
     formula is used by our lenders in determining compliance with financial
     covenants. However, EBITDA should not be considered as an alternative to
     cash flow from operating activities, as a measure of liquidity or as an
     alternative to net income as a measure of operating results in accordance
     with generally accepted accounting principles.

(3)  We intend to use approximately $63.9 million of the net proceeds from this
     offering to repay existing indebtedness. The table above reflects the
     repayment of $53.6 million, the amount of our indebtedness outstanding as
     of March 31, 2000. Subsequently, we incurred additional indebtedness of
     $10.3 million. See "Use of Proceeds."

                                       7
RISK FACTORS

   You should carefully consider the risks described below before making a
decision to buy our shares. If any of the following risks actually occur, our
business could be harmed. In that event, the trading price of our shares might
decline, and you could lose all or part of your investment. You should also
refer to the other information set forth in this prospectus, including our
consolidated financial statements and related notes.

                  Risks Relating to Our Business and Industry

A downturn in the EMS markets we serve would likely negatively affect our net
sales.

   The communications, computing, data storage, industrial and medical
equipment markets of the EMS industry are characterized by intense competition,
relatively short product life-cycles and significant fluctuations in product
demand. In addition, these EMS industry markets are generally subject to rapid
technological change and product obsolescence. If any of these factors or other
factors reduce demand for specific products or components that we design or
manufacture for our customers, our net sales would likely be negatively
affected. Furthermore, these industries are subject to economic cycles and have
in the past experienced, and are likely in the future to experience,
recessionary periods. A recession or any other event leading to excess capacity
or a downturn in the EMS markets we serve would likely negatively affect our
net sales.

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

   We depend on a relatively small number of customers for a significant
portion of our net sales. Our two largest customers in fiscal 2000 were IBM and
Motorola, which represented approximately 37% and 15% of our total net sales.
In addition, our five largest customers in fiscal 2000 accounted for
approximately 75% of our net sales. We expect to continue to depend upon a
relatively small number of customers for a significant percentage of our net
sales. Because our major customers represent such a large part of our business,
the loss of any of our major customers could negatively impact our business.

   Our major customers may not continue to purchase products and services from
us at current levels or at all. For various reasons, including consolidation in
our customers' industries, we have in the past and expect in the future to
terminate or lose relationships with customers. We may not be able to expand
our customer base to make up any sales shortfalls if we lose a major customer.
Our attempts to diversify our customer base and reduce our reliance on
particular customers may not be successful.

Our business is not typified by long-term contracts, and cancellations,
reductions or delays in customer orders would adversely affect our
profitability.

   We do not typically obtain firm long-term purchase orders or commitments
from our customers. We work closely with our customers to develop forecasts for
future orders, but these forecasts are not binding. Customers may cancel their
orders, change production quantities from forecast volumes or delay production
for a number of reasons beyond our control. Any material delay, cancellation or
reduction of orders from our largest customers could cause our net sales to
decline significantly. In addition, as many of our costs and operating expenses
are relatively fixed, a reduction in customer demand can decrease our gross
margins and adversely affect our business, financial condition and results of
operations.

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

   Many of the products we manufacture require one or more components that we
order from sole-source suppliers. Supply shortages for a particular component
can delay production of all products using that component or cause cost
increases in the services we provide. In the past, some of the materials we
use, such

                                       8
as capacitors and memory and logic devices, have been subject to industry-wide
shortages. As a result, suppliers have been forced to allocate available
quantities among their customers and we have not been able to obtain all of the
materials desired. Our inability to obtain these needed materials could slow
production or assembly, delay shipments to our customers, increase costs and
reduce operating income. In certain circumstances, we may bear the risk of
periodic component price increases. Accordingly, some component price increases
could increase costs and reduce our operating income.

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

We have experienced significant growth in a short period of time and we may
have trouble managing our expansion and integrating acquired businesses.

   We have grown rapidly in recent years due to acquisitions and organic
growth. Since 1994, we have completed two acquisitions and developed two
greenfield operations. As a result, we have a limited history of owning and
operating our acquired businesses on a consolidated basis. We cannot assure you
that we will be able to meet performance expectations or successfully integrate
our acquired businesses on a timely basis without disrupting the quality and
reliability of service to our customers or diverting management resources. Our
rapid growth has placed and will continue to place a significant strain on our
management, financial resources and on our information, operations and
financial systems. If we are unable to manage our growth effectively, it may
have an adverse effect on our business, financial condition and results of
operations. We cannot assure you that we will manage our growth effectively,
and we expect that our annual growth rate of net sales will decrease in the
future due to our increased size.

   We expect to continue to expand our operations through acquisitions and
greenfield expansions. These activities involve numerous risks, including
difficulty in integrating operations, technologies, systems, and products and
services of these acquired companies; diversion of management's attention; a
disruption of operations; increases in expenses and working capital
requirements; failure to enter effectively markets in which we have limited or
no prior experience and where competitors in such markets have stronger market
positions; and potential loss of key employees and customers of acquired
companies. In addition, acquisitions may involve financial risks, such as the
potential liabilities of the acquired businesses, the dilutive effect of the
issuance of additional equity securities, the incurrence of additional debt,
the financial impact of transaction expenses and the amortization of goodwill
and other intangible assets involved in any transactions that are accounted for
using the purchase method of accounting, and possible adverse tax and
accounting effects.

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

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

  .  Respond more quickly to new or emerging technologies;
  .  Have greater name recognition, critical mass and geographic and market
     presence;
  .  Be better able to take advantage of acquisition opportunities;

                                       9
.  Adapt more quickly to changes in customer requirements; and
  .  Devote greater resources to the development, promotion and sale of their
     services.

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

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

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

  .  Variations in customer orders relative to our manufacturing capacity;
  .  Variations in the timing of shipment of products to customers;
  .  Introduction and market acceptance of our customers' new products;
  .  Changes in competitive and economic conditions generally or in our
     customers' markets;
  .  Effectiveness of our manufacturing processes, including controlling
     costs;
  .  Changes in cost and availability of components or skilled labor; and
  .  The timing and price we pay for acquisitions and related acquisition
     costs.

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

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

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

We will need additional financing to support our future growth.

   We expect to continue to make substantial capital expenditures to expand our
operations and remain competitive in the rapidly changing EMS industry. Our
future success depends on our ability to obtain

                                       10
additional financing and capital to support our future growth, if any. We may
not be able to obtain additional capital when we want or need it, and capital
may not be available on satisfactory terms. If we issue additional equity
securities or convertible debt to raise capital, it may be dilutive to your
ownership interest. In addition, any additional capital may have terms and
conditions that adversely affect our business, such as financial or operating
covenants.

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

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

  .  Economic or political instability;
  .  Transportation delays and interruptions;
  .  Foreign currency exchange rate fluctuations;
  .  Increased employee turnover and labor unrest;
  .  Longer payment cycles;
  .  Greater difficulty in collecting accounts receivable;
  .  Utilization of different systems and equipment;
  .  Difficulties in staffing and managing foreign personnel and diverse
     cultures; and
  .  Less developed infrastructures.

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

Our acquisition strategy may not succeed.

   As part of our business strategy, we expect to continue to grow by pursuing
acquisitions of other companies, assets or product lines that complement or
expand our existing business. Competition for attractive companies in our
industry is substantial. We cannot assure you that we will be able to identify
suitable acquisition candidates or finance and complete transactions that we
select. Failure to execute our acquisition strategy may adversely affect our
business, financial condition and results of operations.

We may be unable to protect our intellectual property, which would negatively
affect our ability to compete.

   We rely on our proprietary technology, and we expect that future
technological advances made by us will be critical to remain competitive.
Therefore, we believe that the protection of our intellectual property rights
is, and will continue to be, important to the success of our business. We rely
on a combination of patent, trademark and trade secret laws and restrictions on
disclosure to protect our intellectual property rights. Despite these
protections, unauthorized parties may attempt to copy or otherwise obtain and
use our proprietary technology. We cannot be certain that patents we have or
that may be issued as a result of our pending patent applications will protect
or benefit us or give us adequate protection from competing technologies. We
also cannot be certain that others will not develop our unpatented proprietary
technology or effective competing technologies on their own. We believe that
our proprietary technology does not infringe on the proprietary rights of
others. However, if others assert valid infringement claims against us with
respect to our past, current or future designs or processes, we could be
required to enter into expensive royalty arrangements, develop non-infringing
technologies or engage in costly litigation, which could negatively affect our
business, financial condition and results of operations.

                                       11
Our inability to expand our Web-based supply chain management system could
negatively impact our future competitiveness.

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

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

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

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

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

                        Risks Relating to this Offering

Management has discretion in spending our proceeds from this offering.

   Management intends to use approximately $63.9 million of the net proceeds
from this offering to repay existing indebtedness and approximately $28.4
million of the net proceeds for general corporate purposes, including working
capital, capital expenditures and possible acquisitions. You should be aware
that we have broad discretion to determine the allocation of our proceeds from
this offering that will be used for general corporate purposes. You will not
have an opportunity to evaluate the economic, financial or other information on
which we base our decisions on how to use these proceeds. See "Use of
Proceeds."

The initial public offering price is significantly higher than the book value
of our common stock, and you will experience immediate and substantial dilution
in the book value of your investment.

   Prior investors paid a lower per share price than the price in this
offering. The initial public offering price is substantially higher than the
net book value per share of the outstanding common stock immediately after

                                       12
this offering. Accordingly, if you purchase common stock in this offering, you
will incur immediate and substantial dilution of $    per share. In addition,
we have issued options to acquire common stock at prices significantly below
the initial public offering price. To the extent these outstanding options are
exercised, there will be further dilution to investors in this offering. See
"Dilution."

We do not intend to pay dividends on our common stock.

   We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future.

Future sales of our common stock, including the shares purchased in this
offering, may depress our stock price.

   Sales of a substantial number of shares of our common stock in the public
market by our shareholders after this offering, or the perception that such
sales are likely to occur, could depress the market price of our common stock
and could impair our ability to raise capital through the sale of additional
equity securities. Based on shares outstanding as of March 31, 2000, upon
completion of this offering we will have outstanding         shares of common
stock, assuming no exercise of the underwriters' overallotment option. Of these
shares, the      shares of common stock sold in this offering will be freely
tradable, without restriction, in the public market. After the lockup
agreements pertaining to this offering expire 180 days from the date of this
prospectus, an additional 18.5 million shares will be eligible for sale in the
public market. In addition, 3.0 million of the shares subject to outstanding
options will be exercisable, and if exercised, available for sale 180 days
after the date of this prospectus. See "Shares Eligible for Future Sale."

An active public market for our common stock may not develop, which could
impede your ability to sell your shares and depress our stock price.

   Before this offering, you could not buy or sell our common stock on the
public market. An active public market for our common stock may not develop or
be sustained after the offering, which could affect your ability to sell your
shares and depress the market price of your shares. The market price of your
shares may fall below the initial public offering price.

Provisions in our charter documents and Minnesota law may delay or prevent
acquisition of our company.

   Provisions of our amended articles of incorporation and our amended and
restated bylaws which we intend to adopt prior to completion of this offering
and provisions of Minnesota law may delay or prevent the acquisition of our
company which you may consider favorable. These provisions include the
following:

  .  No cumulative voting by shareholders for directors;
  .  A classified board of directors with three-year staggered terms;
  .  The ability of our board to set the size of the board of directors, to
     create new directorships and to fill vacancies;
  .  The ability of our board, without shareholder approval, to issue
     preferred stock, which may have rights and preferences that are superior
     to our common stock;
  .  The ability of our board to amend the bylaws;
  .  A shareholder rights plan, which discourages the unauthorized
     acquisition of 15% or more of our common stock or an unauthorized
     exchange or tender offer;

  .  Restrictions under Minnesota law on mergers or other business
     combinations between us and any holder of 10% or more of our outstanding
     common stock; and
  .  A requirement that at least two-thirds of our shareholders and at least
     two-thirds of our directors approve amendments of our articles of
     incorporation.

                                       13
USE OF PROCEEDS

   We estimate the net proceeds from this offering to be approximately $92.3
million or approximately $       million if the underwriters exercise their
over-allotment option in full based on an assumed public offering price of
$      per share and after deducting our estimated underwriting and offering
expenses.

   We intend to use approximately $63.9 million of the net proceeds from this
offering to repay existing indebtedness and approximately $28.4 million for
general corporate purposes, including the funding of working capital, capital
expenditures and internal expansion. In addition, we may acquire companies,
assets or product lines that are complementary to ours, and a portion of the
net proceeds may be used for these acquisitions. While we engage from time to
time in discussions with respect to potential acquisitions, we cannot assure
you that any acquisitions will be made. Pending use of the net proceeds of this
offering, we intend to invest the net proceeds in short-term, interest bearing,
investment-grade marketable securities.

   As of May 15, 2000, the existing indebtedness to be repaid from a portion of
the net proceeds from this offering consisted of the following:

  .  Approximately $48.7 million under our two revolving credit facilities
     with US Bank, excluding accrued interest, with an effective interest
     rate of 11.0% and a final maturity date of August 2002;
  .  Approximately $15.0 million under our credit facility with IBM Credit
     Corporation, excluding accrued interest, with an interest rate of 10.0%
     and a final maturity date of May 2001; and
  .  Approximately $0.2 million under non-interest bearing notes issued to
     Rochester Area Economic Development, Inc., which are due and payable in
     the event we complete an initial public offering.

   We used borrowings under our US Bank revolving credit facilities to fund a
portion of the purchase price for Quadrus Manufacturing and all of the purchase
price of our Almelo, the Netherlands facility.

                                DIVIDEND POLICY

   We have never declared or paid any cash 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.

                                       14
CAPITALIZATION

   The following table sets forth our capitalization as of March 31, 2000:

  .  on an actual basis; and
  .  on a pro forma as adjusted basis to reflect (1) the automatic conversion
     of all of our outstanding preferred stock into common stock upon the
     consummation of this offering, and (2) the application of the net
     proceeds from this offering upon the consummation of this offering,
     assuming an initial public offering price of $      per share after
     deducting our estimated underwriting and offering expenses.
As of March 31, 2000
                                                      -------------------------
                                                                   Pro Forma
                                                                As Adjusted (2)
                                                       Actual     (unaudited)
                                                      --------  ---------------
                                                       (in thousands, except
                                                            share data)
Unrestricted cash and cash equivalents............... $  2,727     $ 41,427
                                                      ========     ========
Current maturities of long-term obligations.......... $ 15,229     $  6,829
                                                      ========     ========
Long-term obligations, net of current maturities:
  Revolving credit facility.......................... $ 45,000     $    --
  Industrial revenue bonds...........................    4,990        4,990
  Other total long-term obligations, net of current
   maturities........................................    5,191        5,041
                                                      --------     --------
    Total long-term obligations, net of current
     maturities......................................   55,181       10,031
Redeemable preferred stock (1).......................   26,549          --
Shareholders' equity:
  Preferred stock, $0.01 par value, 3,333,000 shares
   authorized and undesignated; none issued and
   outstanding on an actual and pro forma as adjusted
   basis.............................................                   --
  Common stock, $0.01 par value, 150,000,000 shares
   authorized; 13,819,260 shares issued and
   outstanding on an actual basis; and     issued and
   outstanding on a pro forma adjusted basis.........      138          185
  Additional paid-in capital.........................   15,395      134,147
  Accumulated other comprehensive loss...............     (772)        (772)
  Retained earnings..................................   11,170       11,170
  Loans to stockholders..............................   (3,258)      (3,258)
                                                      --------     --------
    Total shareholders' equity.......................   22,673      141,472
                                                      --------     --------
    Total capitalization............................. $104,403     $151,503
                                                      ========     ========
--------
(1) The Series A and Series B preferred stock is subject to mandatory
    redemption rights and automatically convert into shares of common stock
    upon the consummation of this offering.

   The number of shares that will be outstanding after this offering is based
on the number of shares outstanding as of March 31, 2000, and excludes:

  .  3,845,232 shares of common stock issuable upon exercise of stock options
     outstanding as of March 31, 2000, with a weighted average exercise price
     of $4.35 per share; and
  .  1,327,362 additional shares reserved for issuance under our stock option
     plans as of March 31, 2000.

   See "Management--Stock Option Plans."

(2) We intend to use approximately $63.9 million of the net proceeds from this
    offering to repay existing indebtedness. The table above reflects the
    repayment of $53.6 million, the amount of such indebtedness outstanding as
    of March 31, 2000. Subsequent to March 31, 2000, we incurred additional net
    indebtedness of $10.3 million, which is being repaid with the proceeds from
    this offering. See "Use of Proceeds."

                                       15
DILUTION

   Our pro forma net tangible book value as of March 31, 2000, was
$             or $               per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible
assets, less our total liabilities, divided by the pro forma number of shares
of common stock outstanding, after giving effect to the conversion of all
outstanding shares of preferred stock into common stock. Dilution in pro forma
net tangible book value per share represents the difference between the amount
per share paid by investors in this offering and the pro forma net tangible
book value per share of our common stock immediately after this offering. After
giving effect to our sale of the            shares of common stock in this
offering, based upon an assumed initial public offering price of $
per share, our pro forma net tangible book value as of March 31, 2000 would
have been approximately $           or $           per share of common stock.
This represents an immediate increase in pro forma net tangible book value to
existing shareholders of $           per share and an immediate dilution to new
investors in this offering of $           per share. The following table
illustrates the per share dilution in pro forma net tangible book value to new
investors:
Assumed initial public offering price per share..............         $
     Pro forma net tangible book value per share as of March 31,
      2000......................................................  $
     Increase in pro forma net tangible book value per share
      attributable to new investors.............................
                                                                  ------
   Pro forma net tangible book value per share as of March 31,
    2000 after the offering.....................................
                                                                         ------
   Pro forma net tangible book value dilution per share to new
    investors...................................................         $
                                                                         ======
The following table summarizes, on a pro forma basis, as of March 31, 2000,
the differences between the number of shares of common stock purchased from us,
the aggregate cash consideration paid to us and the average price per share
paid by existing shareholders since our inception and new investors purchasing
shares of common stock in this offering. The calculation below is based on an
offering price of $      per share, before deducting estimated underwriting and
offering expenses payable by us:
Shares           Total
                                    Purchased     Consideration
                                 --------------- ---------------- Average Price
                                 Number  Percent  Amount  Percent   Per Share
                                 ------- ------- -------- ------- -------------
Existing shareholders...........              %  $             %     $
New public investors (1)........
                                 -------   ---   --------   ---
  Total.........................           100%  $          100%
                                 =======   ===   ========   ===
--------
(1)  The above discussion and the table does not include 3,845,232 shares of
     common stock issuable pursuant to the exercise of stock options under our
     stock option plans at a weighted average exercise price of $4.35 per
     share. To the extent that outstanding options are exercised in the future,
     there will be further dilution to investors. See "Capitalization" and
     "Management--Stock Option Plans."

                                       16
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

   The unaudited pro forma consolidated statement of operations for the fiscal
year ended March 31, 2000 gives effect to the acquisition of Quadrus
Manufacturing, the consummation of this offering and the application of the net
proceeds therefrom as described under "Use of Proceeds," as if each had
occurred on April 1, 1999.

   The unaudited pro forma consolidated balance sheet gives pro forma effect to
the conversion of all of our outstanding preferred stock into common stock, the
consummation of this offering and the application of the net proceeds therefrom
as described under "Use of Proceeds," as if each had occurred on March 31,
2000.

   Our unaudited pro forma consolidated financial data should be read in
conjunction with our audited consolidated financial statements for the fiscal
year ended March 31, 2000, and the related notes thereto, which statements have
been audited by Ernst & Young LLP, independent auditors, whose report is
included elsewhere herein and the audited financial statements of Quadrus
Manufacturing and the related notes thereto, which statements have been audited
by McGladrey & Pullen, LLP, independent auditors, whose report is included
elsewhere herein.

   Our unaudited pro forma consolidated financial data has been prepared to
illustrate the effects of the Quadrus Manufacturing acquisition and the receipt
and application of the net proceeds from this offering. Our unaudited pro forma
consolidated financial data does not necessarily present our financial position
or results of operations as they would have been if the companies involved had
constituted one entity for the period presented and is not necessarily
indicative of our future results of operations or the results that might have
occurred if the forgoing transactions had been consummated on the indicated
dates.

                                       17
Pemstar Inc.

            Unaudited Pro Forma Consolidated Statement of Operations
                        Fiscal Year Ended March 31, 2000
                     (in thousands, except per share data)
Quadrus                                            Pro Forma
                          Pemstar Inc. Manufacturing                                        As Adjusted
                           Year Ended  From April 1,                                        Year Ended
                           March 31,     1999, to    Acquisition   Pro Forma   Offering      March 31,
                              2000     June 7, 1999  Adjustments   Combined   Adjustments      2000
                          ------------ ------------- -----------  ----------- -----------   -----------
                           (audited)    (unaudited)               (unaudited)               (unaudited)
Net sales...............    $393,842      $14,130       $  --      $407,972     $   --       $407,972
Costs of goods sold.....     363,974       16,810          --       380,784         --        380,784
                            --------      -------       -----      --------     ------       --------
Gross profit............      29,868       (2,680)         --        27,188         --         27,188
Selling, general and
 administrative
 expenses...............      21,576          627                    22,203         --         22,203
Amortization............       1,281           --         102 (a)     1,383         --          1,383
                            --------      -------       -----      --------     ------       --------
Operating income
 (loss).................       7,011       (3,307)       (102)        3,602         --          3,602
Other income (expense) -
 net....................         (74)          (7)                      (81)                      (81)
Interest expense........      (3,588)         (81)       (248)(b)    (3,917)     2,738 (c)     (1,179)
                            --------      -------       -----      --------     ------       --------
Income (loss) before
 income taxes...........       3,349       (3,395)       (350)         (396)     2,738          2,342
Income tax expense
 (benefit)..............         698       (1,307)       (135)         (744)     1,054 (d)        310
                            --------      -------       -----      --------     ------       --------
Net income (loss).......    $  2,651      $(2,088)      $(215)     $    348     $1,684       $  2,032
                            ========      =======       =====      ========     ======       ========
Net income (loss) per
 share:
  Basic.................    $   0.23                                                         $
  Diluted...............        0.15
Weighted average number
 of common shares
 outstanding:
  Basic.................      11,503
  Diluted...............      17,167
--------
(a)  Reflects the additional amortization expense related to the allocation of
     the purchase price to goodwill for the acquisition. The amortization is
     based on the estimated useful life of twenty years for the goodwill.

(b)  Reflects the additional interest expense related to the borrowings
     required by us to complete the acquisition using borrowing capacity
     available under our credit facility with US Bank.

(c)  Reflects the decrease in interest expense in connection with the use of
     net proceeds from the offering to repay outstanding debt.

(d)  Reflects the income tax effect of adjustments (b) and (c) at a 38.5%
     effective tax rate.

                                       18
Pemstar Inc.

           Unaudited Pro Forma As Adjusted Consolidated Balance Sheet
                                 March 31, 2000
                    (in thousands, except per share amounts)
Offering       Pro Forma
                                         Pemstar Inc. Adjustments    As Adjusted
                                         ------------ -----------    -----------
Assets
Current assets:
 Cash and cash equivalents..............   $  2,727    $100,000 (a)   $ 41,427
                                                         (7,750)(a)
                                                        (53,550)(a)
 Restricted cash........................        528                        528
 Accounts receivable, net...............     60,061                     60,061
 Inventories, net.......................     64,437                     64,437
 Deferred income taxes..................      2,232                      2,232
 Prepaid expenses and other.............      3,458                      3,458
                                           --------    --------       --------
   Total current assets.................    133,443      38,700        172,143
Property, plant, and equipment, net.....     34,933                     34,933
Goodwill, net...........................     20,691                     20,691
Other assets, net.......................      1,384                      1,384
                                           --------    --------       --------
   Total assets.........................   $190,451    $ 38,700       $229,151
                                           ========    ========       ========
Liabilities and Shareholders' Equity
Current liabilities:
 Bank overdrafts........................   $ 10,213    $              $ 10,213
 Accounts payable.......................     47,138                     47,138
 Accrued expenses and other.............      9,740                      9,740
 Income taxes payable...................      1,474                      1,474
 Current maturities of long-term debt...     12,930      (8,400)(a)      4,530
 Current maturities of capital lease
  obligations...........................      2,299                      2,299
                                           --------    --------       --------
   Total current liabilities............     83,794      (8,400)        75,394
Long-term debt, less current
 maturities.............................     51,114     (45,150)(a)      5,964
Capital lease obligations, less current
 maturities.............................      4,067                      4,067
Deferred grant income...................      1,713                      1,713
Deferred revenue........................        350                        350
Deferred income taxes...................         17                         17
Minority interest in consolidated
 subsidiaries...........................        174                        174
Redeemable stock:
 Series A preferred stock, $0.01 par
  value; 570 shares issued and
  outstanding...........................      8,549      (8,549)(b)         --
 Series B preferred stock, $0.01 per
  share; 1,000 shares issued and
  outstanding...........................     18,000     (18,000)(b)         --
Shareholders' Equity:
 Common stock, $0.01 par value; shares
  issued and outstanding--     ; 2000--
  13,819 shares; pro forma issued and
  outstanding--    shares...............        138          47 (b)        185
 Additional paid-in capital.............     15,395      26,502 (b)    134,147
                                                         92,250 (a)
 Accumulated other comprehensive loss...       (772)                      (772)
 Retained earnings......................     11,170                     11,170
 Loans to shareholders..................     (3,258)                    (3,258)
                                           --------    --------       --------
   Total shareholders' equity...........     22,673     118,799        141,472
                                           --------    --------       --------
   Total liabilities and shareholders'
    equity..............................   $190,451    $ 38,700       $229,151
                                           ========    ========       ========
--------
(a)  Reflects our sale of            shares of common stock generating net
     proceeds of $92,250, after deducting our estimated underwriting and
     offering expenses totaling approximately $7,750, and the use of $53,550 of
     the estimated net proceeds to repay borrowings outstanding as of March 31,
     2000. Subsequent to March 31, 2000, we incurred additional net
     indebtedness of $10,300. We intend to repay total indebtedness of $63,900
     from the proceeds from this offering as detailed in "Use of Proceeds."
(b)  Reflects the conversion of our outstanding preferred stock into common
     stock upon closing of this offering.

                                       19
SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial data as of and for the dates
and periods indicated have been derived from our audited consolidated financial
statements. The selected consolidated statements of income data for the fiscal
year ended March 31, 2000, and the historical consolidated balance sheet data
as of March 31, 2000, were derived from consolidated financial statements
audited by Ernst & Young LLP, whose report appears elsewhere in this
prospectus. The selected historical consolidated statements of income data for
the fiscal years ended March 31, 1998 and 1999, and the historical balance
sheet data as of March 31, 1999, were derived from consolidated financial
statements audited by McGladrey & Pullen, LLP, whose report appears elsewhere
in this prospectus. You should read the data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and the related notes
thereto appearing elsewhere in this prospectus.
Year Ended March 31,
                                 ----------------------------------------------
                                  1996     1997      1998      1999      2000
                                 -------  -------  --------  --------  --------
                                 (in thousands, except for per share data)
Consolidated Statements of
 Income Data:
Net sales......................  $22,021  $31,895  $165,049  $187,381  $393,842
Costs of goods sold............   18,724   27,347   147,962   172,219   363,974
                                 -------  -------  --------  --------  --------
Gross profit...................    3,297    4,548    17,087    15,162    29,868
Selling, general and
 administrative expenses.......    2,309    2,976     8,328    10,955    21,576
Amortization...................       --       --        54       190     1,281
                                 -------  -------  --------  --------  --------
Operating income...............      988    1,572     8,705     4,017     7,011
Other income (expense) - net...      187      247       455      (438)      (74)
Interest expense...............     (255)    (315)     (746)     (640)   (3,588)
                                 -------  -------  --------  --------  --------
Income before income taxes.....      920    1,504     8,414     2,939     3,349
Income tax expense.............      289      554     3,097     1,273       698
                                 -------  -------  --------  --------  --------
Net income.....................  $   631  $   950  $  5,317  $  1,666  $  2,651
                                 =======  =======  ========  ========  ========
Net income per share:
 Basic.........................  $  0.08  $  0.12  $   0.55  $   0.15  $   0.23
 Diluted.......................     0.08     0.12      0.49      0.12      0.15
Weighted average number of
 common shares outstanding (1):
 Basic.........................    7,645    8,009     9,653    10,897    11,503
 Diluted.......................    7,758    8,039    10,874    14,143    17,167
Other Financial Data:
Depreciation...................  $   600  $   911  $  1,929  $  3,331  $  7,455
Capital expenditures...........    1,587    2,887     8,393     8,657    13,415
Supplemental Data:
EBITDA (2).....................  $ 1,775  $ 2,730  $ 11,143  $  7,100  $ 15,673
Net cash provided by (used in)
 operating activities..........      150      776    (1,374)       65   (20,225)
Net cash provided by (used in)
 investing activities..........   (1,576)  (2,938)  (10,126)   (5,545)  (53,489)
Net cash provided by (used in)
 financing activities..........    1,343    2,133    14,661     3,112    75,612
March 31,
                                 ----------------------------------------------
                                  1996     1997      1998      1999      2000
                                 -------  -------  --------  --------  --------
                                               (in thousands)
Consolidated Balance Sheet
 Data:
Unrestricted cash and cash
 equivalents...................  $    64  $    34  $  3,195  $    827  $  2,727
Working capital................      719      525    12,873    12,783    49,649
Total assets...................    9,398   16,334    61,121    64,983   190,451
Long-term debt and capital
 lease obligations less current
 maturities....................    1,713    2,251     6,340     7,090    55,181
Total shareholders' equity.....    1,901    3,009    19,544    16,555    22,673
--------
(1)  For an explanation of the determination of the weighted average number of
     common shares outstanding used in computing net income per share see Note
     1 of notes to consolidated financial statements.
(2)  EBITDA means earnings before net interest expense, income taxes,
     depreciation and amortization. EBITDA is presented because we believe it
     is an indicator of our ability to incur and service debt and a similar
     formula is used by our lenders in determining compliance with financial
     covenants. However, EBITDA should not be considered as an alternative to
     cash flow from operating activities, as a measure of liquidity or as an
     alternative to net income as a measure of operating results in accordance
     with generally accepted accounting principles.

                                       20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   You should read the following discussion in conjunction with the "Selected
Consolidated Financial Data" section of this prospectus and our consolidated
financial statements and notes to those statements included elsewhere in this
prospectus. 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,
including the factors as described in the "Risk Factors" section of this
prospectus. Our actual results may differ materially from those contained in
any forward-looking statements.

Overview

   We are a leading provider of electronics manufacturing services to OEMs in
the communications, computing, data storage, industrial and medical equipment
markets. We provide OEMs with a comprehensive range of engineering,
manufacturing and fulfillment services on a global basis through nine
facilities strategically located in the United States, Mexico, Asia and Europe.
Our comprehensive service offerings support our customers' products from
initial development and design through manufacturing to worldwide distribution
and aftermarket support.

   We were 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 communications and computing OEMs. 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:

  .  In June 1997, we established a manufacturing facility to produce storage
     product components and assemblies in Bangkok, Thailand. This facility
     provides us with cost-effective manufacturing capabilities and a
     facility strategically located in Asia's growing communications and
     computing markets.
  .  In September 1997, we established a greenfield operation in Guadalajara,
     Mexico, which enhanced our cost-effective manufacturing capabilities in
     close proximity to Mexico's emerging communications and computing
     markets.
  .  In June 1998, we established a greenfield operation in Tianjin, China,
     which we believe made us one of the first independent EMS companies in
     northern China. Our facility in China has further enhanced our cost-
     effective manufacturing capabilities while giving us access to new
     customers in the communications, computing and data storage industries.
  .  In October 1998, we entered into a joint venture with Honguan
     Technologies, a mechanical fabrication company in Singapore. We own a
     51% controlling interest in this joint venture, Pemstar-Honguan Pte.
     This joint venture enables us to target data storage industry OEMs by
     adding specialized test and process equipment design, manufacturing and
     service capabilities and has further strengthened our presence in
     southeast Asia.
  .  In May 1999, we acquired a facility located in Almelo, the Netherlands,
     from Fluke Corporation, a manufacturer of precision test equipment,
     scopes and meters. In connection with this acquisition, we entered into
     a long-term supply agreement to provide manufacturing and design
     services to Fluke. In addition to adding Fluke as a key customer, the
     acquisition increased our engineering and design capabilities,
     particularly in the areas of electrical and industrial design and
     enabled us to expand into Europe.
  .  In June 1999, we acquired Quadrus Manufacturing, located in San Jose,
     California. Quadrus Manufacturing was a division of Bell Microproducts,
     a distributor of storage and semiconductor

                                       21
products. This acquisition further strengthened our relationships with
     OEMs in the communications market, including such industry leaders as
     Efficient Networks and Electronics For Imaging.

See Note 2 to our consolidated financial statements for further information
regarding our acquisitions.

   We derive most of our net sales from customer purchase orders. We recognize
sales, net of product returns and warranty costs, typically at the time of
product shipment or as services are rendered. Our net sales and margins from
period to period are affected by the volume of turnkey manufacturing
transactions as compared to consignment transactions. In turnkey
manufacturing, we purchase the materials and components necessary to produce
the products we are manufacturing, resulting in generally higher net sales and
cost of goods sold and generally lower margins. In consignment sales, the
customer purchases all or a portion of the materials and components necessary
for production, resulting in generally lower net sales and generally higher
margins, since we record only the value-added portion as revenue. Currently,
substantially all of our revenue is generated from turnkey transactions. In
addition, our net sales and margins are affected by the mix of projects
between engineering and manufacturing and the complexity of those projects.
For example, manufacturing projects typically generate lower margins than
engineering projects because of the high material content of a manufacturing
project as a percentage of revenue and the lower value-added content. 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 operating results are also impacted by the level of capacity
utilization of our manufacturing facilities, indirect labor, and selling,
general and administrative expense. 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. As our capacity has grown in recent years both
through greenfield operations and acquisitions, our selling, general and
administrative expenses have increased to support this growth.

   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 thirty to ninety days in advance. We work to minimize the risk
relative to our inventory by ordering materials and components only to the
extent necessary to satisfy existing customer orders. We believe we are
largely protected from the risk of inventory cost fluctuations because we
generally pass these costs through to our customers.

                                      22
Results of Operations

   The table below sets forth certain operating data expressed as a percentage
of our net sales for the years indicated:
Fiscal Year Ended
                                                                March 31,
                                                            -------------------
                                                            1998   1999   2000
                                                            -----  -----  -----
Net sales.................................................. 100.0% 100.0% 100.0%
Cost of goods sold.........................................  89.7   91.9   92.4
                                                            -----  -----  -----
Gross profit...............................................  10.3    8.1    7.6
Selling, general and administrative expenses...............   5.0    5.9    5.5
Amortization...............................................   0.0    0.1    0.3
                                                            -----  -----  -----
Operating income...........................................   5.3    2.1    1.8
Other income (expense)-net.................................   0.3   (0.2)  (0.0)
Interest expense...........................................  (0.5)  (0.3)  (0.9)
                                                            -----  -----  -----
Income before income taxes.................................   5.1    1.6    0.9
Income tax expense.........................................   1.9    0.7    0.2
                                                            -----  -----  -----
Net income.................................................   3.2%   0.9%   0.7%
                                                            =====  =====  =====
Fiscal Year Ended March 31, 2000 Compared to Fiscal Year Ended March 31, 1999

   Net Sales. Our net sales increased $206.4 million, or 110.1%, to $393.8
million in fiscal 2000 from $187.4 million in fiscal 1999. This increase
resulted from both organic growth and strategic acquisitions. In fiscal 2000,
our organic growth, which excludes net sales increases from operations acquired
in the preceding twelve months, accounted for $61.9 million, or 30.0%, of total
year-to-year growth and was driven by new projects with existing and new
customers in North America and Asia. Our acquisitions of Quadrus Manufacturing
and a European division of Fluke Corporation accounted for $144.5 million, or
70.0% of total year-to-year growth.

   Gross Profit. Our gross profit increased $14.7 million to $29.9 million in
fiscal 2000 from $15.2 million in fiscal 1999. This increase in gross profit
reflects the year-to-year growth in net sales. Gross margins decreased to 7.6%
of net sales in fiscal 2000 from 8.1% in fiscal 1999, primarily due to
initially lower gross margins of businesses acquired in fiscal 2000,
underutilization of assets in certain locations and set-up costs related to new
product introductions.

   Selling, General and Administrative Expenses. Our selling, general and
administrative expenses increased $10.6 million to $21.6 million in fiscal 2000
from $11.0 million in fiscal 1999. This increase was a result of increased
staffing levels and higher selling and administrative costs to support our
growth. As a percentage of net sales, our selling, general and administrative
expenses decreased to 5.5% in fiscal 2000 from 5.9% in fiscal 1999, due to our
leveraging these expenses over an increased revenue base.

   Amortization. Amortization increased $1.1 million to $1.3 million in fiscal
2000 from $0.2 million in fiscal 1999, primarily as a result of amortization of
goodwill arising out of our fiscal 2000 acquisitions.

   Other Income (Expense)--Net. Our other expense decreased $0.3 million to
$0.1 million in fiscal 2000 from $0.4 million in fiscal 1999. Fiscal 1999
includes a $0.4 million loss on the sale of property and equipment.

   Interest Expense. Our interest expense increased $3.0 million to $3.6
million in fiscal 2000 from $0.6 million in fiscal 1999. This increase reflects
increased borrowings required to fund acquisitions and

                                       23
greenfield expansions as well as increased working capital requirements driven
by growth in business with new and existing customers.

   Income Tax Expense. In fiscal 2000, our effective tax rate decreased to
20.8% from 43.3% in fiscal 1999. This decrease resulted from the mix of
domestic versus international income from operations and the benefit of state
tax credits generated by the Quadrus acquisition. In general, our international
operations are being taxed at a lower rate than our domestic operations due to
tax holidays and incentives.

 Fiscal Year Ended March 31, 1999 Compared to Fiscal Year Ended March 31, 1998

   Net Sales. Our net sales increased $22.3 million, or 13.5%, to $187.4
million in fiscal 1999 from $165.0 million in fiscal 1998 due entirely to
organic growth. This growth was offset in part by a $41.6 million decline in
net sales to a customer that discontinued manufacturing a product that had
accounted for $43.7 million of our net sales in fiscal 1998. The organic growth
was the result of new programs with both new and existing customers as well as
the transition of a major project from a consignment to a turnkey basis.

   Gross Profit. Our gross profit decreased $1.9 million to $15.2 million in
fiscal 1999 from $17.1 in fiscal 1998. Gross margins decreased to 8.1% of net
sales in fiscal 1999 from 10.3% in fiscal 1998. These decreases resulted from
start-up expenses associated with our greenfield expansions in Mexico and China
and the transition of a major project from a consignment to a turnkey basis.

   Selling, General and Administrative Expenses. Our selling, general and
administrative expenses increased $2.6 million to $11.0 million in fiscal 1999
from $8.3 million in fiscal 1998. Selling, general and administrative expenses
increased to 5.9% of net sales in fiscal 1999 from 5.0% in fiscal 1998. These
increases reflect increased staffing and expenses added to support anticipated
growth.

   Amortization. Amortization increased $0.1 million to $0.2 million in fiscal
1999 from $0.1 million in fiscal 1998.

   Other Income (Expense)-Net. Our other income and expense was $0.4 million of
expense in fiscal 1999 compared to $0.5 million of income in fiscal 1998. This
decrease principally reflects recognition of minority interest in our net
income of consolidated subsidiaries and a loss on sales of property and
equipment in fiscal 1999.

   Interest Expense. Our interest expense decreased $0.1 million to $0.6
million in fiscal 1999 from $0.7 million in fiscal 1998. This decrease reflects
reduced borrowings under our bank agreement as a result of using the proceeds
from the sale of approximately $9.9 million of equity in fiscal 1998 to repay
indebtedness.

   Income Tax Expense. In fiscal 1999, our effective tax rate increased to
43.3% from 36.8% in fiscal 1998. This increase resulted from an increased
percentage of revenue derived from higher tax jurisdictions in fiscal 1999
versus fiscal 1998.

Quarterly Results of Operations

   The following table sets forth unaudited quarterly financial information of
Pemstar for the eight quarters ended fiscal 1999 and 2000. 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 variation may be offset in part by organic 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 prospectus. The operating results for any previous
quarter are not necessarily indicative of results for any future period.

                                       24
Quarter Ended
                         ----------------------------------------------------------------------------
                         June 30,  Sept. 30, Dec. 31,  Mar. 31, June 30, Sept. 30, Dec. 31,  Mar. 31,
                           1998      1998      1998      1999     1999     1999      1999      2000
                         --------  --------- --------  -------- -------- --------- --------  --------
                                                      (in thousands)
Net sales............... $42,551    $44,641  $50,677   $49,512  $68,566   $97,550  $111,787  $115,939
Cost of goods sold......  38,507     41,250   46,439    46,023   62,275    89,817   103,845   108,037
                         -------    -------  -------   -------  -------   -------  --------  --------
Gross profit............   4,044      3,391    4,238     3,489    6,291     7,733     7,942     7,902
Selling, general and
 administrative
 expenses...............   2,238      2,368    3,015     3,334    3,895     5,003     5,862     6,816
Amortization............      16         16       75        83      205       271       277       528
                         -------    -------  -------   -------  -------   -------  --------  --------
Operating income........   1,790      1,007    1,148        72    2,191     2,459     1,803       558
Other income (expense)-
  net...................    (315)      (282)    (172)      331       --      (518)     (387)      831
Interest expense........     125        135      152       228      341       776       986     1,485
                         -------    -------  -------   -------  -------   -------  --------  --------
Income (loss) before
 income taxes...........   1,350        590      824       175    1,850     1,165       430       (96)
Income tax expense
 (benefit)..............     556        277      379        61      738       351        62      (453)
                         -------    -------  -------   -------  -------   -------  --------  --------
Net income.............. $   794    $   313  $   445   $   114  $ 1,112   $   814  $    368  $    357
                         =======    =======  =======   =======  =======   =======  ========  ========
Liquidity and Capital Resources

   Our principle sources of liquidity are cash provided by operations,
borrowings under our various credit facilities and debt instruments and private
sales of equity. Our principal uses of cash have been to finance working
capital, acquisitions, greenfield expansions, 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 year 2000,
1999 and 1998 was ($20.2 million), $0.1 million and ($1.4 million),
respectively. Fluctuations in net cash provided by (used in) operating
activities are attributable to increases and decreases in our net income,
normal fluctuations in working capital and longer collection periods and lower
inventory turns at properties acquired in fiscal 2000.

   Net cash used in investing activities for fiscal 2000, 1999 and 1998 was
$53.5 million, $5.5 million and $10.1 million, respectively. In fiscal 2000,
our cash used in investing activities consisted primarily of $35.0 million used
in the acquisition of Quadrus Manufacturing, $13.4 million used for capital
expenditures and $4.5 million used in the acquisition of a European division of
Fluke Corporation.

   Net cash provided by financing activities for fiscal 2000, 1999 and 1998 was
$75.6 million, $3.1 million and $14.7 million, respectively. Our principal
sources of cash from financing activities in fiscal 2000 included proceeds of
approximately $18.0 million from the sale of private equity and proceeds from
long-term debt. Net cash provided by financing activities for fiscal 1999
consisted primarily of proceeds from long-term debt, offset in part by payments
of long-term debt, and net cash provided by financing activities for fiscal
1998 included proceeds of approximately $9.9 million from the sale of private
equity and proceeds from long-term debt offset in part by payments of short-
term and long-term debt.

   Our capital expenditures in fiscal 2000 consisted of $5.4 million of printed
circuit board assembly equipment purchased for our Tianjin, China facility and
an investment of $8.0 million in general equipment and information technology
upgrades across all of our facilities. We estimate our capital expenditures for
fiscal 2001 will increase over fiscal 2000 and will be used primarily for
equipment upgrades, optical technology equipment, information technology
systems and expansion of our facilities.

                                       25
As of March 31, 2000, we had unrestricted cash and cash equivalents of $2.7
million and total borrowings of approximately $70.4 million. Of these total
borrowings, we had approximately $53.4 million outstanding under our US Bank
revolving credit facility at an effective interest rate of 10.3%. On May 5,
2000, we entered into a new credit facility with IBM Credit Corporation, which
provides for borrowings up to $40.0 million, and amended our US Bank credit
facility to reduce our available borrowings from $65.0 million to $55.0
million. As of May 15, 2000, we had $48.7 million outstanding under the US Bank
credit facility and $15.0 million outstanding under our IBM facility. We also
have a $3.2 million credit facility serving our Netherlands operations. As of
March 31, 2000, we had $3.1 million outstanding under our Netherlands credit
facility. Each credit facility bears interest on outstanding borrowings at
variable interest rates, which as of May 15, 2000, were 11.0% for the US Bank
facility, 10.0% for the IBM facility and 5.75% for the Netherlands facility.
All of these credit facilities are secured by substantially all of our domestic
non real-estate assets. We also have certain financial covenants under these
facilities, which we are required to meet. We had other debt obligations
totaling $17.0 million as of March 31, 2000. See Notes 8 and 11 to our
consolidated financial statements. We intend to use a portion of the net
proceeds from this offering to repay indebtedness under our credit facilities.
Subsequent to this offering, we intend to revise our existing credit facilities
to increase our borrowing capacity.

   We believe that cash flows from operating activities, borrowings available
in our current financing agreements and the proceeds from this offering will be
sufficient to fund our currently anticipated working capital, planned capital
expenditures and debt service requirements for the next twelve months. However,
we regularly review acquisition and additional greenfield expansion
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. The sale of additional equity could result in additional
dilution to our shareholders. We cannot assure you that any financing
arrangements will be available in amounts or on terms acceptable to us.

Quantitative and Qualitative Disclosures About Market Risks

 Interest Rate Risk

   Our exposure to interest rate risk arises principally from the variable
rates associated with our primary revolving line of credit. On March 31, 2000,
we had total borrowings of $53.4 million under this line of credit, which
accrued interest at an effective rate of 10.3%. 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
$605,000 on an annual basis. As of March 31, 1999 an adverse change of one
percent in the interest rate would cause us to incur a change in interest
expense of approximately $103,000 on an annual basis for all borrowings
outstanding bearing interest at variable rates at March 31, 1999.

 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. For example, if there is an increase in
the rate at which a foreign currency is exchanged for U.S. dollars, it will
require more of the foreign currency to equal a specified amount of U.S.
dollars than before the rate increase. In such cases, and if we price our
products and services in the foreign currency, we will receive less in U.S.
dollars than we did before the rate increase went into effect. If we price our
products and services in U.S. dollars and competitors price their products in
local currency, an increase in the relative strength of the U.S. dollar could
result in our prices being uncompetitive in a market where business is
transacted in the local currency.

   The result of a uniform 10% strengthening in the value of the U.S. dollar
from March 31, 2000 and 1999 levels relative to each of the currencies in which
our revenues and expenses are denominated would result in a decrease in
operating income of approximately $148,000 and $110,000, respectively, for the
fiscal years ended March 31, 2000 and 1999.

                                       26
For the fiscal year ended March 31, 2000, the amount we consider
permanently invested in foreign subsidiaries and translated into dollars using
the year end exchange rate is $8,343,000 and the potential loss in fair value
resulting from a hypothetical 10% adverse change in foreign currency exchange
rate amounts to $758,000. For the fiscal year ended March 31, 1999, we did not
have any amounts permanently in foreign subsidiaries. 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.

Recently Issued Accounting Pronouncements

   In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or instruments at fair value. This
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000 and is therefore applicable to us beginning with our fiscal
quarter ending June 30, 2001. Based upon the nature of our financial
instruments and hedging activities in effect as of the date of this filing,
this pronouncement would not have a material impact on our financial position
or results of operations. We will adopt SFAS No. 133 effective April 1, 2001.

   In fiscal 2000, we adopted the American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
provides guidance on accounting for the costs of computer software developed
or obtained for internal use and for determining when specific costs should be
capitalized and when they should be expensed. The impact of adopting SOP 98-1
did not have a material impact on our financial position, results of
operations or cash flows.

   In fiscal 2000, we adopted AICPA SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires that all start-up costs related to new
operations be expensed as incurred. The impact of adopting SOP 98-5 did not
have a material impact on our financial position, results of operations or
cash flows.

                                      27
BUSINESS

Overview

   We are a leading EMS provider to OEMs in the communications, computing, data
storage, industrial and medical equipment markets. We offer our communications
industry customers substantial expertise and experience in wireless and optical
systems markets that are experiencing rapidly growing demand for specialized
engineering and manufacturing services. We provide a comprehensive range of
engineering, manufacturing and fulfillment services to our customers on a
global basis through nine facilities strategically located in the United
States, Mexico, Asia and Europe. Our comprehensive service offerings support
our customers' needs from product development and design through manufacturing
to worldwide distribution and aftermarket support. Since our founding in 1994,
we have experienced strong financial growth and consistent profitability, with
Manufacturing Market Insider ranking our revenue growth rate of 110% in fiscal
2000 the highest among the top twenty domestic EMS companies for their most
recent fiscal year.

   Our customers include industry leading OEMs such as 3M, Efficient Networks,
Electronics For Imaging, Fluke Corporation, Fujitsu, Hewlett Packard,
Honeywell, IBM, Motorola, Pinnacle, RSA, Seagate and Sony. We also have
leveraged our expertise in the wireless and optical systems markets to develop
strong relationships with a number of emerging wireless and optical systems
OEMs, including Ancor Communications, Interwave, Optical Networks, Optical
Solutions, Repeater Technologies and Western Multiplex.

   Over the past several years, we have completed a number of acquisitions and
established new operations in order to expand our geographic presence, enhance
our product and service offerings, diversify our customer base and increase our
production capacity. In June 1999, we acquired Quadrus Manufacturing, a
division of Bell Microproducts, located in San Jose, California, which
primarily serves the communication sector in North America. In May 1999, we
also acquired a European division of Fluke Corporation located in Almelo, the
Netherlands, which primarily serves the industrial equipment sector in Europe
and North America. Since 1994, we have established operations in Guadalajara,
Mexico; Tianjin, China; Singapore and Bangkok, Thailand, which have expanded
our manufacturing and distribution capabilities and further broadened our
customer base. We continue to actively pursue potential acquisitions to
complement our organic growth and to expand our business.

Industry Background

   EMS companies provide a broad range of engineering, manufacturing and
fulfillment services to OEMs worldwide. Growth in the EMS industry is primarily
being driven by the overall growth of the electronics industry, the increased
use of outsourcing among OEMs and the frequency of OEM asset divestitures to
EMS businesses. By outsourcing EMS, OEMs are able to focus on their core
competencies, including product development, sales, marketing and customer
service, while leveraging the expertise of EMS providers for design,
procurement, assembly and test operations and supply chain management. OEMs use
EMS providers to enhance their competitive position by:

  .  Accessing leading engineering technologies;
  .  Accessing advanced manufacturing and processing technologies;
  .  Reducing time to market;
  .  Reducing operating costs and invested capital;
  .  Improving supply chain management; and
  .  Improving access to global markets.

   According to TFI, the global EMS industry is expected to grow at an average
annual rate of 20% from $60 billion in revenues in 1998 to $149 billion in
2003. TFI estimates that the percentage of cost of goods sold in the
electronics industry that is outsourced for manufacture by OEMs will increase
from 9.5% in 1998 to

                                       28
17.1% by 2003. We believe that OEMs will continue to increase their use of
outsourcing due to rapidly changing product technologies, shortening product
lifecycles and the increasing capability of EMS companies to manufacture more
complex products. A summary of the historical and projected growth of the EMS
industry is provided below.

                                  [Bar Chart]

                  Historical and Projected EMS Industry Growth

                               (BILLIONS)   % Outsourced
                               ----------   ------------
                         1998       $60           9.5%
                         1999       $73          10.9%
                         2000E      $88          12.4%
                         2001E     $106          14.0%
                         2002E     $126          15.5%
                         2003E     $149          17.1%

   Source: Technology Forecasters, Inc., Contract Manufacturing from a Global
                            Perspective-1999 Update.

   According to TFI, the EMS industry is extremely fragmented, with over 3,000
independent EMS companies in existence today. Additionally, the twenty largest
companies represented approximately 56% of the worldwide EMS market in 1998,
with the largest company in the industry representing 11.3% of total industry
revenues. The industry has experienced and is anticipated to continue to
experience significant consolidation.

   TFI indicates that OEMs of all sizes are embracing the outsourcing model,
with smaller OEMs, those with less than $1.0 billion of revenue in 1998, just
as likely to outsource as manufacture products in-house. This is due in part to
the advent of the "virtual corporation," in which companies evolve without
performing any manufacturing in-house, relying instead on long term
relationships with EMS companies. In addition, according to TFI, medium size
companies, those with $1.0 billion to $9.9 billion of revenue in 1998, are
expected to increase their use of outsourcing from approximately 10% of their
total cost of goods sold in 1998 to approximately 45% by 2003. As a result,
small and medium size OEMs have represented and will continue to represent a
large market opportunity for the EMS industry going forward.

   The EMS industry is highly diverse with companies serving OEMs in a broad
array of industry segments. Communications and computing are currently the
largest EMS markets based on 1998 total revenues having accounted for 34% and
39% of total EMS revenues in 1998, respectively. TFI also forecasts that the
communications market will be the fastest growing end market for EMS over the
next several years, with total EMS revenue from OEMs in the communications
sector expected to grow from $19.2 billion of revenues in 1998 to $55.5 billion
in 2003. We also believe that certain segments of the communications sector
offer particularly strong growth opportunities, including the wireless and
optical systems markets.

   As this outsourcing trend continues, many OEMs are increasingly evaluating
whether to outsource additional aspects of their business functions, including
design, logistics, procurement and test. For example, in a 1999 TFI survey,
OEMs indicated an increased willingness to outsource a broad spectrum of design
services, including product definition, product design, design for
manufacturability and design for test services. As a result, we believe EMS
companies that have core competencies in providing advanced engineering
services and in serving the communications markets are well positioned to
benefit from OEMs' accelerating demand for EMS.

                                       29
Our Competitive Strengths

   We have established strong, long-term relationships with numerous OEMs, many
of which are leaders in their respective markets. Our business is built on
several specific strengths, including the following:

   World-Class Engineering Capabilities. Utilizing over 400 engineering
professionals worldwide, we differentiate ourselves in the EMS marketplace by
providing our customers with world-class engineering and product management
services. Our engineering capabilities enable us to conceptualize, create
specifications, design, prototype, validate and ramp our customers' products to
volume production. We offer our customers expertise in a variety of design
applications, including mechanical and electromechanical engineering, software,
firmware, application specific integrated circuit design, printed circuit board
design, industrial design and systems engineering and integration. In addition,
we offer extensive custom test and automation equipment design and build
services. These product design, custom test equipment and automation
capabilities enhance the design and manufacturability of our customers'
products, reduce time to market and allow us to provide customers with a
seamless transition to commercial volume production.

   Communications Focus with Specific Wireless and Optical Systems
Expertise. We focus substantial resources on the rapidly expanding
communications industry and have developed specific expertise in the high
growth wireless and optical market segments. Our wireless and optical service
offerings include adhesives, advanced printed circuit board assembly
technologies, such as chip on board, chip on flex and flip chip technologies,
lead-free soldering, conformal coating, laser welding, hybrid
optical/electrical printed circuit board assembly and test and sub-micron
alignment of optical sub-assemblies. We use these capabilities to build a wide
variety of advanced optical components and optical subsystems for existing and
emerging OEMs. We have been able to leverage our focus and expertise to
establish strong relationships with wireless and optical systems OEMs,
including Ancor Communications, Interwave, Optical Networks, Optical Solutions,
Repeater Technologies and Western Multiplex. We believe that this expertise and
our early entry into the wireless and optical systems markets will enable us to
continue to attract new customers and increase our sales to existing customers
in the communications marketplace.

   Comprehensive Manufacturing and Fulfillment Services.  We complement our
engineering capabilities with a comprehensive range of manufacturing and
fulfillment services that support our customers' products from initial design
and development through prototyping, assembly, test equipment build and
automation, final system build, supply chain management, packaging, worldwide
distribution, and aftermarket support. These capabilities enable us to provide
OEMs with a complete solution for all of their EMS needs.

   Global Scale and Infrastructure. We operate engineering and manufacturing
facilities in the United States, China, Mexico, the Netherlands, Singapore and
Thailand, all of which are in close proximity to the world's major electronics
markets. Our global presence allows us to shift manufacturing efforts to the
areas where our customers and their end markets are located, reduce the time
and cost required to bring our customers' products to market and simultaneously
introduce our customers' products in major global markets.

Strategy

   Our objective is to enhance our position as a leading EMS provider to OEMs
worldwide. We intend to achieve this objective by continuing to employ the
following strategies:

   Leverage Our World-Class Engineering Services. We are committed to providing
world-class engineering services to meet OEMs' increasing requirements to
outsource front-end product design, prototyping and test services. We intend to
leverage our engineering services to establish relationships with OEMs early in
the new product design and development process to give us an opportunity to
also provide integrated engineering, manufacturing and fulfillment services for
these new products. In addition, we provide engineering expertise in the design
and build of custom test equipment systems, which OEMs have traditionally been
unable to outsource. Our custom equipment design and build services provide us
with another opportunity to attract new customers and to introduce other
components of our comprehensive EMS solution to existing customers. We intend
to continue developing new advanced engineering, custom test equipment and
process automation services to meet the changing needs of our customers in a
cost efficient and timely manner.

                                       30
Provide Comprehensive Engineering, Manufacturing and Fulfillment Service
Offerings. We will continue to expand our service offerings to meet the
evolving needs of our customers who are increasingly requiring a wider range of
advanced services from EMS companies. We have developed the engineering,
manufacturing and fulfillment capabilities to provide comprehensive EMS
solutions that support our customers' products from initial product design and
development through prototyping, testing, manufacture and world-wide
distribution. We intend to use these capabilities to increase our services to
our existing customers and to expand the scope of services we provide to OEMs
launching new product programs.

   Focus on High Growth EMS Market Segments. We focus on establishing
profitable and strategic relationships with industry leaders in high growth
markets such as the wireless and optical segments of the communications
industry. We will continue to leverage our engineering and manufacturing
capabilities to develop relationships with established and emerging OEMs in
high growth markets to increase our customer base and increase our sales to
existing customers as they expand into new markets.

   Expand Our Global Scale and Infrastructure. Over the last several years, we
have expanded from one facility in North America to nine facilities across
North America, Europe and Asia. We intend to continue to expand our presence in
strategic locations to provide our customers with services in close proximity
to their own operations or their end customers. This strategy enhances our
ability to offer our customers timely delivery of products and cost effective
manufacturing solutions worldwide.

   Pursue Selective Acquisitions. We completed two acquisitions in fiscal 2000
and we will continue to pursue strategic acquisitions that enable us to expand
our geographic reach, add manufacturing capacity, secure key new customers,
diversify into complementary product markets and broaden our technological
capabilities and value-added service offerings. As part of our overall
strategy, we intend to capitalize on the growth opportunities presented by
OEMs' divestitures of their own engineering and manufacturing operations as
well as the consolidation of EMS companies, thereby maximizing our ability to
increase our service capabilities in strategic markets and locations.

   Focus on Quality Management. We are committed to excellence in the
engineering and manufacturing of our customers' products and have adopted an
extensive quality management system that focuses on continual process
improvement and achieving high customer satisfaction. Our facilities in
Rochester, Minnesota; San Jose, California; and Almelo, the Netherlands are ISO
9001 certified for quality assurance in design, development, production,
installation and servicing activities. Our facilities in Mexico and Thailand
are ISO 9002 certified for quality assurance in production, installation and
servicing activities. In addition, all of our facilities engaged in medical
product design and manufacture are FDA/QSR compliant, and our Rochester,
Minnesota facilities are QS 9000 certified. We will continue to utilize
advanced statistical engineering and metrics control techniques to achieve our
high quality standards and customer satisfaction objectives.

   Provide Superior Supply Chain Management. We are committed to maintaining a
leadership position in supply chain management to reduce our customers' total
costs and time to market and increase our flexibility to respond to changing
customer requirements. We are currently implementing Web-based supply chain
software products from AGILE Software Corporation and i2 Technologies that will
allow us to communicate with our supply chain partners to provide them real-
time information on specific orders, product demand, inventory and component
lead times. We will continue to utilize and develop advanced electronic data
interchange and Web-based e-business systems to manage all aspects of the
engineering, manufacturing and fulfillment processes and streamline the supply
chain system for our customers.

Services

   We offer a comprehensive range of engineering, manufacturing and fulfillment
services that support our customers' products from initial design through
prototyping, design validation, testing, ramp to volume production, worldwide
distribution and aftermarket support. We support all of our service offerings
with a comprehensive supply chain management system, superior quality
management program and sophisticated

                                       31
information technology systems. Our comprehensive service offerings enable us
to provide a complete and solution for our customers' outsourcing requirements.
The following illustration highlights our comprehensive service offerings and
our value added support services:

[Illustration of customer circled by engineering, fulfillment and manufacturing
services.]

  Our Engineering Services

   New Product Design, Engineering, Prototype & Test. We offer a full spectrum
of new product design, prototype, test and related engineering services that
shorten product development cycles, resulting in faster time to market and
reduced costs for our customers. Our multi-disciplined engineering teams
provide expertise in a number of core competencies critical to serving OEMs in
our target markets, including industrial design, mechanical and electrical
hardware, firmware, software and systems integration and support. We create
specifications, design, prototype, validate and ramp our customers' products
into high volume manufacturing. Our technical expertise includes electronic
circuit design for analog, digital, radio frequency and microwave printed
circuit boards and application specific integrated circuits.

   Custom Test and Automation Equipment Design & Build Services. We provide our
customers with a comprehensive range of custom functional test equipment,
process automation and replication services. We have substantial expertise in
tooling, testers, equipment control, systems planning, automation, floor
control, systems integration, replication and programming. Our custom
functional test equipment, process automation and replication services are
available to OEMs as part of our full service product design and manufacturing
services package or on a stand-alone basis for products designed and
manufactured elsewhere. Our ability to provide these services allows us to
capitalize on OEMs' increasing needs for custom manufacturing solutions and
provide an additional opportunity to introduce customers to our comprehensive
engineering and manufacturing services.

  Our Manufacturing Services

   Printed Circuit Board Assembly & Test. We offer a wide range of printed
circuit board assembly and test services, including printed circuit board
assembly, assembly of subsystems, in-circuit and functional testing of printed
assemblies, board level functional testing, environmental and stress testing
and component reliability testing. Our multi-disciplined engineering
professionals have expertise in a variety of established and emerging
technologies, including surface mount technology, fine pitch, ball grid array,
flip chip, chip on board, micro chip, column ball grid array, direct chip
attach and wire bonding. All of our printed circuit boards are manufactured
using a continuous flow process, which minimizes process times for faster
delivery and reduces the overall costs to our customers.

   Flex Circuit Assembly & Test. We provide OEMs with a wide range of flexible
circuit assembly and test services, including surface mount technology, fine
pitch, ball grid array and flip chip attached to flexible circuits and ceramic
substrates. We utilize specialized tooling strategies and advanced procedures
to minimize circuit

                                       32
handling and ensure that consistent processing parameters are maintained
throughout the assembly process. All of our manufacturing activities are
monitored to comply with strict environmental controls and to maintain our
product quality standards.

   Systems Assembly & Test. We offer a wide range of systems assembly and test
services that enhance product quality and product life cycles. Our
manufacturing capabilities include the design, development and building of test
strategies for specific products which utilize manual, mechanized or fully
automated production lines to improve product quality, reduce costs and improve
delivery time to customers. As OEMs seek to provide greater functionality in
smaller products, they require more sophisticated systems assembly technologies
and processes. Our expertise in advanced precision and electromechanical
technologies and our continued investment in technology enables us to meet our
customers' changing needs and gives our customers access to a wide variety of
advanced manufacturing solutions without having to make substantial capital
investments. In order to meet our customers' demand for systems assembly and
test services, we offer subassembly build, final assembly, functional test,
configuration and software installation and final packaging services.

   Precision Electromechanical Assembly & Test. We offer a full spectrum of
precision electromechanical assembly and test services that can be utilized in
a variety of advanced applications. We design, develop and build product
specific manufacturing processes utilizing manual, mechanized or fully
automated lines to meet our customers' product volume and quality requirements.
We provide OEMs with expertise in several core technologies that can be
utilized in a variety of applications, including optical systems assembly and
test, magnetics assembly and test, overmolding, precision metal joining, in-
process forming, vision-assisted assembly and precision alignment and assembly.
All of our assembly and test processes are developed according to customer
specifications and replicated within our facilities.

   Plastic Injection Molding. We provide our customers with plastic injection
molding services for the communications, computing, data storage and medical
device industries. All of our molding services can be performed with hands-free
robotic systems in a humidity and temperature controlled environment to
maximize product quality.

  Our Fulfillment Services

   Product Configuration and Distribution. We provide our customers with
product configuration and global distribution services that complement our
engineering and manufacturing services and enable our customers to be
responsive to changing market demands and reduce time to market. We utilize
sophisticated build-to-order software to configure our customers' products on a
customized basis. Our global distribution capabilities allow us to distribute
products to customers, distributors and end-users around the world. We provide
vendor-managed inventory programs, including customer-designated hubs where a
customer's inventory can be stored prior to distribution, to streamline the
distribution process and decrease delivery times.

   Aftermarket Services. We provide a range of aftermarket services, including
repair, replacement, refurbishment, remanufacturing, exchange, systems upgrade
and spare part manufacturing. These services are tracked and supported by
specific information technology systems that can be tailored to meet our
customers' individual requirements.

  Our Value-Added Support Systems

   We support our engineering, manufacturing and fulfillment services with an
efficient supply chain management system and a superior quality management
program. All of our value-added support services are implemented and managed
through sophisticated information technology systems, which enable us to
collaborate with our customers throughout all stages of the engineering,
manufacturing and order fulfillment processes.

                                       33
Supply Chain Management

   Our supply chain management system reduces our customers' total costs by
assisting them in the selection of components during the product design stage
to ensure advantageous sourcing and pricing from preferred suppliers and
distributors. We have strong relationships with a broad range of materials and
component suppliers and distributors, and our product design and volume
procurement capabilities enhance our ability to secure supplies of materials
and components at advantageous pricing. We employ a supplier certification
process to ensure that suppliers of key components have predictable and stable
manufacturing processes capable of supplying components that meet or exceed our
quality requirements.

   We utilize a full complement of electronic data interchange transactions, or
EDI, with our suppliers to coordinate forecasts, orders, reschedules, inventory
and component lead times. At our engineering facilities, we also utilize Web-
based products from AGILE Software Corporation to collaborate with our supply
chain partners in real-time on product content and engineering change
management. We are in the process of expanding our Web-based system by
implementing a suite of real-time supply chain management software products
from i2 Technologies across all of our facilities to enhance our ability to
rapidly scale operations to meet customer needs, shift capacity in response to
product demand fluctuations, reduce materials costs and effectively distribute
products to our customers or their end-customers.

 Quality Management

   We believe quality management is paramount to providing quality engineering
and manufacturing services to our customers. We employ several quality
management systems, which ensure the highest quality services and customer
satisfaction. Our facilities in Rochester, Minnesota; San Jose, California; and
Almelo, the Netherlands are ISO 9001 certified for quality assurance in design,
development, production, installation and servicing activities. Our
manufacturing facilities in Mexico and Thailand are ISO 9002 certified for
quality assurance in production, installation and servicing activities. In
addition, all of our facilities engaged in medical product design and
manufacture are FDA/QSR compliant and our Rochester facilities are QS 9000
certified. We are currently pursuing an ISO 14000 environmental certification
for all of our facilities. All of our assembly and test activities are
supported by advanced statistical engineering and metrics control techniques,
including yield management and failure analysis, which improve product and
service quality. Statistical information is regularly reviewed by each
facility's management team to ensure we are achieving our quality goals and
customer satisfaction. Our customers can access our quality data information
through our Web-based program management system and monitor our commitment to
quality assurance.

 Information Systems

   Information systems are a critical element for achieving our business
objectives. We believe that our significant investment in sophisticated
information systems will deliver competitive advantages for our customers by
improving product quality and operational flexibility. Our enterprise resource
planning systems, or ERP systems, provide product and production information to
our supply chain management and engineering change management systems. These
ERP systems also provide us with real-time financial and materials management
data. Our information systems also control serialization and quality data for
all of our facilities around the world utilizing state-of-the-art statistical
process control techniques for continuous process improvements. We will
continue to make significant investments in Web-based collaboration tools that
will leverage the speed and technology of the Internet to facilitate the flow
of information, both within Pemstar and with our customers and suppliers,
resulting in superior quality products, quicker response time for our clients
and reduced time to market.

Customers

   Our customers include established OEMs, including such industry leaders as
3M, Efficient Networks, Electronics For Imaging, Fluke Corporation, Fujitsu,
Hewlett Packard, Honeywell, IBM, Motorola, Pinnacle, RSA, Seagate and Sony. We
also have relationships with a number of emerging wireless and optical systems

                                       34
OEMs, including Ancor Communications, Interwave, Optical Networks, Optical
Solutions, Repeater Technologies and Western Multiplex. Our customers include
established and emerging OEMs in the communications, computing, data storage,
industrial and medical equipment industries. The following table shows the
percentage of our sales in each of the markets we serve for the fiscal years
ended March 31, 1998, 1999 and 2000.
Fiscal Year
                                                                     Ended
                                                                   March 31,
                                                                 ----------------
      Markets                                                    1998  1999  2000
      -------                                                    ----  ----  ----
Communications............................................  15%   16%   34%
      Computing.................................................  41    60    32
      Data Storage..............................................  39    18    20
      Industrial Equipment......................................   2     3    13
      Medical Equipment.........................................   3     3     1
                                                                 ---   ---   ---
        Total................................................... 100%  100%  100%
                                                                 ===   ===   ===
The following table indicates, for fiscal 2000, our ten largest customers in
terms of net sales, in alphabetical order and the primary products for which we
provided our services.
OEM Customers                                   End Products
      -------------                                   ------------
Ancor Communications............. Communications switching equipment
      Efficient Networks............... Broadband access devices
      Electronics For Imaging.......... Networking equipment
      Fluke Corporation................ Industrial instrumentation
      IBM.............................. Computing, network and storage equipment
      Interwave........................ Wireless communications equipment
      Motorola......................... Wireless communications devices
      Pinnacle......................... Computer video equipment
      RSA.............................. Computer security devices
      Sony............................. Industrial equipment
In fiscal 2000, IBM represented approximately 37% of our net sales and
Motorola represented approximately 15% of our net sales.

Sales and Marketing

   We market our engineering, manufacturing and fulfillment services through a
sales force of fifteen full-time senior sales professionals located in North
America, Europe and Asia. Our North American sales force is assisted by six
manufacturers representative organizations. Our direct sales efforts in North
America are organized into four regions, Eastern, Central, Rocky Mountain and
Western. Sales in each region are managed by an experienced director of sales
with the assistance of a director of technical sales who coordinates
engineering sales across all four regions. Our direct sales personnel have
knowledge of local markets, which we believe is critical to identifying new
customers and developing new business opportunities. In excess of 95% of our
net sales in fiscal 2000 were generated through our internal sales force. Our
executive management team is integral to our sales efforts, with each member
being assigned to a North American, European or Asian region in which the
executive interfaces with customers to ensure customer satisfaction and
generate additional business opportunities.

   Our sales and marketing professionals target OEMs that require a
comprehensive outsourcing solution in the communications, computing, data
storage, industrial and medical equipment industries and whose outsourcing
requirements will utilize our global facilities and capabilities. Our marketing
strategy focuses on developing close working relationships with our customers
early in the design phase and throughout the lifecycle of a product. To
facilitate these relationships, a customer support team is assigned to each

                                       35
customer to service all of the customer's needs throughout the outsourcing
process. Each customer support team consists of a dedicated program manager,
project buyer, production control planner, manufacturing engineer and quality
engineer. The program manager serves as the customer's single point of contact
for all of the customer's requirements on a worldwide basis and, with the
support of the team, has responsibility for managing all aspects of the
customer's project.

Intellectual Property

   We have developed proprietary processes and program management methodologies
that enable us to shorten time to market and to deliver superior quality
products in a cost-effective manner. Our intellectual property portfolio of
patents, patent applications, trade secrets and other proprietary information
consists primarily of unique processes that enable us to develop and
manufacture superior custom test equipment solutions for our customers. We
currently have one patent and fourteen patent applications filed for technology
and methodologies relating to process automation, test equipment, product
quality and reliability, manufacturing processes, failure analysis, process
control techniques and test equipment. These proprietary processes are grouped
into building blocks that can be applied in a variety of applications.

   Our multi-disciplined engineering teams continually seek to develop new
testing and manufacturing equipment and processes to meet our customers'
changing needs and provide custom solutions at an affordable cost. Our
engineers often incorporate custom built equipment into our own proprietary
manufacturing systems to maximize the equipment's functionality and optimize
manufacturability. Because these systems are based on our proprietary
technology, they can be quickly replicated in our facilities and provided to
our customers in a cost-efficient manner.

   To protect our proprietary rights, we rely largely upon a combination of
patents, trade secret laws, non-disclosure agreements with our customers and
our internal confidentiality procedures and employee confidentiality
agreements. Although we take steps to protect our proprietary information and
trade secrets, misappropriation may still occur. We believe that our
proprietary design and manufacturing processes do not infringe on the
proprietary rights of others.

   We license some technology from third parties that we use in providing
engineering and manufacturing services to our customers. We believe that these
licenses are generally available on commercial terms from a number of
licensors. Generally, the agreements governing this technology grant us non-
exclusive, worldwide licenses with respect to the subject technology and could
terminate upon a material breach by us.

Research and Development

   The market for our services is characterized by rapidly changing technology
and continuing process development. OEMs are demanding smaller, faster and
higher performance products. These demands require increasingly complex
engineering and manufacturing capabilities. We are committed to developing new
design and manufacturing technologies and enhancing our existing technologies.
Since our formation in 1994, we have made substantial investments in technology
and equipment to meet our customers' needs and maintain our competitive
advantage. Our expenditures for research and development in fiscal 2000 were
$410,000, and our expenditures in fiscal 1999 and 1998 were $387,000 and
$401,000, respectively.

   Our close relationships with customers in the early stages of product design
allows us to develop new products that utilize innovative technology in a
variety of engineering disciplines. These close relationships assist us in
identifying emerging products and related technologies in target markets, which
allows us to develop and expand our existing technology, or to develop or
obtain new technology that will enable us to remain a leading provider of EMS.
As a result of our commitment to maintaining superior technological
capabilities, we have developed substantial expertise in communications,
particularly in the areas of wireless and optical technologies, which we
believe gives us a competitive advantage over many other EMS providers.

                                       36
Employees

   As of March 31, 2000, we had 2,715 full-time employees. In addition to our
full-time employees, we regularly hire part-time and temporary (contract)
employees. Given the variable nature of our project flow and the quick response
time required by our customers, it is critical that we be able to quickly ramp-
up and ramp-down our production capacities to maximize efficiency. To achieve
this, our strategy has been to employ a skilled temporary labor force, as
required. Except for our 218 employees located in Almelo, the Netherlands, none
of our employees are unionized. We believe our employee relations are good, and
we have not experienced any work stoppages at any of our facilities.

International Operations

   A key element in our business strategy is to expand our global presence to
provide engineering, manufacturing and fulfillment services in locations that
meet our customers' regional requirements. Consistent with this strategy, we
have established international design and manufacturing facilities in China,
Mexico, the Netherlands, Singapore and Thailand. We will continue to seek
strategic opportunities to acquire facilities throughout the world, especially
in low-cost regions, either through OEM divestitures or the acquisition of, or
strategic partnering with, regional engineering and manufacturing service
companies.

   In May 1999, we acquired a facility located in Almelo, the Netherlands from
Fluke Corporation. Acquisition of our Netherlands facility increased our
engineering design capabilities, particularly in the areas of electrical and
industrial design. This facility also gives us the ability to rapidly
distribute products for our European and North American customers. In
connection with this acquisition, we entered into a long-term supply agreement
to provide manufacturing and design services to Fluke.

   Our Mexican facility, located in Guadalajara, Mexico and our Chinese
facility located in Tianjin, China, represent greenfield operations established
in September 1997 and June 1998, respectively. Establishment of these
facilities has enabled us to provide low-cost manufacturing and order
fulfillment services for our customers on a global basis. Our facility in
Guadalajara is located in Mexico's emerging communications and computing
markets, and our expansion into this region has provided us with the
opportunity to attract new customers in those industries. Similarly, our
expansion into China has enabled us to reduce our customers' manufacturing
costs while giving us access to new customers in the communications, computing
and data storage industries.

   Our Bangkok, Thailand facility was initially a strategic partnership with
Italade Technology Holdings, Ltd. This facility, Pemstar Limited, is now a
wholly-owned subsidiary of Pemstar. Our Thailand operations are strategically
situated in the rapidly expanding Asian communications, computing and data
storage markets, giving us access to new customers in those industries.

   In October 1998, we formed a Singapore joint venture company called Pemstar-
Honguan Pte. Ltd. with a manufacturing services company called Honguan
Technologies. We own a controlling 51% interest in this joint venture. Our
facility in Singapore has significantly enhanced our service capabilities in
the data storage industry by adding specialized disk drive design and
manufacturing capabilities. This facility also provides critical sales support
for customers in the United States, Southeast Asia, the Philippines, Japan and
Korea.

                                       37
Facilities

   Our executive offices are located in Rochester, Minnesota, where we also
have engineering and manufacturing facilities. We also have two other U.S.
facilities located in San Jose, California as well as facilities in China,
Mexico, the Netherlands, Singapore and Thailand. Information about these
facilities is set forth below:
Location                                        Square Feet  Leased/Owned
      --------                                        ----------- --------------
Rochester, Minnesota (2 facilities)............   225,000   Owned & Leased
      San Jose, California (2 facilities)............   179,000       Leased
      Almelo, the Netherlands........................   132,000       Leased
      Guadalajara, Mexico............................    60,000       Leased
      Bangkok, Thailand..............................    52,000       Leased
      Tianjin, China.................................    40,000       Leased
      Singapore......................................     8,000       Leased
We believe our facilities are well maintained and suitable for their
respective operations. We anticipate that as our business grows, we will need
to acquire, lease or build additional facilities. We may encounter unforeseen
difficulties, costs or delays in expanding our facilities.

Competition

   The EMS industry is highly competitive and we compete against numerous
domestic and foreign engineering and manufacturing service companies. We
believe that the principal competitive factors in our industry are:

  .  Service offerings;
  .  Technological capabilities;
  .  Scale of operations and financial strength;
  .  Geographic location and coverage;
  .  Pricing;
  .  Product quality;
  .  Meeting product delivery schedules; and
  .  Flexible and timely response to design and schedule changes.

   We believe that large, publicly-traded OEMs prefer to enter into outsourcing
relationships with other public EMS companies that present them with the
opportunity to build a long-term relationship because of their greater access
to capital and resulting financial stability. Many of our competitors are
substantially larger and have greater financial, operating, manufacturing and
marketing resources than we do. Some of our competitors have broader geographic
breadth and range of services than we do. In addition, some of our competitors
may have stronger relationships with our existing customers than we do. We
believe that we are a leading EMS provider and that we are well positioned to
compete against these larger competitors due to our world-class engineering,
product quality, flexibility and timeliness in responding to design and
schedule changes, reliability in meeting product delivery schedules, pricing,
the provision of value-added services and geographic location.

   We also face competition from the manufacturing operations of our current
and potential customers, who continually evaluate the relative benefits of
internal manufacturing compared to outsourcing. As more OEMs dispose of their
manufacturing assets and increase their use of outsourcing, we face increasing
competitive pressure to grow our business in order to maintain our competitive
position.

                                       38
Governmental Regulation

   Our operations are subject to federal, state and local regulatory
requirements relating to environmental, waste management and health and safety
measures relating to the use, release, storage, treatment, transportation,
discharge, disposal and clean-up of hazardous substances and wastes, as well as
practices and procedures applicable to the construction and operation of our
plants. In addition, we are required to register with the United States Food
and Drug Administration as a medical device manufacturer. The FDA and various
state agencies inspect our facilities from time to time to determine whether we
are in compliance with the FDA's Quality Systems Regulation relating to medical
device manufacturing companies, including regulations concerning manufacturing,
testing, quality control and product labeling practices. The current costs of
compliance are not material to us, and we are not presently aware of any facts
or circumstances that would cause us to incur significant costs or liabilities
in the future related to environmental, health and safety law compliance.

Legal Proceedings

   To the best of our knowledge, there are no legal proceedings pending or
threatened against us.

                                       39
MANAGEMENT

Directors and Executive Officers

   The following table sets forth our directors and executive officers, their
ages as of May 15, 2000 and the positions currently held by them:
Name                     Age Position
 ----                     --- --------
Allen J. Berning........  45 Chairman, Chief Executive Officer and Director
 William J. Kullback.....  40 Vice President--Finance and Chief Financial
                              Officer
 William B. Leary........  58 Executive Vice President--Rochester Site
                              Operations and Director
 David L. Sippel(1)......  56 Executive Vice President--Engineering Services
                              and Chief Technology Officer and Director
 Robert R. Murphy(1).....  56 Executive Vice President--Corporate Operations
                              Treasurer and Director
 Gary L. Lingbeck........  54 Executive Vice President--North American Sales,
                              Secretary and Director
 Steve V. Petracca.......  44 Executive Vice President--Business Development
                              and Director
 Karl D. Shurson(1)......  60 Executive Vice President--Quality and Director
 Hargopal (Paul) Singh...  50 Executive Vice President--International
                              Operations and Director
 Robert J. Legendre......  43 Vice President--Worldwide Materials
 Robert D. Ahmann........  44 Executive Vice President--Manufacturing Systems
                              and Director
 Thomas A. Burton(1)(2)..  63 Director
 Michael J.                36
  Odrich(1)(2)...........     Director
 Bruce M. Jaffe(1)(2)....  56 Director
--------
(1)Member of our executive compensation committee.
(2)Member of our audit committee.

   Allen J. Berning has served as our Chief Executive Officer, director and
Chairman of our Board since the founding of Pemstar in 1994. Prior to founding
Pemstar, Mr. Berning was employed by IBM for fifteen years, where he held
several engineering and management positions in process engineering,
manufacturing, cost engineering and resource planning, including most recently
as Operations Manager for IBM's Rochester Storage Systems facility. Mr. Berning
received a B.S.I.E. and an M.B.A. from St. Cloud State University. He is
currently serving as board member and past chair of the Greater Rochester Area
University Center. In 1999, Mr. Berning received the national Ernst & Young
Entrepreneur of the Year Award.

   William J. Kullback has served as our Vice President--Finance and Chief
Financial Officer since joining Pemstar in 2000. Prior to joining Pemstar, Mr.
Kullback served for five years as Chief Financial Officer of Crenlo, Inc., a
manufacturer of fabricated metal products. Prior to joining Crenlo, Mr.
Kullback worked in various positions with the Stant Corporation, a manufacturer
of automotive parts and tools, including Corporate Controller and Vice
President of Finance of Stant's Plews Tool subsidiary. From 1987 to 1990, Mr.
Kullback served as a consultant in the audit and manufacturing consulting
practices of Price Waterhouse. Mr. Kullback received a B.A. in Economics and
English and an M.B.A. in Accounting from the State University of New York at
Buffalo.

   William B. Leary has served as our Executive Vice President--Rochester Site
Operations and as a director since 1994. Prior to joining Pemstar, Mr. Leary
was employed by IBM from 1965 until 1994, where he held a variety of
engineering and management positions, including most recently as engineering
manager of storage production. Mr. Leary holds a B.S.E.E. from Marquette
University.

                                       40
David L. Sippel has served as our Executive Vice President--Engineering
Services and Chief Technology Officer and as a director since 1994. From 1970
until 1994, Dr. Sippel was employed by IBM, where he held several engineering
and management positions, including most recently as the manager of IBM's thin-
film disk development and manufacturing operations. Dr. Sippel holds a B.S. in
Aeronautics and Engineering Mechanics, an M.S. in Mechanics and Materials and a
Ph.D. in Mechanics and Materials from the University of Minnesota.

   Robert R. Murphy has served as Executive Vice President--Corporate
Operations since 2000 and as Treasurer and a director since 1994. Prior to
serving as our Executive Vice President--Corporate Operations, Mr. Murphy
served as our Chief Financial Officer from 1994 to 2000. From June 1962 to
1994, Mr. Murphy was employed by IBM, where he held several engineering and
management positions, including most recently as manager of magnetic head
development and production. Mr. Murphy holds a B.S. degree in Mathematics from
Winona State University.

   Gary L. Lingbeck has served as our Executive Vice President--North American
Sales since 1999, and as Secretary and a director since 1994. Prior to serving
as our Executive Vice President--North American Sales, Mr. Lingbeck served as
our Executive Vice President--World Wide Sales from 1994 to 1999. From 1964 to
1993, Mr. Lingbeck was employed by IBM in various technical and management
positions, including establishing OEM sales and marketing groups for IBM's
storage products and midrange systems groups.

   Steve V. Petracca has served as our Executive Vice President--Business
Development and as a director since joining Pemstar in 1999. From 1998 to 1999,
Mr. Petracca served as the Executive Vice President and General Manager of
Quadrus Manufacturing, a division of Bell Microproducts. From 1988 to 1997,
Mr. Petracca served as the Chief Executive Officer and President of Reply
Corporation, a venture backed computer start-up company that he founded, and
after acquisition of Reply Corporation by Radius Inc. in 1997, as its Senior
Vice President of engineering and operations until 1998. Prior to founding
Reply Corporation, Mr. Petracca worked in various positions with IBM. Mr.
Petracca holds a B.A. from the University of Colorado and an M.B.A. from Nova
University.

   Karl D. Shurson has served as our Executive Vice President--Operations and
Quality since 1998 and as a director since 1994. Mr. Shurson has also served as
our Corporate Manager of Human Resources since 1994 and as the site executive
for our Bangkok, Thailand operations since 1998. From 1962 to 1994, Mr. Shurson
was employed by IBM where he held several technical and management positions,
including most recently as production facility manager for storage products at
IBM's Rochester, Minnesota facility.

   Hargopal (Paul) Singh has served as our Executive Vice President--
International Operations and Wireless Communications since 1999 and as a
director since 1998. Mr. Singh has been employed by us since 1995 and also
serves as President of our Chinese and Mexican subsidiaries. From 1994 to 1995,
Mr. Singh was employed by Microsoft, and from 1979 to 1994, he was employed by
IBM. Mr. Singh holds a B.E. in Mechanical Engineering from Osmania University
in India and an M.S. in Engineering Management from Oklahoma State University.

   Robert J. Legendre has served as Vice President, World Wide Materials since
2000. Prior to joining Pemstar, Mr. Legendre was employed by Western Digital
Corporation from 1987 to 2000, most recently as Vice President of World Wide
Materials. Mr. Legendre holds a B.S. degree in Business from LaSalle
University.

   Robert D. Ahmann has served as our Executive Vice President--Manufacturing
Systems and a director since August 1999. Mr. Ahmann has worked for us in
various capacities since 1994. From 1977 to 1994, Mr. Ahmann was employed by
IBM where he held several engineering and management positions, including most
recently as manager of test and process engineering for storage products. Mr.
Ahmann holds a B.S.E.E. from North Dakota State University and a M.S.E.E. from
the University of Minnesota.

                                       41
Thomas A. Burton has served as a director since 1994. Mr. Burton has been an
independent consultant since 1995. Prior to joining Pemstar, Mr. Burton was
President and Chief Executive Officer of Waters Instruments Inc., a diversified
manufacturer of medical and agricultural products and a contract manufacturer
for the computing and telecommunications industries, from 1960 to 1990. From
1992 to 1997, Mr. Burton was appointed to serve on the Minnesota Public
Utilities Commission which regulates the electric gas and telephone industries
in Minnesota.

   Michael J. Odrich has served as a director of Pemstar since 1998. Since
1995, Mr. Odrich has been a Managing Director and head of the Lehman Brothers'
Venture Capital Fund. Prior to joining Lehman Brothers Private Equity, he
served as assistant to Lehman Brothers' Chairman and Chief Executive Officer
from 1993 until 1995. Mr. Odrich joined the Investment Banking Division of
Lehman Brothers in 1986. He is currently a director of Active Software, Inc.
and Regeneration Technologies, Inc. Mr. Odrich holds a B.A. degree from
Stanford University and an M.B.A. from Columbia University.

   Bruce M. Jaffe has served as a director of Pemstar since 2000. Mr. Jaffe,
currently a private investor, was Senior Vice President and Chief Financial
Officer of Bell Microproducts Inc., a distributor of storage and computer
products from 1997 to 1999. From 1967 to 1996, Mr. Jaffe was employed by Bell
Industries Inc., a distributor of electronic components, where he held several
management positions, most recently as President, Chief Operating Officer and a
member of the Board of Directors. From 1965 to 1967, Mr. Jaffe was employed as
an accountant by Price Waterhouse. Mr. Jaffe holds a B.S. in Business from the
University of Southern California and is a certified public accountant. Mr.
Jaffe currently serves on the Board of Advisors for the University of Southern
California School of Business.

Board of Directors

   Following the offering, our board of directors will consist of twelve
directors divided into three classes with each class serving for a term of
three years. At each annual meeting of shareholders, directors will be elected
by the holders of common stock to succeed those directors whose terms are
expiring. Gary L. Lingbeck, Karl D. Shurson, Robert D. Ahman and Bruce M. Jaffe
will be Class I directors whose terms will expire in 2001; William B. Leary,
Robert R. Murphy, Hargopal (Paul) Singh and Thomas A. Burton will be Class II
directors whose terms will expire in 2002; and Allen J. Berning, David L.
Sippel, Steve V. Petracca and Michael J. Odrich will be Class III directors
whose terms will expire in 2003. Following the offering, our bylaws will
provide that the number of directors shall be fixed by the board of directors.
The number of directors on our board will be fixed at a maximum of fifteen.

Director Compensation

   We pay our non-employee board members $1,000 for attendance at each board
meeting and $500 for attendance at each committee meeting. We also reimburse
our non-employee directors for reasonable expenses incurred in serving as a
director. All of our non-employee directors are entitled to participate in our
Stock Plans. The number of options granted to our non-employee directors is
determined by our Options Committee on an annual basis. In fiscal 2000, one of
our non-employee directors, Thomas A. Burton was awarded an option to purchase
3,000 shares of common stock under our 1999 Amended and Restated Option Plan.
See "Benefit Plans--Stock Option Plans."

Committees

   Our board of directors has authority to appoint committees to perform
certain management and administrative functions. We currently have two board-
appointed committees:

 Audit Committee

   The functions of the audit committee, which consists of Thomas A. Burton,
Michael J. Odrich and Bruce M. Jaffe, each a non-employee director, include:
reviewing the adequacy of our system of internal accounting controls; reviewing
the results of the independent auditors' annual audit, including any
significant adjustments, management judgments and estimates, new accounting
policies and disagreements with

                                       42
management; reviewing our audited financial statements and discussing them with
management; reviewing the audit reports submitted by the independent auditors;
reviewing disclosures by independent auditors concerning relationships with our
company and the performance of our independent auditors and annually
recommending independent auditors; adopting and annually assessing our charter;
and preparing such reports or statements as may be required by Nasdaq or the
securities laws.

 Executive Compensation Committee

   The executive compensation committee consists of Thomas A. Burton, Michael
J. Odrich and Bruce M. Jaffe, each a non-employee director, and Robert R.
Murphy, Karl D. Shurson and David L. Sippel, each of whom is also a director.
The functions of the executive compensation committee currently include making
promotion and compensation recommendations for our executive officers and vice
presidents and reviewing our general compensation strategy.

Executive Compensation Committee Interlocks and Insider Participation

   During fiscal 2000, Robert R. Murphy, David L. Sippel and Karl D. Shurson,
each an executive officer of Pemstar, served on our executive compensation
committee. Mr. Murphy has an outstanding loan from us in the principal amount
of $67,650, excluding accrued interest. See "Related Party Transactions."

   No interlocking relationship exists between the board of directors or the
executive compensation committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.

Employment Agreements

   We currently do not have employment agreements with any of our executive
officers, although the terms of our change of control agreements with each
executive officer impose limitations on our ability to terminate an executive
officer. See "Executive Compensation--Change in Control Arrangements."

Change in Control Arrangements

   We have entered into change in control arrangements with each of our
executive officers. These agreements are designed to diminish the distractions
that could be caused by personal uncertainties and risks associated with
changes in control and other significant business combinations involving our
company by providing these individuals with assurances regarding their
compensation and benefits expectations under such circumstances.

   Under these agreements, we agree not to terminate any of these individuals
during the six month period prior to a "change in control" involving our
company and for the two year period following any change in control. If, during
the applicable period, we terminate any individual other than for "cause" or
"disability" or the individual terminates his employment for "good reason," the
individual is entitled to receive a severance payment from us in the amount of
110% of the individual's annual base salary in effect at the time of
termination or immediately prior to the change in control, whichever is
earlier. We may pay the severance payment in one lump sum or in twelve
consecutive monthly installments.

Limitation on Liability and Indemnification Matters

   Minnesota law and our articles of incorporation and bylaws provide that we
shall, under certain circumstances and subject to certain limitations,
indemnify any person made or threatened to be made a party to a proceeding by
reason of that person's former or present official capacity with us against
judgments, penalties, fines, settlements and reasonable expenses. Any such
person also is entitled, subject to limitations, to payment or reimbursement of
reasonable expenses in advance of the final disposition of the proceeding.

                                       43
Pursuant to provisions of the Minnesota Business Corporation Act, we have
adopted provisions in our articles of incorporation which provide that our
directors shall not be personally liable to us or our shareholders for monetary
damages for a breach of fiduciary duty as a director, subject to exceptions.

   At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for indemnification.

Executive Compensation

   The following table sets forth information regarding compensation received
during the fiscal year ended March 31, 2000 by our Chief Executive Officer and
the other four most highly compensated executive officers.

                           Summary Compensation Table
Annual        Long-Term
                                     Compensation(1)  Compensation
                                     -----------------------------
                                                       Securities   All Other
                                      Salary   Bonus   Underlying  Compensation
Name and Principal Position            ($)      ($)   Options (#)     ($)(2)
---------------------------           ------   ------------------- ------------
Allen J. Berning....................   156,346    --    216,000       4,656
 Chief Executive Officer
Steve V. Petracca...................   182,948    --    210,000       5,192
 Executive Vice President--Business
 Development
William B. Leary....................   126,154    --    135,000       2,360
 Executive Vice President--Rochester
 Site Operations
Hargopal (Paul) Singh...............   126,154    --    135,000       2,360
 Executive Vice President--
 International Operations
David L. Sippel.....................   126,154    --    135,000       2,390
 Executive Vice President--
 Engineering Services and Chief
 Technology Officer
--------
(1) With respect to each of the named executive officers, the aggregate amount
    of prerequisites and other personal benefits, securities or property
    received was less than either $50,000 or 10% of the total annual salary and
    bonus reported for such named executive officer.
(2)  All other compensation consists of discretionary matching contributions to
     our 401(k) on behalf of each named executive officer. See "Benefits--
     401(k) Plan."

                                       44
Stock Option Grants in Last Fiscal Year

   The following table sets forth information regarding grants of stock options
to each of the executive officers named in the Summary Compensation Table
during fiscal 2000. The percentage of total options set forth below is based on
an aggregate of 3,269,775 options granted to employees during fiscal 2000. All
options were granted at the fair market value of our common stock, as
determined by our board of directors, on the date of grant. Potential
realizable values are net of exercise price, but before taxes associated with
exercise. Amounts representing hypothetical gains are those that could be
achieved for the options if exercised at the end of the option term. The
assumed 5% and 10% rates of stock price appreciation are provided in accordance
with rules of the Securities and Exchange Commission based on a deemed common
stock value of $5.00 at the time of option grant, and do not represent our
estimate or projection of the future stock price.

               Option Grants in Fiscal Year Ended March 31, 2000
Potential
                                      Individual Grants               Realizable Value
                         -------------------------------------------- at Assumed Annual
                          Number of   % of Total                        Rate Of Stock
                          Shares of    Options                              Price
                         Common Stock Granted to                      Appreciation For
                          Underlying  Employees  Exercise                Option Term
                           Options    in FY 2000 Price Per Expiration -----------------
Name                      Granted(1)     (%)     Share ($)    Date    5% ($)   10% ($)
----                     ------------ ---------- --------- ---------- ------- ---------
Allen J. Berning........   216,000       6.6       5.00     08/02/09  679,206 1,721,242
Steve V. Petracca.......   210,000       6.4       5.00     08/02/09  660,339 1,673,429
William B. Leary........   135,000       4.1       5.00     08/02/09  424,504 1,075,776
Hargopal (Paul) Singh...   135,000       4.1       5.00     08/02/09  424,504 1,075,776
David L. Sippel.........   135,000       4.1       5.00     08/02/09  424,504 1,075,776
--------
(1)  All options granted to the named executive officers in fiscal 2000 are
     fully vested and exercisable.

Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

   The table below sets forth the number of shares of common stock acquired
upon the exercise of options in the fiscal year ended March 31, 2000 and the
value and the number of shares of common stock subject to exercisable and
unexercisable options held as of March 31, 2000, by each of the executive
officers named in the Summary Compensation Table.

                   Aggregate Option Exercises in Fiscal 2000
                       and Fiscal Year-End Option Values
Number of Shares      Value of Unexercised In-
                                                Underlying Unexercised     the-Money Options at
                         Number of              Options at Year-End(2)          Year-End(3)
                          Shares      Value    ------------------------- -------------------------
Name                     Acquired  Realized(1) Exercisable Unexercisable Exercisable Unexercisable
----                     --------- ----------- ----------- ------------- ----------- -------------
Allen J. Berning........  187,500   $470,250     150,000        --          $ --         $ --
Steve V. Petracca.......      --         --      210,000        --            --           --
William B. Leary........   82,500    344,850     135,000        --            --           --
Hargopal (Paul) Singh...  285,000    670,800         --         --            --           --
David L. Sippel.........   82,500    344,850     143,100        --            --           --
--------
(1) Based on an estimated fair market value of $5.00 per share of our common
    stock.
(2)  As of March 31, 2000, all outstanding options are exercisable as a result
     of a board action accelerating the vesting dates of all options granted
     prior to December 13, 1999.
(3) There is no value of the unexercised in-the-money options at year end
    because the exercise price of all outstanding options is equal to the fair
    market value of the shares as determined by the board of directors.

                                       45
Benefit Plans

 Stock Option Plans

   We currently maintain five stock option plans: (1) the Pemstar Inc. 1994
Stock Option Plan (the "1994 Option Plan"), (2) the Pemstar Inc. 1995 Stock
Option Plan (the "1995 Option Plan"), (3) the Pemstar Inc. 1997 Stock Option
Plan (the "1997 Option Plan"), (4) the Pemstar Inc. Amended and Restated 1999
Stock Option Plan (the "1999 Amended and Restated Option Plan") and (5) the
Pemstar Inc. 2000 Stock Option Plan (the "2000 Option Plan") (collectively
referred to as the "Option Plans"). Our Option Plans provide for the grant of
options to purchase shares of our common stock to any of our full or part-time
employees, including officers and directors who are also employees, and any of
our subsidiaries. Such options may qualify as incentive stock options under the
Internal Revenue Code of 1986. Members of our board of directors, consultants
or independent contractors providing valuable services to us or one of our
subsidiaries who are not employees are eligible to receive options which do not
qualify as incentive stock options.

   We have reserved 900,000 shares of common stock for issuance under our 1994
Option Plan, 600,000 shares of common stock under our 1995 Option Plan,
1,500,000 shares of common stock under the 1997 Option Plan, 3,000,000 shares
of common stock under our 1999 Amended and Restated Option Plan and 1,500,000
shares of common stock under our 2000 Option Plan.

   Our Option Plans are administered by our options committee. Our options
committee has the discretion to determine the purchase price of the common
shares covered by each option, select the people to whom options are granted
and to establish the terms and conditions of each stock option, subject to the
provisions of our Option Plans and the approval of our board of directors.

   Our 1999 Amended and Restated Option Plan and our 2000 Option Plan allow our
options committee to establish special rules for employees located in our
foreign subsidiaries. Such rules may not increase the number of shares that may
be issued under our 1999 Amended and Restated Option Plan.

   The exercise price of an incentive stock option granted under our Option
Plans must not be less than 100% of fair market value of the common stock on
the date the option is granted. In the event that a proposed optionee owns more
than 10% of our common stock, any incentive stock option granted must have an
exercise price not less than 110% of the fair market value of our common stock
on the grant date.

   The term of each option is determined by our options committee, but in any
event the term of an incentive stock option may not exceed 10 years from the
date of grant and the term of a non-qualified stock option may not exceed 15
years from the date of grant. In the case of an incentive stock option granted
to an owner of more than 10% of our common stock, the term may not exceed five
years from the date of grant.

   The Option Plans are subject to amendment or discontinuance by our board of
directors, except that the board may not, without the approval of our
shareholders, increase the number of shares that may be issued under our plans,
decrease the minimum exercise price, extend the maximum option term or
materially modify the eligibility requirements for participation.

 Employee Stock Purchase Plan

   Prior to completion of this offering, we expect our board of directors and
shareholders to approve an employee stock purchase plan covering an aggregate
of 500,000 shares of common stock. The purchase plan will provide a means by
which employees may purchase our common stock through payroll deductions. The
purchase plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Internal Revenue Code of 1986, as amended.

 401(k) Plan

   In 1995, we adopted a 401(k) plan to provide eligible employees with a tax
preferential savings and investment program. Employees become eligible to
participate in the 401(k) plan on the first day of the first

                                       46
month after they become employed by us, at which point we classify them as
participants. Employees may elect to reduce their current compensation by not
less than 1% nor more than 15% of eligible compensation or the statutorily
prescribed annual limit, currently $10,500, and have this reduction contributed
to the 401(k) plan. Our board of directors may change the minimum and maximum
contribution levels, subject to the statutorily prescribed limit. The 401(k)
plan permits, but does not require, us to make discretionary matching
contributions and discretionary profit sharing contributions to the 401(k) plan
on behalf of eligible participants. In 1997, our board approved a discretionary
matching contribution of 3% of an employee's contributions to the plan. All
contributions made by and on behalf of participants are subject to a maximum
contribution limitation currently equal to the lesser of 25% of their
compensation or $30,000 per year. At the direction of each participant, the
trustee of the 401(k) plan invests the assets of the 401(k) plan in selected
investment options. Contributions by participants or by us to the 401(k) plan
and income earned on plan contributions, are generally not taxable to the
participants until withdrawn, and contributions by us, if any, are generally
deductible by us when made. In fiscal 2000, we made $412,800 in matching
contributions to the plan on behalf of participants.

                           RELATED PARTY TRANSACTIONS

Loans to Executive Officers

   In connection with the purchase of shares of common stock and exercise of
options in fiscal 2000, we accepted as payment from certain executive officers,
notes bearing interest at 6.5% per annum. These notes are secured by a security
interest in the shares purchased or issued upon exercise of the options. As of
March 31, 2000, the following executive officers had outstanding loan balances
in excess of $60,000 which are due and payable within ninety days: Allen J.
Berning--$75,030, William B. Leary--$67,650, Gary L. Lingbeck--$77,650, Robert
R. Murphy--$67,650 and Hargopal (Paul) Singh--$379,200. As of March 31, 2000,
the following executive officers had outstanding loan balances in excess of
$60,000 which are due and payable within two years: Allen J. Berning--$375,000,
William J. Kullback--$225,000, Robert J. Legendre--$150,000, Steve V.
Petracca--$450,000 and Hargopal (Paul) Singh--$375,000.

Financing Transactions

   In fiscal 1998, we sold 569,966 shares of Series A preferred stock
convertible into 1,709,898 shares of common stock for an aggregate purchase
price of $8.5 million, or $15.00 per share to affiliates of Lehman Brothers
Inc. In fiscal 2000, we sold 1,000,000 shares of Series B preferred stock
convertible into 3,000,000 shares of common stock for an aggregate purchase
price of $18.0 million, or $18.00 per share to affiliates of Lehman Brothers
Inc. Upon the automatic conversion of the Series A and Series B preferred stock
upon consummation of this offering, Lehman Brothers Inc. will be the beneficial
owner of more than 5% of our outstanding shares of common stock. Michael
Odrich, one of our non-employee directors, is an affiliate of Lehman Brothers
Inc. See "Principal Shareholders" for information relating to the beneficial
ownership of shares and identification of affiliates of Lehman Brothers Inc.

                                       47
PRINCIPAL SHAREHOLDERS

   The table below sets forth information known to us regarding the beneficial
ownership of our common stock as of March 31, 2000, as adjusted to reflect the
automatic conversion of outstanding shares of preferred stock into common
stock, and to reflect the sale of the common stock offered by this prospectus,
by:

  .  Each shareholder known by us to be the owner of more than 5% of our
     outstanding common stock;
  .  Each of our executive officers listed on the Summary Compensation Table
     under "Management";
  .  Each of our directors; and
  .  All executive officers and directors as a group.

   Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes generally voting power and/or
investment power with respect to securities. Shares of common stock subject to
options currently exercisable or exercisable within sixty days of March 31,
2000 are deemed outstanding for purposes of computing the percentage
beneficially owned by the person holding such options but are not deemed
outstanding for purposes of computing the percentage beneficially owned by any
other person. Except as otherwise noted, the persons or entities named have
sole voting and investment power with respect to all shares shown as
beneficially owned by them. Unless otherwise indicated, the principal address
of each of the shareholders below is c/o Pemstar Inc., 3535 Technology Drive
N.W., Rochester, Minnesota 55901.
Number of        Percentage of Shares
                                      Shares          Beneficially Owned
                                   Beneficially ------------------------------
Beneficial Owner                      Owned     Before Offering After Offering
----------------                   ------------ --------------- --------------
5% Shareholders:
Lehman Brothers Inc.(1)...........   4,959,903       26.77%
Italade Technology Holdings
 Limited(2).......................   2,610,000       14.09
Executive Officers and Directors:
Allen J. Berning(3)...............   1,110,900        5.95
Steve V. Petracca(4)..............     300,000        1.60
William B. Leary(5)...............     682,500        3.66
David L. Sippel(6)................     995,640        5.33
Robert R. Murphy(7)...............   1,003,500        5.38
Gary L. Lingbeck(8)...............     592,500        3.17
Karl D. Shurson(9)................     510,310        2.73
Hargopal Singh(10)................     491,400        2.65
Robert D. Ahmann(11)..............     462,000        2.47
Thomas A. Burton..................       6,000           *
Michael J. Odrich(12).............   4,959,903       26.77
Bruce M. Jaffe....................         --          --
All directors and executive
 officers as a group (13
 persons)(13).....................  11,189,613       56.74%
--------
*  Shares represent less than 1% of total shares outstanding.
(1)  Shares beneficially owned by Lehman Brothers Inc. include shares held by
     the following wholly-owned subsidiaries of Lehman Brothers Inc.: (a) LBI
     Group Inc.--3,580,416; (b) Lehman Brothers Venture Capital Partners I,
     L.P.--366,906; (c) Lehman Brothers Venture Partners L.P.--613,158; (d)
     Lehman Brothers VC Partners L.P.--300,000; (e) Lehman Brothers MBG Venture
     Capital Partners 1998 (A) L.P.--87,807; (f) Lehman Brothers MBG Venture
     Capital Partners 1998 (B) L.P.--1,620; (g) Lehman Brothers MBG Venture
     Capital Partners 1998 (C) L.P.--9,996. The shares beneficially owned by
     Lehman Brothers Inc. and its wholly-owned subsidiaries include 553,301
     shares of our Series A preferred stock and 1,000,000 shares of our Series
     B preferred stock, which shares automatically convert into shares of our
     common stock upon consummation of this offering. The address of Lehman
     Brothers Inc. is 3 World Financial Center, New York, New York 10285.

                                       48
(2) On March 31, 2000, the shares reflected as owned by Italade Technology
    Holdings Limited were transferred to the following persons: (a) Chi Ming
    Gabriel Xu--200,000; (b) Rose Beauty Limited--211,697; (c) Lai Ngor Chan--
    200,000; (d) Kar Chun Nicky Lor--42,369; and (e) Sing Cheong Tien and Lian
    Imm Tien--211,671. The address of Italade Technology Holdings Limited is
    29/F The Center, 99 Queen's Road Central, Hong Kong.
(3)  The shares of common stock included in this table include 764,400 shares
     held jointly by Mr. Berning and his spouse and 150,000 shares that can be
     acquired upon the exercise of outstanding options.
(4)  The shares of common stock included in this table include 210,000 shares
     that can be acquired upon the exercise of outstanding options.
(5)  The shares of common stock included in this table include 240,000 shares
     held by Mr. Leary's spouse and 135,000 shares that can be acquired upon
     the exercise of outstanding options.
(6)  The shares of common stock included in this table include 385,020 shares
     held by Mr. Sippel's spouse and 143,100 shares that can be acquired upon
     the exercise of outstanding options.
(7)  The shares of common stock included in this table include 777,000 shares
     held jointly by Mr. Murphy and his spouse and 135,000 shares that can be
     acquired upon the exercise of outstanding options.
(8)  The shares of common stock included in this table include 135,000 shares
     that can be acquired upon the exercise of outstanding options.
(9)  The shares of common stock included in this table include 318,000 shares
     held jointly by Mr. Shurson and his spouse and 141,600 shares that can be
     acquired upon the exercise of outstanding options.
(10)  Includes 71,400 shares held jointly by Mr. Singh and his spouse and
      75,000 shares held by Mr. Singh's spouse.
(11)  The shares of common stock included in this table include 141,000 shares
      that can be acquired upon the exercise of outstanding options.
(12)  Mr. Odrich is a Managing Director of Lehman Brothers Inc. and may be
      considered to have beneficial ownership of Lehman Brothers Inc.'s
      interest in us. Mr. Odrich disclaims beneficial ownership of all such
      shares. The address of Mr. Odrich is c/o Lehman Brothers Inc., is 3 World
      Financial Center, New York, New York 10285.
(13)  See Notes (2) through (11). Includes an aggregate of 1,190,700 shares
      issuable upon the exercise of currently exercisable options held by our
      executive officers and directors.

   We have granted the underwriters an option to purchase up to an aggregate of
      shares of our common stock (equal to at least two-thirds of the over-
allotment option) to cover over-allotments, if any. The following selling
shareholders have also granted the underwriters an option to purchase up to an
aggregate of        shares of common stock (equal to no more than one-third of
the over-allotment option) to cover over-allotments, if any.      ,       and
      who currently own     ,      and      shares, respectively. These
shareholders are offering up to     ,      and      shares in the offering. If
the underwriters exercise their over-allotment option in full      will
beneficially own      shares, or   % of our outstanding common stock;
will own      shares or   %; and       will own      shares or   %.

                                       49
DESCRIPTION OF CAPITAL STOCK

General Matters

   Upon the closing of this offering, our authorized capital stock will consist
of 150,000,000 shares of common stock, par value $0.01 per share, and 5,000,000
shares of preferred stock, par value $0.01 per share.

   The following is a summary of the material terms of our common stock. Please
see our amended and restated articles of incorporation filed as an exhibit to
the registration statement of which this prospectus is a part.

Common Stock

   As of March 31, 2000, there were 13,819,260 shares of common stock
outstanding, held by approximately 293 shareholders of record.

   Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders, including the
election of directors, and do not have cumulative voting rights. Subject to
preferences that may be applicable to any then outstanding preferred stock,
holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by the board of directors out of funds legally available
therefore. See "Dividend Policy." Upon a liquidation, dissolution or winding up
of Pemstar, the holders of common stock will be entitled to share ratably in
the net assets legally available for distribution to shareholders after the
payment of all of our debts and other liabilities, subject to the prior rights
of any preferred stock then outstanding. Holders of common stock have no
preemptive or conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and the common stock to be outstanding
upon completion of this offering will be, fully paid and nonassessable.

Preferred Stock

   We currently have two classes of preferred stock, Series A preferred stock
and Series B preferred stock. As of March 31, 2000, there were 569,966 shares
of Series A preferred stock outstanding and 1,000,000 shares of Series B
preferred stock outstanding. Upon closing of this offering, all of the
outstanding shares of preferred stock will automatically convert into 4,709,898
shares of common stock and no shares of preferred stock will be outstanding.
Our board of directors has the authority, without action by the shareholders,
to designate and issue preferred stock in one or more series and to designate
the rights, preferences and privileges of each series, any of which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock on the rights of
holders of common stock until the board of directors determines the specific
rights of the preferred stock. However, the effects might include, among other
things, restricting dividends on the common stock, diluting the power of the
common stock, impairing liquidation rights of the common stock and delaying or
preventing a change of control or the removal of our existing management
without further action by the shareholders. We have no present plans to issue
any shares of preferred stock.

Registration Rights

   As of March 31, 2000, the holders of common stock issuable upon conversion
of the preferred shares of our outstanding shares of preferred stock are
entitled to rights with respect to the registration of 4,709,898 shares under
the Securities Act. The holders of registration rights are those investors that
purchased shares of our mandatorily redeemable, convertible Series A and Series
B preferred stock. Under the terms of the agreement between us and the holders
of these registrable securities, the holders of at least 35% of the registrable
securities may require that we file a registration statement under the
Securities Act with respect to their shares of common stock after the earlier
of February 12, 2001, or the six month anniversary of the

                                       50
effective date of this offering, so long as the total offering price of the
shares to the public under such registration statement is at least $10 million.
We will only be required to file two registration statements in response to a
request for registration by the holders of registrable securities. We may
postpone the filing of a registration statement for up to ninety days in any
twelve month period if we determine that the filing would be seriously
detrimental to us and our shareholders. Further, holders of the registrable
securities may require us on two occasions within any twelve month period to
file additional registration statements on Form S-3 at our expense. In
addition, in the event that we decide to register our securities, we are
required to include in our registration statement the registrable securities of
any holder who so requests. These rights are subject to the right of the
underwriters of an offering to limit the number of shares included in that
registration under certain circumstances. The expenses incurred in such
registrations will be borne by us.

   The registration rights described above will expire with respect to any
holder of registrable securities if such holder can sell all of its shares in a
three month period under Rule 144 of the Securities Act. In any event, the
registration rights described above will expire five years after this offering
is completed. Holders of registrable securities have agreed not to exercise
their registration rights for a period of 180 days following the date of this
prospectus.

Shareholder Rights Plan

   Prior to completion of this offering, the board of directors will declare a
dividend of one preferred share purchase right for each outstanding share of
common stock outstanding on the business day immediately preceding the date of
this prospectus to the shareholders of record on that date. Each right entitles
the registered holder to purchase one one-hundredth of a share of Series A
junior participating preferred stock, par value $0.01 per share, at a price of
$       per one one-hundredth of a preferred share, subject to adjustment. The
description and terms of the share purchase rights will be set forth in a
rights agreement between Pemstar and a rights agent, a copy of the form of
which is filed as an exhibit to the registration statement of which this
prospectus is a part.

   Initially, the certificates for shares of common stock then outstanding will
evidence the rights and we will not distribute separate rights certificates.
The rights will separate from the common stock on the share purchase rights
distribution date, which is the earlier of:

  .  The first date of public announcement that a person or group of
     affiliated or associated persons has become the beneficial owner of 15%
     or more of the outstanding common stock, subject to certain exceptions;
     and
  .  The close of business on the tenth day, or such later date as may be
     determined by the board of directors prior to such time as any person
     becomes the beneficial owner of 15% or more of the outstanding common
     stock, following the commencement or public announcement of a tender
     offer or exchange offer, the consummation of which would result in a
     person or group of affiliated or associated persons becoming the
     beneficial owner of 15% or more of the outstanding common stock.

   The board of directors, after receiving such advice as it deems necessary
and giving due consideration to all relevant factors, may elect to approve a
tender offer or an exchange offer for all of our outstanding common stock if
the board determines the offer to be in our best interest and the best
interests of our stockholders. If the board does approve a tender offer or
exchange offer, the rights will expire.

   Until the share purchase rights distribution date,

  .  The rights will be evidenced by the certificates for shares of common
     stock and will be transferred with and only with the common stock;
  .  Any common stock certificates issued after the business day immediately
     preceding the date of this Prospectus upon transfer or new issuance of
     the common stock will contain a notation incorporating the rights
     agreement by reference; and
  .  The transfer of any common stock will also constitute the transfer of
     the rights associated with the common stock.

                                       51
As promptly as practicable following the share purchase rights distribution
date, we will mail separate certificates evidencing the share purchase rights
to holders of record of the common stock as of the close of business on that
date, and such separate certificates alone will evidence the share purchase
rights.

   The holders of our common stock and the share purchase rights cannot
exercise the rights until the share purchase rights distribution date. The
rights will expire on the date that is ten years after the business day
immediately preceding the date of this Prospectus, unless we extend or earlier
redeem or exchange the rights as described below. We will not issue fractions
of a preferred share, other than fractions in integral multiples of one one-
hundredth of a share, and, in lieu thereof, we will make a cash adjustment on
the closing price on the last trading date prior to the date of exercise.

   We will adjust the purchase price payable and the number of preferred shares
issuable upon exercise of the rights from time to time to prevent dilution:

  .  In the event of a stock dividend on, or a subdivision, combination or
     reclassification of, the preferred shares;
  .  Upon the grant to holders of the preferred shares of certain rights,
     options or warrants to subscribe for or purchase preferred shares or
     convertible securities at less than the then current market price of the
     preferred shares; or
  .  Upon the distribution to holders of the preferred shares of any evidence
     of indebtedness or assets, excluding regular periodic cash dividends or
     dividends payable in preferred shares, or of subscription rights or
     warrants, other than those described in clause (2) of this paragraph.

   With certain exceptions, we are not required to adjust the purchase price
until cumulative adjustments require an adjustment of at least 1% in the
purchase price. We also will adjust the number of outstanding share purchase
rights and the number of preferred shares issuable upon exercise of the rights
in the event of a stock split of the common stock or a stock dividend on the
common stock payable in common stock or subdivisions, consolidations or
combinations of the common stock occurring, in any such case, prior to the
distribution date.

   We cannot redeem the preferred shares purchasable upon exercise of the
rights. Each preferred share will be entitled to a minimum preferential
quarterly dividend payment of $     per share but will be entitled to an
aggregate dividend of 100 times the dividend declared per share of common
stock. In the event of liquidation, the holders of the preferred shares will be
entitled to a minimum preferential liquidation payment of $         per share
but will be entitled to an aggregate payment of 100 times the payment made per
share of common stock. Each preferred share will have 100 votes, voting
together with the common stock. Finally, in the event of any merger,
consolidation or other transaction in which common stock is exchanged, each
preferred share will be entitled to receive 100 times the amount received per
share of common stock. These rights are subject to adjustment in the event of a
stock dividend on the common stock or a subdivision, combination or
consolidation of the common stock.

   In the event any person becomes the beneficial owner of 15% or more of the
outstanding common stock, each holder of a share purchase right shall
thereafter have a right to receive, upon exercise thereof at the then current
aggregate exercise price, in lieu of preferred shares, such number of shares of
our common stock having a current aggregate market price equal to twice the
current aggregate exercise price. In the event that at any time after there is
a beneficial owner of 15% or more of the outstanding common stock, we are
acquired in certain mergers or other business combination transactions or 50%
or more of our assets or earning power and our subsidiaries, taken as a whole,
are sold, holders of the rights will thereafter have the right to receive, upon
exercise thereof at the then current aggregate exercise price, such number of
shares of common stock of the acquiring company or, in certain cases, one of
its affiliates, having a current aggregate market price equal to twice the
current aggregate exercise price.

   At any time after a person becomes the beneficial owner of 15% or more of
the outstanding common stock, subject to certain exceptions, and prior to the
acquisition by a person of 50% or more of the outstanding

                                       52
common stock, the board of directors may exchange all or part of the rights for
common stock at an exchange ratio of one share of common stock per right,
subject to adjustment.

   At any time before a person has become the beneficial owner of 15% or more
of the outstanding common stock, the board of directors may redeem the rights
in whole, but not in part, at a price of $0.01 per right, subject to
adjustment. The redemption of the rights may be made effective at such time, on
such basis and with such conditions as the board of directors in its sole
discretion may establish.

   Until a right is exercised, the holder thereof, as such, will have no rights
as a stockholder, including without limitation, the right to vote or to receive
dividends.

   The rights have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire us pursuant
to an offer that is not approved by the board of directors, unless the rights
have been redeemed. However, the rights should not interfere with any tender
offer or merger approved by the board because the board of directors may redeem
the rights or approve an offer at any time prior to such time as any person
becomes the beneficial owner of 15% or more of the outstanding common stock.

   Provisions of our Articles of Incorporation and Bylaws and State Law
Provisions with Potential Antitakeover Effects

   Some provisions of our articles of incorporation and amendments to our
articles of incorporation and bylaws we intend to adopt prior to completion of
this offering could make it more difficult to acquire control of our company
and to remove existing management. These provisions include:

  .  Our articles of incorporation do not provide for cumulative voting for
     directors;

  .  We will have a classified board of directors with each class serving a
     staggered three-year term;

  .  The board of directors fixes the size of the board of directors, may
     create new directorships and may elect new directors to serve for the
     full term of the class of directors in which the new directorship was
     created. The board of directors (or its remaining members, even though
     less than a quorum) also may fill vacancies on the board of directors
     occurring for any reason for the remainder of the term of the class of
     director in which the vacancy occurred;

  .  The board of directors may issue preferred stock without any vote or
     further action by the shareholders;

  .  The board of directors may adopt, amend, alter or repeal the bylaws
     without a vote of the shareholders;

  .  All shareholder actions must be taken at a regular or special meeting of
     the shareholders and cannot be taken by written consent without a
     meeting; and

  .  We require advance notice procedures with respect to shareholder
     proposals and the nomination of candidates for election as directors.

   These provisions are intended to discourage coercive takeover practices and
inadequate takeover bids. They are also designed to encourage persons seeking
to acquire control of us to first negotiate with our board. We believe that the
benefits of increased protection give us the potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure us and outweigh the disadvantages of discouraging such proposals.
Negotiating with the proponent could result in an improvement of the terms of
the proposal.

 The Minnesota Business Corporations Act

   Section 302A.671 of the Minnesota Business Corporation Act, or MBCA,
applies, with certain exceptions, to any acquisition of our voting stock (from
a person other than us and other than in connection with certain

                                       53
mergers and exchanges to which we are a party) resulting in the acquiring
person owning 20% or more of our voting stock then outstanding. The MBCA
requires approval of any such acquisitions by a majority vote of our
shareholders prior to its consummation. In general, shares acquired without
such approval lose their voting rights and are redeemable by us at their then
fair market value within thirty days after the acquiring person failed to give
us timely information regarding the acquisition of the shares or the date the
shareholders voted not to grant voting rights to the acquiring person's shares.

   Section 302A.673 of the MBCA generally prohibits us, or any of our
subsidiaries, from entering into any transaction with a shareholder under which
the shareholder purchases 10% or more of our voting shares (an "interested
shareholder") within four years following the date the person became an
interested shareholder, unless the transaction is approved by a committee of
all of the disinterested members of our board of directors before the
interested shareholder acquires the shares.

Transfer Agent and Registrar

   The transfer agent and registrar for our common stock is     .

                        SHARES ELIGIBLE FOR FUTURE SALE

   Sales of substantial amounts of our common stock in the public market after
the offering could cause the market price of our common stock to fall and could
affect our ability to raise equity capital in the future on terms favorable to
us.

   Upon the closing of this offering, we will have        shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options to purchase common stock. Of
these shares, the       shares of common stock being sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, except that any shares held by our "affiliates," as such term
is defined in Rule 144 under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 described below.

   The remaining shares that were issued and sold by us in private
transactions, are restricted securities and may be sold in the public market
only if registered under the Securities Act or if they qualify for an exemption
from registration under Rules 144, 144(k) or 701 under the Securities Act,
which rules are summarized below. Subject to the lock-up agreements described
below and the provisions of Rules 144, 144(k) and 701, additional shares will
be available for sale in the public market, subject in the case of shares held
by affiliates to compliance with certain volume restrictions, as follows:

  .       shares will be available for immediate sale in the public market on
     the date of this prospectus; and
  .       shares will be available for sale upon the expiration of lock-up
     agreements 180 days after the date of this prospectus.

Rule 144

   In general, under Rule 144 as currently in effect, beginning ninety days
after the date of this prospectus, a person who has beneficially owned shares
of our common stock for at least one year is entitled to sell, within any
three-month period, a number of shares that is not more than the greater of:

  .  1% of the number of shares of common stock then outstanding, which will
     equal approximately                shares immediately after this
     offering; or
  .  The average weekly trading volume of our common stock on the Nasdaq
     National Market during the four calendar weeks before a notice of the
     sale on Form 144 is filed.

                                       54
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us.

   Under Rule 144(k), a person who has not been one of our affiliates at any
time during the three months before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.

Rule 701

   In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchase shares from us under a
stock option plan or other written agreement can resell those shares ninety
days after the effective date of this offering in reliance on Rule 144, but
without complying with some of the restrictions, including the holding period,
contained in Rule 144.

   We intend to file a Form S-8 registration statement under the Securities Act
to register all shares of common stock issuable under our stock option plans.
See "Management--Stock Option Plans." Such registration statement is expected
to become effective immediately upon filing and shares covered by that
registration statement will thereupon be eligible for sale in the public
markets, subject to Rule 144 limitations applicable to affiliates.

   Prior to this offering there has been no public market for our common stock,
and no predictions can be made regarding the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of our
common stock in the public market could adversely affect the prevailing market
price.

   All of our directors, executive officers and shareholders have agreed that
they will not, without the prior written consent of the representatives of the
underwriters, sell or otherwise dispose of any shares of common stock or
options to acquire shares of common stock during the 180-day period following
the closing of this offering. See "Underwriting."

   After the closing of this offering, the holders of shares of our common
stock will be entitled to certain rights with respect to the registration of
such shares under the Securities Act. See "Description of Capital Stock-
Registration Rights." Registration of such shares under the Securities Act
would result in such shares, except for shares purchased by affiliates,
becoming freely tradable without restriction under the Securities Act
immediately upon the effectiveness of such registration.

                                       55
UNDERWRITING

   Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, Lehman Brothers Inc.,
FleetBoston Robertson Stephens Inc., Chase Securities Inc., CIBC World Markets
Corp. and Fidelity Capital Markets, a division of National Financial Services
Corporation are acting as representatives of each of the underwriters named
below. Under the underwriting agreement, each of the underwriters has agreed to
purchase from us the respective number of shares of common stock shown opposite
its name below:
Number of
Underwriters                                                           Shares
------------                                                         ----------
Lehman Brothers Inc. ..............................................
FleetBoston Robertson Stephens Inc.................................
Chase Securities Inc...............................................
CIBC World Markets Corp............................................
Fidelity Capital Markets, a division of National Financial Services
 Corporation.......................................................
                                                                     ----------
  Total............................................................
                                                                     ==========
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement and that, if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, all of the shares of common stock that the underwriters have agreed
to purchase under the underwriting agreement, must be purchased. The conditions
contained in the underwriting agreement include the requirement that the
representations and warranties made by us to the underwriters are true, that
there is no material change in the financial markets and that we deliver to the
underwriters customary closing documents.

   The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares described below. Assuming full exercise of the
underwriters' over-allotment option, $     of the underwriting fee will be paid
by us and $     will be paid by the selling shareholders. The underwriting fee
is the difference between the public offering price and the amount the
underwriters pay to us to purchase the shares from us. On a per share basis,
the underwriting fee is    % of the initial public offering price.
No      Full
                                                               Exercise Exercise
                                                               -------- --------
Per share............................................... $        $
      Total................................................... $        $
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the initial public
offering price set forth on the cover page of this prospectus, and to dealers,
who may include the underwriters, at this public offering price less a selling
concession not in excess of $    per share. The underwriters may allow, and the
dealers may reallow, a concession not in excess of $    per share to brokers
and dealers. After the offering, the underwriters may change the offering price
and other selling terms.

   We estimate that the total expenses of this offering, including
registration, filing and listing fees, printing fees and legal and accounting
expenses, but excluding underwriting discounts, will be approximately $1.0
million.

   We and the selling shareholders have granted to the underwriters an option
to purchase up to an aggregate of            additional shares of common stock,
exercisable to cover over-allotments, if any, at the initial public offering
price less the underwriting discounts shown on the cover page of this
prospectus. The underwriters may exercise this option any time until thirty
days after the date of the underwriting agreement. If this option is exercised,
each underwriter will be committed, so long as the conditions of the
underwriting agreement are satisfied, to purchase a number of additional shares
of common stock proportionate to the

                                       56
underwriter's initial commitment as indicated in the table above and we will be
obligated, under the over-allotment option, to sell the shares of common stock
to the underwriters.

   We have agreed that, without the consent of Lehman Brothers Inc., we will
not, directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities that may be converted into or exchanged for any
shares of common stock for a period of 180 days from the date of this
prospectus. All of our executive officers, directors and shareholders holding
all of the shares of our capital stock have agreed under lock-up agreements
that, without the prior written consent of Lehman Brothers Inc., they will not,
directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities that may be converted into or exchanged for any
shares of common stock for the period ending 180 days after the date of this
prospectus. See "Shares Eligible for Future Sale."

   Prior to the offering, there has been no public market for the shares of our
common stock. The initial public offering price has been negotiated between the
representatives and us. The material factors considered in determining the
initial public offering price of the common stock, in addition to prevailing
market conditions, were:

  .  Our historical performance and capital structure;
  .  Estimates of our business potential and earning prospects;
  .  An overall assessment of our management; and
  .  The above factors in relation to market valuation of companies in
     related businesses.

   Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter of this offering and will be
facilitating electronic distribution through the Internet.

   We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "PMTR."

   We and the selling shareholders have agreed to indemnify the underwriters
against liabilities under the Securities Act and liabilities arising from
breaches of the representations and warranties contained in the underwriting
agreement, and to contribute to payments that the underwriters may be required
to make for these liabilities.

   Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.

   The underwriters may create a short position in the common stock in
connection with this offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create
a short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option.

   The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position
or to stabilize the price of the common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members who sold
those shares as part of the offering.

   In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.

   Neither we, nor the selling shareholders or any of the underwriters makes
any representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the

                                       57
common stock. In addition, neither we nor any of the selling shareholders or
the underwriters make any representation that the representatives will engage
in these transactions or that these transactions, once commenced, will not be
discontinued without notice.

   Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.

   Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
page of this prospectus.

   The representatives have informed us that they do not intend to confirm the
sales of shares of common stock offered by this prospectus to any accounts over
which they exercise discretionary authority without the prior written approval
of the customer.

   At our request, the underwriters have reserved up to        shares or     %
of the common stock offered by this prospectus for sale to our directors,
employees and other persons having an established business relationship with us
at the initial public offering price set forth on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares.

   Affiliates of Lehman Brothers Inc., one of the representatives of the
underwriters, hold shares of our Series A and Series B preferred stock which
will automatically convert into 4,709,898 shares of our common stock upon
closing of this offering. In addition, Michael J. Odrich, one of our directors,
is a Managing Director of Lehman Brothers Inc. Because of this relationship
between us and Lehman Brothers Inc., the offering is being conducted in
accordance with Rule 2720 of the National Association of Securities Dealers, or
NASD. This rule requires that the initial public offering price for our shares
cannot be higher than the price recommended by a "qualified independent
underwriter," as defined by the NASD. FleetBoston Robertson Stephens Inc. is
serving as a qualified independent underwriters and will perform the due
diligence investigations and review and participate in the preparation of the
registration statement of which this prospectus is a part.

                                 LEGAL MATTERS

   The validity of the shares of common stock offered hereby will be passed
upon for us by Dorsey & Whitney LLP, Minneapolis, Minnesota. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Kirkland & Ellis (a partnership that includes professional
corporations), Chicago, Illinois.

                                    EXPERTS

   Ernst & Young LLP, independent auditors have audited our consolidated
financial statement as of and for the year ended March 31, 2000, as set forth
in their report. McGladrey & Pullen, LLP, independent auditors, have audited
our consolidated financial statements as of and for the years ended March 31,
1999 and 1998, as set forth in their report. We have included our financial
statements in the prospectus in reliance on the reports of Ernst & Young LLP
and McGladrey & Pullen, LLP, given on their authority as experts in accounting
and auditing.

   McGladrey & Pullen, LLP, independent auditors, have audited the financial
statements of Quadrus Manufacturing, a division of Bell Microproducts, Inc., as
of and for the years ended December 31, 1998, 1997 and 1996, as set forth in
their report. We have included the Quadrus Manufacturing financial statements
in the registration statement in reliance on the report of McGladrey & Pullen,
LLP, given on their authority as experts in accounting and auditing.

                                       58
On February 11, 2000, upon the recommendation of the audit committee, the
board of directors engaged Ernst & Young LLP to audit our consolidated
financial statements for the year ended March 31, 2000. There were no
disagreements between us and our prior accountants, McGladrey & Pullen, LLP, on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. The audit opinion of McGladrey &
Pullen, LLP for the fiscal years March 31, 1999 and 1998 did not contain an
adverse option or disclaimer of opinion, nor were they qualified as to
uncertainty, audit scope or accounting principles.

                      WHERE YOU CAN FIND MORE INFORMATION

   We have filed with the SEC a registration statement on Form S-1 with respect
to the shares offered hereby. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information set forth in
the registration statement or the exhibits and schedules which are part of the
registration statement. For further information with respect to Pemstar and the
shares, reference is made to the registration statement and exhibits and
schedules thereto. You may read and copy any document we file at the SEC's
public reference room in Washington, DC. Please call the SEC at 1-800-SEC-0330
for further information on the public reference room. Our SEC filings are also
available to the public from the SEC's website at http://www.sec.gov.

   Upon completion of this offering, Pemstar will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
and, in accordance therewith, will file periodic reports, proxy statements and
other information with the SEC. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the SEC's
public reference rooms, Pemstar's website at www.pemstar.com and the website of
the SEC referred to above. Information on our website does not constitute a
part of this prospectus.

                                       59
PEMSTAR INC.

                         INDEX TO FINANCIAL STATEMENTS
Pemstar Inc.:
Report of Independent Auditors--Ernst & Young LLP........................   F-2
Report of Independent Auditors--McGladrey & Pullen, LLP..................   F-3
Consolidated Balance Sheets as of March 31, 1999 and 2000................   F-4
Consolidated Statements of Income for the Years Ended March 31, 1998,
 1999 and 2000...........................................................   F-5
Consolidated Statements of Shareholders' Equity for the Years Ended March
 31, 1998, 1999 and 2000.................................................   F-6
Consolidated Statements of Cash Flows for the Years Ended March 31, 1998,
 1999 and 2000...........................................................   F-7
Notes to Consolidated Financial Statements...............................   F-8
Quadrus Manufacturing, a Division of Bell Microproducts, Inc.:
Report of Independent Auditors--McGladrey & Pullen, LLP..................  F-22
Balance Sheets as of December 31, 1998, 1997 and 1996....................  F-23
Statements of Cash Flows and Divisional Equity for the Years Ended March
 31, 1998, 1997 and 1996.................................................  F-24
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
 1996....................................................................  F-25
Notes to Financial Statements............................................  F-26
F-1
REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Directors of Pemstar Inc.

   We have audited the accompanying consolidated balance sheet of Pemstar Inc.
as of March 31, 2000, and the related consolidated statement of income,
shareholders' equity, and cash flows for the year then ended. 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 audit.

   We conducted our audit 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 audit provides 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, 2000, and the consolidated results of their operations and their
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States.

                                          /s/ ERNST & YOUNG LLP

Minneapolis, Minnesota
May 5, 2000

                                      F-2
REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Directors of Pemstar Inc.

   We have audited the accompanying consolidated balance sheet of Pemstar Inc.
as of March 31, 1999, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the two years in the period
ended March 31, 1999. 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 generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Pemstar Inc. as of March 31, 1999, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
March 31, 1999, in conformity with generally accepted accounting principles.

                                          /s/ McGLADREY & PULLEN, LLP

Rochester, Minnesota
May 10, 1999

                                      F-3
PEMSTAR INC.

                          CONSOLIDATED BALANCE SHEETS
                    (in thousands, except per share amounts)
March 31,
                                               -----------------
                                                1999      2000
                                               -------  --------
Assets
Current assets:
 Cash and cash equivalents.................... $   827  $  2,727
 Restricted cash..............................     411       528
 Accounts receivable, net.....................  21,681    60,061
 Inventories, net.............................  16,449    64,437
 Recoverable income taxes.....................     415       --
 Deferred income taxes........................     --      2,232
 Prepaid expenses and other...................   2,116     3,458
                                               -------  --------
   Total current assets.......................  41,899   133,443
 Property and equipment, net..................  17,561    34,933
 Goodwill, net................................   3,794    20,691
 Other assets, net............................   1,336     1,384
 Deferred income taxes........................     393       --
                                               -------  --------
   Total Assets............................... $64,983  $190,451
                                               =======  ========
Pro Forma
                                                  March 31,       Shareholders'
                                               -----------------  Equity March
                                                1999      2000      31, 2000
                                               -------  --------  -------------
                                                                  (See Note 1)
Liabilities and Shareholders' Equity
Current liabilities:
 Bank overdrafts.............................. $ 1,644  $ 10,213
 Accounts payable.............................  19,935    47,138
 Accrued expenses and other...................   2,208     9,740
 Income taxes payable.........................     207     1,474
 Deferred income taxes........................     357       --
 Current maturities of long-term debt.........   4,471    12,930
 Current maturities of capital lease
  obligations.................................     294     2,299
                                               -------  --------
   Total current liabilities..................  29,116    83,794
Long-term debt, less current maturities.......   7,000    51,114
Capital lease obligations, less current
 maturities...................................      90     4,067
Deferred grant income.........................   1,808     1,713
Deferred revenue..............................   1,017       350
Deferred income taxes.........................     --         17
Minority interest in consolidated
 subsidiaries.................................     848       174
Redeemable stock:
 Series A preferred stock, $0.01 par value;
  570 shares issued and outstanding in 1999
  and 2000; pro forma--none...................   8,549     8,549     $   --
 Series B preferred stock, $0.01 per share;
  2000--1,000 shares issued and outstanding;
  pro forma--none.............................     --     18,000         --
Shareholders' equity:
 Common stock, $0.01 par value; 150,000
  shares authorized; shares issued and
  outstanding--1999--11,270; 2000--13,819
  shares; pro forma issued and outstanding--
  18,529 shares...............................     113       138         185
 Additional paid-in capital...................   7,949    15,395      41,897
 Accumulated other comprehensive loss.........     (32)     (772)       (772)
 Retained earnings............................   8,525    11,170      11,170
 Loans to shareholders........................     --     (3,258)     (3,258)
                                               -------  --------     -------
   Total shareholders' equity.................  16,555    22,673     $49,222
                                               -------  --------     =======
   Total liabilities and shareholders'
    equity.................................... $64,983  $190,451
                                               =======  ========
See accompanying notes.

                                      F-4
PEMSTAR INC.

                       CONSOLIDATED STATEMENTS OF INCOME
                    (in thousands, except per share amounts)
Year Ended March 31,
                                                  ----------------------------
                                                    1998      1999      2000
                                                  --------  --------  --------
Net sales.......................................  $165,049  $187,381  $393,842
Cost of goods sold..............................   147,962   172,219   363,974
                                                  --------  --------  --------
Gross profit....................................    17,087    15,162    29,868
Selling, general and administrative expenses....     8,328    10,955    21,576
Amortization....................................        54       190     1,281
                                                  --------  --------  --------
Operating income................................     8,705     4,017     7,011
Other income (expense)--net.....................       455      (438)      (74)
Interest expense................................      (746)     (640)   (3,588)
                                                  --------  --------  --------
Income before income taxes......................     8,414     2,939     3,349
Income tax expense..............................     3,097     1,273       698
                                                  --------  --------  --------
Net income......................................  $  5,317  $  1,666  $  2,651
                                                  ========  ========  ========
Net income per common share:
  Basic.........................................  $   0.55  $   0.15  $   0.23
  Diluted.......................................      0.49      0.12      0.15
Shares used in computing net income per common
 share:
  Basic.........................................     9,653    10,897    11,503
  Diluted.......................................    10,874    14,143    17,167
Unaudited pro forma net income per share (see
 Note 1):
  Basic.........................................                      $   0.17
  Diluted.......................................                          0.15
Shares used in computing unaudited pro forma net
 income per share (see Note 1):
  Basic.........................................                        15,647
  Diluted.......................................                        17,167
See accompanying notes.

                                      F-5
PEMSTAR INC.

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                 (in thousands)
Accumulated
                          Common Stock   Additional     Other
                          --------------  Paid-In   Comprehensive Retained    Loans to
                          Shares  Amount  Capital       Loss      Earnings  Shareholders  Total
                          ------  ------ ---------- ------------- --------  ------------ -------
Balance, March 31,
 1997...................   8,366   $ 84   $ 1,371       $ --      $ 1,554     $   --     $ 3,009
Issuance of common stock
 upon exercise of stock
 options................     273      3        81         --          --          --          84
Issuance of common
 stock..................   1,765     17     2,567         --          --          --       2,584
Net income..............     --     --        --          --        5,317         --       5,317
                          ------   ----   -------       -----     -------     -------    -------
Balance, March 31,
 1998...................  10,404    104     4,019         --        6,871         --      10,994
Issuance of common stock
 upon exercise of stock
 options................     111      1        45         --          --          --          46
Issuance of common
 stock..................     783      8     3,907         --          --          --       3,915
Repurchase of common
 stock..................     (28)   --        (22)        --          (12)        --         (34)
Comprehensive income:
Net income..............     --     --        --          --        1,666         --       1,666
Foreign currency
 translation
 adjustment.............     --     --        --          (32)        --          --         (32)
                                                                                         -------
Comprehensive income....     --     --        --          --          --          --       1,634
                          ------   ----   -------       -----     -------     -------    -------
Balance, March 31,
 1999...................  11,270    113     7,949         (32)      8,525         --      16,555
Issuance of common stock
 upon exercise of stock
 options................   1,565     15     2,410         --          --       (1,855)       570
Issuance of common
 stock..................     985     10     4,913         --          --       (1,403)     3,520
Repurchase of common
 stock..................      (1)   --        --          --           (6)        --          (6)
Comprehensive income:
Net income..............     --     --        --          --        2,651         --       2,651
Foreign currency
 translation
 adjustment.............     --     --        --         (740)        --          --        (740)
                                                                                         -------
Comprehensive income....     --     --        --          --          --          --       1,911
Other...................     --     --        123         --          --          --         123
                          ------   ----   -------       -----     -------     -------    -------
Balance, March 31,
 2000...................  13,819   $138   $15,395       $(772)    $11,170     $(3,258)   $22,673
                          ======   ====   =======       =====     =======     =======    =======
See accompanying notes.

                                      F-6
PEMSTAR INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
Year Ended March 31,
                                                   ---------------------------
                                                     1998     1999      2000
                                                   --------  -------  --------
Cash flows from operating activities:
 Net income....................................... $  5,317  $ 1,666  $  2,651
 Adjustments to reconcile net income to net cash
  (used in) provided by operating activities:
 Depreciation.....................................    1,929    3,331     7,455
 Amortization.....................................       54      190     1,281
 Deferred grant income recognized.................     (193)    (222)      (95)
 Deferred revenue.................................      962     (725)     (667)
 Deferred income taxes............................     (185)     151    (2,179)
 (Gain) loss on sale of property and equipment....      --       377       (42)
 Equity in income of affiliate....................     (169)     --        --
 Minority interest................................      --       277       191
 Issuance of stock options for services...........      --       --        150
 Changes in operating assets and liabilities:
  Accounts receivable.............................  (15,052)     439   (23,828)
  Inventories.....................................  (15,382)   2,418   (22,962)
  Recoverable income taxes........................      628   (1,214)    1,889
  Prepaid expenses and other......................     (492)  (1,127)     (343)
  Accounts payable................................   20,516   (5,733)   15,404
  Accrued expenses and other......................      693      237       870
                                                   --------  -------  --------
   Net cash (used in) provided by operating
    activities....................................   (1,374)      65   (20,225)
Cash flows from investing activities:
 (Increase) decrease in restricted cash...........   (1,447)     583       155
 Business acquisitions, net of cash acquired......      --       --    (39,473)
 Increase of intangibles..........................     (286)    (556)     (878)
 Proceeds from sale of property and equipment.....      --     3,085       122
 Purchases of property and equipment..............   (8,393)  (8,657)  (13,415)
                                                   --------  -------  --------
   Net cash used in investing activities..........  (10,126)  (5,545)  (53,489)
Cash flows from financing activities:
 Bank overdrafts..................................    2,364   (1,273)    8,569
 Proceeds from grants.............................      836      --        --
 Net (payments on) proceeds from short-term
  borrowings......................................   (3,206)     --        --
 Proceeds from sale/exercise of stock options.....      335       46       802
 Repurchase of common stock.......................      --       (34)       (6)
 Proceeds from private placement offering.........    9,920      --     18,000
 Proceeds from minority interest shareholder......      --       296       --
 Principal payments on long-term borrowings.......   (1,453)  (1,879)   (4,645)
 Proceeds from long-term borrowings...............    5,865    5,956    52,892
                                                   --------  -------  --------
   Net cash provided by financing activities......   14,661    3,112    75,612
Effect of exchange rate changes on cash...........      --       --          2
                                                   --------  -------  --------
Net increase (decrease) in cash and cash
 equivalents......................................    3,161   (2,368)    1,900
Cash and cash equivalents:
 Beginning of year................................       34    3,195       827
                                                   --------  -------  --------
 End of year...................................... $  3,195  $   827  $  2,727
                                                   ========  =======  ========
See accompanying notes.

                                      F-7
PEMSTAR INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (in thousands, except per share amounts)

Note 1. Nature of Business and Significant Accounting Policies

   Business--Pemstar Inc. (the "Company") is a leading provider of electronics
manufacturing services to original equipment manufacturers in the
communications, computing, data storage, industrial and medical equipment
sectors. The Company provides its services to customers on a global basis
through manufacturing facilities located in the United States, Mexico, Europe
and Asia. The Company considers its business activities as a single segment.

   Basis of presentation--The accompanying financial statements include the
accounts of Pemstar Inc., its majority-owned subsidiaries and the Company's
share of net earnings or losses of fifty 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 sale of products is recognized when
the product is shipped to the customer. Revenue from design, development and
engineering services is recognized when the services are performed and
collectibility is reasonably certain.

   Cash and cash equivalents--The Company considers all highly liquid debt
investments 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 and equipment--Property and equipment is stated at cost.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
Number of
                                                                         Years
                                                                       ---------
Buildings and improvements.........................................  4 to 40
   Machinery and equipment............................................        4
   Furniture and fixtures.............................................  2 to 10
   Computer hardware and software.....................................        4
Amortization of assets acquired under capital leases is included with
depreciation expense.

   Goodwill and other intangible assets--Goodwill represents the excess of the
purchase price over the fair value of the net assets acquired and is being
amortized on a straight-line basis over 20 years. Other intangible assets
principally consist of debt financing costs that are being amortized over the
terms of the applicable agreement.

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

                                      F-8
PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

   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, 1999 and 2000.

   Foreign currency--Foreign currency denominated assets and liabilities are
translated into United States dollars using the exchange rates in effect at the
balance sheet date. Results of operations are translated using the average
exchange rates throughout the period. The effect of exchange rate fluctuations
on translation of assets and liabilities is recorded as a component of
shareholders' equity. Gains and losses from foreign currency transactions are
included in net other income or expense.

   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.

   Deferred grant income--The Company recognizes revenue related to grants
received from various sources over the life of the property and equipment to
which the funding relates or during the period in which the expense occurs for
which grants were received.

   Research and development--Research and development costs are expensed when
incurred and totaled $401, $387 and $410 for the years ended March 31, 1998,
1999 and 2000, respectively.

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

   Segment information--The Company follows the provisions of SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 replaces the "industry segment" approach with the "management" approach of
reporting segment information. The management approach designates the internal
organization used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments. The Company
derives its revenue from one industry segment, the electronics manufacturing
services industry. Until such time as the Company diversifies its operations,
this pronouncement has no significant impact on the reporting practices of the
Company. Refer to Note 15 for geographic and significant customer disclosures.

   Comprehensive income--The Company follows the provisions of SFAS No. 130,
"Reporting Comprehensive Income," which established standards for reporting and
display of comprehensive income and its components. Comprehensive income
reflects the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. For the
Company, comprehensive income represents net income adjusted for foreign
currency translation adjustments. In accordance with SFAS No. 130, the Company
has chosen to disclose comprehensive income in the consolidated statement of
shareholders' equity.

   Stock-based compensation--The Company 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

                                      F-9
PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

current fair value of the underlying stock exceeds the exercise price of the
option. The Company has provided the pro forma disclosures required by SFAS No.
123, "Accounting for Stock-Based Compensation."

   Net income per common share--The Company follows the provisions of SFAS No.
128, "Earnings Per Share." Basic net income per share is computed based upon
the weighted average number of common shares issued and outstanding during each
year. Diluted net income per share amounts assume conversion, exercise or
issuance of all potential common stock instruments (stock options as discussed
in Note 16 and convertible preferred stock as discussed in Note 14) unless the
effect is to reduce a loss or increase net income per share. The following
table reflects the components of common shares outstanding in accordance with
SFAS No. 128:
Year Ended March 31,
                                                          --------------------
                                                           1998   1999   2000
                                                          ------ ------ ------
Weighted average common shares outstanding--basic........  9,653 10,897 11,503
Effect of dilutive securities:
  Preferred stock conversion.............................    198  1,710  4,144
  Stock options..........................................  1,023  1,536  1,520
                                                          ------ ------ ------
Shares used in computing net income per common share--
 diluted................................................. 10,874 14,143 17,167
                                                          ====== ====== ======
Pro forma shareholders' equity--Upon the closing of an initial public
offering, all outstanding shares of Series A and Series B preferred stock will
automatically convert into 4,710 shares of common stock. The pro forma effects
of these transactions are unaudited and have been reflected in the accompanying
pro forma shareholders' equity section at March 31, 2000.

   Pro forma net income per share--Pro forma basic net income per share is
computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of the Company's
redeemable Series A and Series B preferred stock into shares of the Company's
common stock as if such conversion occurred at the date of original issuance.
The resulting pro forma adjustments include an increase in the weighted average
shares used to compute basic net income per share of 4,144 shares for the year
ended March 31, 2000. The pro forma effects of these transactions are
unaudited.

   Stock split--In May 2000, the Company's Board of Directors declared a 3-for-
1 stock split payable in the form of a stock dividend. Accordingly, all share,
per share, weighted average share and stock option information for periods
prior to the split, have been restated to reflect the split.

   New accounting pronouncements--In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires an entity recognize all derivatives as either assets or liabilities at
fair value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 and is therefore effective for the Company
beginning April 1, 2001. Based upon the nature of the financial instruments and
hedging activities in effect as of March 31, 2000, this pronouncement would not
have a material impact on the Company's financial position or results of
operations.

   In fiscal 2000, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." SOP
98-1 provides guidance on accounting for the costs of computer software
developed or obtained for internal use and for determining when specific costs
should be capitalized and when they should be expensed. The impact of adopting
SOP 98-1 was not significant to the Company's financial position, results of
operations or cash flows.

                                      F-10
PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

   In fiscal 2000, the Company adopted SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities," issued by the AICPA. SOP 98-5 requires costs associated
with certain start-up activities be expensed as incurred versus capitalizing
and expensing them over a period of time. The impact of adopting SOP 98-5 was
not significant to the Company's financial position, results of operations, or
cash flows.

   Reclassification--Certain prior year amounts have been reclassified to
conform with the current year presentation.

Note 2. Acquisitions

   In June 1999, the Company acquired Quadrus, Inc., a division of Bell
Microproducts, Inc. Quadrus is a provider of electronic manufacturing services
to original equipment manufacturers. The purchase price of $34,966 was funded
through the issuance of Series B preferred stock in the aggregate amount of
$18,000 to certain of the Company's existing investors, with the remaining
amount funded by borrowings under the Company's operating line of credit. The
transaction was accounted for as a purchase. Accordingly, the net assets and
operating results have been included in the Company's financial statements from
the date of acquisition. The excess of the purchase price over the estimated
fair value of the net assets acquired of $12,346 has been recorded as goodwill
and is being amortized over an estimated useful life of 20 years. The following
unaudited pro forma combined summary statement of income for the years ended
March 31, 1999 and 2000 was prepared in accordance with Accounting Principles
Board Opinion No. 16 and assumes the acquisition had occurred at the beginning
of the periods presented. The following pro forma data reflect adjustments for
interest expense, amortization of goodwill 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 Income
Year Ended March
                                                                     31,
                                                              -----------------
                                                                1999     2000
                                                              -------- --------
Revenue................................................... $273,480 $407,972
   Net income................................................    3,926      348
   Net income per share--basic............................... $   0.36 $   0.03
   Net income per share--diluted.............................     0.28     0.02
In May 1999, the Company acquired a division of Fluke Corporation located in
Almelo, the Netherlands, which provides electronic manufacturing services to
the industrial equipment sector in Europe and North America. The purchase price
of $7,663 was funded through various credit facilities. 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, including certain employee
termination costs, over the estimated fair value of the net assets acquired of
$3,325 has been recorded as goodwill and is being amortized over an estimated
useful life of 20 years.

   During fiscal 2000, the Company's management approved a plan to reduce
headcount of the acquired operations. The formulation of such plans had begun
as of the date of acquisition, with all affected employees being notified by
March 2000. Costs associated with the planned workforce reductions totaling
$1,439 were recorded as liabilities in the purchase price allocation. The plans
contemplate completion of the workforce reduction by March 2001.

                                      F-11
PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

   Pursuant to the acquisition, the Company assumed all assets and liabilities
associated with a pension plan administered by Fluke Corporation for the
acquired division. As of March 31, 2000, the fair value of plan assets and
projected benefit obligation were $3,997 and $3,932, respectively. Expense
associated with the plan totaled $62 for the year ended March 31, 2000.

Note 3. Accounts Receivable

   Accounts receivable consists of the following:
March 31,
                                                               ----------------
                                                                1999     2000
                                                               -------  -------
Accounts receivable........................................ $21,734  $60,614
   Less allowance for doubtful accounts.......................     (53)    (553)
                                                               -------  -------
                                                               $21,681  $60,061
                                                               =======  =======
Note 4. Inventories

   Inventories consist of the following:
March 31,
                                                                ---------------
                                                                 1999    2000
                                                                ------- -------
Raw materials............................................... $14,961 $49,948
   Work in process.............................................     566   8,675
   Finished goods..............................................     922   6,387
   Less allowance for inventory obsolescence...................     --     (573)
                                                                ------- -------
                                                                $16,449 $64,437
                                                                ======= =======
Note 5. Property and Equipment

   Property and equipment consists of the following:
March 31,
                                                              -----------------
                                                               1999      2000
                                                              -------  --------
Land...................................................... $   812  $  1,022
   Buildings and improvements................................   7,451    11,818
   Machinery and equipment...................................  13,733    27,388
   Computer hardware and software............................   2,351     7,595
   Construction in progress..................................     132     1,131
                                                              -------  --------
                                                               24,479    48,954
   Less accumulated depreciation.............................  (6,918)  (14,021)
                                                              -------  --------
                                                              $17,561  $ 34,933
                                                              =======  ========
F-12
PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

Note 6. Goodwill

   Goodwill consists of the following:
March 31,
                                                                ---------------
                                                                 1999    2000
                                                                ------  -------
Goodwill.................................................... $3,940  $21,717
   Less accumulated amortization...............................   (146)  (1,026)
                                                                ------  -------
                                                                $3,794  $20,691
                                                                ======  =======
Note 7. Other Assets

   Other assets consist of the following:
March 31,
                                                                   -------------
                                                                    1999   2000
                                                                   ------ ------
Restricted cash................................................ $  454 $  182
   Other intangible assets, net of accumulated amortization -
    1999--$107; 2000--$299........................................    882  1,055
   Other..........................................................    --     147
                                                                   ------ ------
                                                                   $1,336 $1,384
                                                                   ====== ======
Note 8. Financing Arrangements

   Long-term debt consists of the following:
March 31,
                                                                ---------------
                                                                 1999    2000
                                                                ------  -------
Revolving credit facilities................................  $3,957  $56,557
   Notes payable, non-interest bearing, due in March 2007--
    $200 and April 2007--$150. Notes totalling $200 are
    collateralized by domestic equipment and real estate......     350      350
   Notes payable bearing interest at 5.00%, due in monthly
    payments of principal and interest of $75 through February
    2001 and annual payments of principal and interest of $58
    through July 2008. Notes are collateralized by domestic
    property and equipment....................................   1,164    1,627
   Bonds payable to the City of Rochester with variable
    interest rates ranging from 4.20% to 6.25% at March 31,
    2000, interest due monthly. Annual principal payments
    ranging from $75 to $285 are due through June 2018........   6,000    5,510
                                                                ------  -------
                                                                11,471   64,044
   Less current maturities....................................  (4,471) (12,930)
                                                                ------  -------
                                                                $7,000  $51,114
                                                                ======  =======
Payment of the bonds is secured by irrevocable letters of credit in favor of
the trustee in the amount of $5,609 expiring August 2003. The Company is
required to maintain letters of credit sufficient to pay all outstanding
principal and interest under the bonds. Interest on the bonds is variable and
is payable monthly until, at the option of the Company with the consent of US
Bank, the rate is fixed (conversion date). In the event the Company exercises
its option to convert the interest rate on the bonds from a variable rate to a
fixed

                                      F-13
PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

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 date 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. Proceeds from the bonds, to the extent unused, are
reported as restricted cash.

   Aggregate maturities of long-term debt are as follows:
Year Ending March 31:
2001............................................................... $12,930
     2002...............................................................  45,648
     2003...............................................................     678
     2004...............................................................     258
     2005...............................................................     272
     Thereafter.........................................................   4,258
                                                                         -------
                                                                         $64,044
                                                                         =======
The Company has two Revolving Credit Facilities totaling $65,000 ($55,000--
"Revolver A" and $10,000--"Revolver B") for revolving credit loans and letters
of credit which expire on Revolver A in August 2002 and Revolver B at the
earlier of October 2000 or the closing of an initial public offering. Advances
under the Revolving Credit Facilities bear interest at the Company's option at
a rate equal to either (1) 3.75% per annum plus the applicable LIBOR rate or
(2) 2.00% per annum plus prime. In addition, the Company is required to pay a
fee of 0.25% on the average unused commitment under the Revolving Credit
Facilities. The Company had $500 reserved against the Revolving Credit
Facilities for letters of credit at March 31, 2000. As of March 31, 2000, the
Company had elected the LIBOR rate (6.20% at March 31, 2000) for advances
totaling $37,400, and the prime rate (8.5% at March 31, 2000) for advances
totaling $16,000.

   On May 5, 2000, Revolver A was amended to reduce the available credit
facility from $55,000 to $45,000. In addition, the index rate for Revolver B
loans was amended to increase on a periodic basis to a maximum rate at October
1, 2000 of (1) 6.75% per annum plus the applicable LIBOR rate or (2) 5.00% per
annum plus the bank's reference rate. Concurrent with this amendment, the
Company entered into a new Revolving Credit Facility with another lender
totaling $40,000. Advances under the new Revolving Credit Facility bear
interest at prime plus 1.00%. In addition, the Company is required to pay a
monthly fee of 0.25% on the unused portion of the facility. Borrowings under
the new Revolving Credit Facility and Revolver A are collateralized by
substantially all domestic non-real estate assets of the Company. Borrowings
under Revolver B are unsecured.

   The Company also has, through one of its subsidiaries, a separate line of
credit totaling $3,257. Advances under the line of credit bear interest at the
bank's base rate (4.25% at March 31, 2000) plus 1.5%. The line of credit is
secured by the inventory and receivables of the subsidiary and the corporate
guarantee of the Company.

   Notes payable totaling $1,225 are subordinated to the Revolving Credit
Facilities. The financing arrangements are subject to certain covenants that
require the Company to maintain certain financial ratios, including minimum
liquidity and debt coverage, and limit investments and cash distributions.

                                      F-14
PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

Note 9. Other Income (Expense)--Net

   The other income and expense consists of the following:
March 31,
                                                             ----------------
                                                             1998 1999   2000
                                                             ---- -----  ----
Grant income............................................. $193 $ 222  $ 95
   Equity in earnings of affiliate..........................  170   --    --
   Minority interest in net income of consolidated
    subsidiaries............................................  --   (277) (191)
   Net other income (expense)...............................   92  (383)   22
                                                             ---- -----  ----
                                                             $455 $(438) $(74)
                                                             ==== =====  ====
Note 10. Fair Value of Financial Instruments

   The carrying values of cash, accounts receivable and payable, and accrued
liabilities approximate fair value due to the short-term maturity of these
instruments. The carrying amount of the Company's revolving line of credit
approximates fair value because of the variability of the interest cost
associated with these instruments. The fair value of the Company's long-term
notes approximated fair value because the majority of the amounts outstanding
accrue interest at variable rates which approximate market. The fair value of
the Company's preferred stock approximated $23,500 at March 31, 2000 based upon
the assumed conversion of the preferred stock into common stock.

Note 11. Commitments and Contingencies

   The Company has various capital and operating leases which expire on various
dates through 2012. Future minimum payments under both capital leases and
operating leases are as follows:
Capital  Operating
                                                              Leases    Leases
                                                              -------  ---------
Fiscal Year Ending March 31:
     2001.................................................... $ 2,899   $ 3,753
     2002....................................................   1,932     3,394
     2003....................................................   1,451     2,936
     2004....................................................     901     2,701
     2005....................................................      18     2,734
     Thereafter..............................................     --      7,618
                                                              -------   -------
   Total minimum lease payments..............................   7,201   $23,136
                                                                        =======
   Less amount representing interest.........................    (835)
                                                              -------
   Present value of minimum lease payment....................   6,366
   Less current portion......................................  (2,299)
                                                              -------
                                                              $ 4,067
                                                              =======
F-15
PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

   Property and equipment includes the following amounts for capitalized
leases:
March 31,
                                                                   ------------
                                                                   1999   2000
                                                                   ----  ------
Machinery and equipment........................................ $125  $5,189
   Furniture and fixtures.........................................   84      84
   Computer hardware and software.................................  644   2,019
                                                                   ----  ------
                                                                    853   7,292
   Less accumulated depreciation.................................. (269)   (719)
                                                                   ----  ------
                                                                   $584  $6,573
                                                                   ====  ======
Total rent expense recognized under operating leases for the years ended
March 31, 1998, 1999 and 2000 totaled $579, $1,567 and $3,027, respectively.

Note 12. Income Taxes

   Income before income taxes consisted of the following:
Year Ended March 31,
                                                            --------------------
                                                             1998   1999   2000
                                                            ------ ------ ------
Domestic................................................ $8,206 $1,837 $2,485
   Foreign.................................................    208  1,102    864
                                                            ------ ------ ------
                                                            $8,414 $2,939 $3,349
                                                            ====== ====== ======
The provision for income taxes consisted of the following:
Year Ended March 31,
                                                         ----------------------
                                                          1998    1999   2000
                                                         ------  ------ -------
Current:
     Domestic........................................... $3,282  $  624 $ 2,378
     Foreign............................................    --      498     499
                                                         ------  ------ -------
                                                          3,282   1,122   2,877
   Deferred:
     Domestic...........................................   (185)    151  (1,678)
     Foreign............................................    --      --     (501)
                                                         ------  ------ -------
                                                           (185)    151  (2,179)
                                                         ------  ------ -------
                                                         $3,097  $1,273 $   698
                                                         ======  ====== =======
F-16
PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

   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,
                                                        ----------------------
                                                         1998    1999    2000
                                                        ------  ------  ------
Computed "expected" tax rate.......................  $2,861  $  999  $1,139
   Increase (decrease) in income taxes resulting from:
     State taxes, net of credits and federal income
      tax benefit.....................................     319      80    (289)
     Permanent differences............................     (77)    (46)    148
     Foreign taxes....................................     (71)    108    (296)
     Other............................................      65     132      (4)
                                                        ------  ------  ------
                                                        $3,097  $1,273  $  698
                                                        ======  ======  ======
A summary of deferred tax assets (liabilities) is as follows:
March 31,
                                                               ---------------
                                                                1999     2000
                                                               -------  ------
Deferred tax assets:
     Deferred revenue......................................... $ 1,087  $  794
     Expenses accelerated for financial reporting purposes....      94   1,135
     Foreign net operating losses.............................     --      492
     State tax credits........................................     --      523
     Other....................................................      25     139
                                                               -------  ------
   Total deferred tax assets..................................   1,206   3,083
   Deferred tax liabilities:
     Unbilled services........................................    (475)   (495)
     Accounting basis of assets in excess of tax basis........    (695)   (373)
                                                               -------  ------
   Total deferred tax liabilities.............................  (1,170)   (868)
                                                               -------  ------
   Net deferred tax asset..................................... $    36  $2,215
                                                               =======  ======
No provision has been made for U.S. income taxes related to undistributed
earnings of foreign subsidiaries that are intended to be permanently
reinvested. The Company had approximately $1,991 of foreign net operating loss
carryforwards, $1,539 of which expire in 2010, with the remaining amount having
an unlimited carryforward period. The state tax credit carryforwards of $792
expire at varying dates through 2015.

Note 13. Deferred Grant Income

   The Company has received grant monies pursuant to certain Development
Assistance and Redevelopment Assistance Agreements (the Agreements) which
provide primarily for the funding of certain development costs associated
primarily with property and equipment acquisitions. The Agreements require,
among other things, that the Company maintain certain levels of employment. If
the Company does not maintain the levels of employment, the Company must repay
the grant monies plus accrued interest at various rates up to 5%, or pay a
penalty of $8 per employee according to the terms of the Agreements. Deferred
grant income is being recognized over the life of the related property and
equipment acquired with the grant proceeds. Grant income for each of the years
ended March 31, 1998, 1999 and 2000 totaled $193, $222 and $95, respectively.

                                      F-17
PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

Note 14. Mandatory Redeemable and Convertible Preferred Stock

   The Company has authorized 5,000 shares of $0.01 par value preferred stock,
667 shares of which are designated as Series A preferred stock (Series A) of
which 570 shares were issued and outstanding as of March 31, 1999 and 2000.
Additionally, 1,000 shares have been designated as Series B preferred stock
(Series B) of which 1,000 shares were issued and outstanding as of March 31,
2000. Dividends are $0.40 and $0.48 per share per year, non-cumulative, for the
Series A and Series B, respectively. After paying the preferred dividend, the
preferred shareholders share ratably with the common shareholders in any
additional dividends. The Series A and Series B preferred shareholders are
entitled to liquidation preferences of $5.00 and $6.00 per share, respectively.
Upon completion of the distribution of the liquidation preferences, the Series
A and Series B preferred shareholders are entitled to receive ratable
distributions with the common shareholders up to $2.50 per share and up to
$3.00 per share, respectively.

   Any time after February 12 and September 15, 2002, the holders of a majority
of the Series A and Series B preferred stock, respectively, can demand
redemption. The purchase price is the original issue price plus declared unpaid
dividends payable in three equal annual installments. The amount of the
potential redemption requirement excluding dividends, subsequent to February
12, 2002 is $8,549 for the Series A preferred stock and subsequent to September
15, 2002 is $18,000 for the Series B preferred stock.

   Each share of preferred stock is convertible into common stock at conversion
prices of $5.00 per share for Series A and $6.00 per share for Series B as of
March 31, 2000. The conversion ratio is adjusted upon the issuance of
additional common shares with certain exceptions.

   Each share of preferred stock is automatically converted into shares of
common stock upon the earlier of (1) an initial public offering at not less
than $6.67 per share for Series A and $8.00 per share for Series B and $15,000
in the aggregate or (2) by written consent of two-thirds of the holders of the
outstanding Series A and Series B preferred shares.

   In connection with the sale of the preferred stock, the founding
shareholders and preferred shareholders entered into a "Shareholders
Agreement." The agreement stipulates the Company has the right of first refusal
on the proposed transfer of stock by any founding shareholder with payment due
in ten days. In the event the Company does not exercise its right, the
preferred shareholders have the same right of first refusal.

   In the event less than all of the shares of stock proposed to be transferred
by a founding shareholder are acquired by the Company and/or preferred
shareholders pursuant to the right of first refusal, each preferred shareholder
shall have the right to participate in such sale (co-sale rights) of stock on
the same terms and conditions. To the extent one or more of the preferred
shareholders exercises such right of participation, the number of shares of
stock the founding shareholder may sell in the transaction shall be
correspondingly reduced.

   The rights of first refusal and the co-sale rights terminate upon the
occurrence of specific events, including the effective date of a bona fide firm
commitment underwritten public offering of the Company's common stock.

                                      F-18
PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

Note 15. Geographic and Concentration of Credit Risk Information

   The following is a summary of net sales and long-lived assets by geographic
location:
March 31,
                                                      --------------------------
                                                        1998     1999     2000
                                                      -------- -------- --------
Net sales:
     United States................................... $165,049 $176,373 $318,616
     Asia............................................      --    11,008   44,314
     Europe..........................................      --       --    30,912
                                                      -------- -------- --------
                                                      $165,049 $187,381 $393,842
                                                      ======== ======== ========
   Long-lived assets:
     United States................................... $ 16,497 $ 19,546 $ 42,463
     Asia............................................      --     3,538   10,421
     Europe..........................................      --       --     4,124
                                                      -------- -------- --------
                                                      $ 16,497 $ 23,084 $ 57,008
                                                      ======== ======== ========
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade receivables. Sales of the Company's
products are concentrated among specific customers in the same industry. The
Company generally does not require collateral. The Company considers
concentrations of credit risk in establishing the allowance for doubtful
accounts and believes the recorded amount is adequate.

   Customers that accounted for more than 10% of consolidated net sales are as
follows:
March 31,
                                                                  ----------------
                                                                  1998  1999  2000
                                                                  ----  ----  ----
Customer A....................................................  36%   64%   37%
   Customer B....................................................  12    11    15
   Customer C....................................................  26    --    --
As of March 31, 1999 and 2000, receivables from these customers represented
59% and 33% of total accounts receivable.

Note 16. Stock Option Plans

   The Company has reserved 1,327 shares of common stock for issuance to board
members and employees under incentive stock option and purchase plans approved
by shareholders. Current exercisable options are granted at prices equal to the
fair market value on the dates of grant. All options are exercisable over a
ten-year period.

   Grants under stock option plans are accounted for using APB No. 25 and
related interpretations. Accordingly, no compensation cost has been recognized
for grants under these stock option plans as the exercise price equaled the
fair market value of the stock on the date of grant. Had compensation cost for
stock option grants been based on the grant date fair values of awards (the
method described in SFAS No. 123), reported net income would have been reduced
to the pro forma amounts reported below.

                                      F-19
PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)
March 31,
                                                          --------------------
                                                           1998   1999   2000
                                                          ------ ------ ------
Net income (loss):
  As reported............................................ $5,317 $1,666 $2,651
  Pro forma..............................................  5,279  1,499 (5,059)
Basic earnings (loss) per share:
  As reported............................................ $ 0.55 $ 0.15 $ 0.23
  Pro forma..............................................   0.55   0.14  (0.44)
Diluted earnings (loss) per share:
  As reported............................................ $ 0.49 $ 0.12 $ 0.15
  Pro forma..............................................   0.49   0.11  (0.44)
The fair value of each option grant has been estimated at the grant date
using the minimum-value method with the following weighted average assumptions:
dividend rate of 0% for all years; risk-free interest rates of 6.13%, 5.53% and
5.73% for 2000, 1999 and 1998, respectively and expected lives of ten years.

   Following is a summary of stock option activity for the fiscal years ended
March 31:
1998             1999              2000
                            ---------------- ---------------- -----------------
                                    Weighted         Weighted          Weighted
                                    Average          Average           Average
                                    Exercise         Exercise          Exercise
                            Shares   Price   Shares   Price   Shares    Price
                            ------  -------- ------  -------- -------  --------
Outstanding, beginning
    of year................    963   $0.32    1,866   $0.65     2,173   $1.40
   Granted.................  1,176    0.83      418    4.52     3,269    4.39
   Exercised/forfeited.....   (273)   0.31     (111)   0.39    (1,597)   1.47
                            ------           ------           -------
   Outstanding, end of
    year...................  1,866    0.65    2,173    1.40     3,845    4.35
                            ======           ======           =======
   Exercisable, end of
    year...................    901    0.53      937    0.57     3,029    4.18
   Weighted average fair
    value per share of
    options granted during
    the year............... $ 0.37           $ 2.29           $  2.35
At March 31, 2000, the options outstanding have average remaining
contractual lives and exercise prices as follows:
Average
            Shares                Contractual Life                           Exercise Price
            ------                ----------------                           --------------
262                      6 years                                   $0.33
               71                    7.5 years                                    0.50
              195                    7.5 years                                    0.82
            3,317                    9.5 years                                    5.00
Note 17. Sale-Leaseback

   During the year ended March 31, 1999, the Company sold its manufacturing and
office space facility. The Company subsequently leased this facility back from
the new owner. The gain realized on this sale is being deferred and recognized
over the term of the new building lease. The remaining deferred gain, which is
included in the deferred revenue balance, as of March 31, 1999 and 2000 was
$272 and $250, respectively. The amount of gain recognized during the years
ended March 31, 1999 and 2000 was $14 and $22, respectively.

                                      F-20
PEMSTAR INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                    (in thousands, except per share amounts)

Note 18. Employee Benefit Plans

Retirement Savings Plans

   The Company sponsors various employee retirement savings plans that allow
qualified employees to provide for their retirement on a tax-deferred basis. In
accordance with the terms of the retirement savings plans, the Company is
required to match certain of the participants' contributions and/or provide
employer contributions based on the Company's performance and other factors.
Employer contributions for the years ended March 31, 1998, 1999 and 2000
totaled $126, $295 and $413, respectively.

Note 19. Supplemental Cash Flow Information
Year Ended March 31,
                                                          --------------------
                                                           1998   1999   2000
                                                          ------ ------ ------
Supplemental disclosures for cash flow information:
     Cash payments for:
       Interest.......................................... $  817 $  643 $3,555
       Income taxes......................................  2,658  2,332  1,197
   Supplemental schedule of non-cash investing and
    financing activities:
     Land acquired through tax increment financing....... $  456 $  --  $  --
     Property and equipment acquired through capital
      lease agreements...................................    683     71  2,514
     Purchase of minority interest in consolidated
      subsidiary through issuance of common stock........    963  3,915  3,263
F-21
REPORT OF INDEPENDENT AUDITORS

To the Board of Directors
Pemstar Inc.
Rochester, Minnesota

   We have audited the accompanying balance sheets of Quadrus Manufacturing, a
Division of Bell Microproducts, Inc. as of December 31, 1998, 1997 and 1996,
and the related statements of income, divisional equity, and cash flows for the
years then ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 presents fairly,
in all material respects, the financial position of Quadrus Manufacturing, a
Division of Bell Microproducts, Inc. as of December 31, 1998, 1997 and 1996,
and the results of its operations and its cash flows for the years then ended
in conformity with generally accepted accounting principles.

                                          /s/ McGLADREY & PULLEN, LLP

Rochester, Minnesota
January 13, 2000

                                      F-22
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.

                                 BALANCE SHEETS
                                 (in thousands)
December 31,
                                                        -----------------------
                                                         1998    1997    1996
                                                        ------- ------- -------
Assets
Current assets:
  Cash................................................. $   --  $    71 $   513
  Receivables, less allowance for doubtful accounts
   1998 $113; 1997 $107; 1996 $119 (Note 9)............  13,618  10,274  11,345
  Inventories (Note 2).................................  24,059  16,553  18,867
  Prepaid expenses.....................................     576     561     527
  Income tax receivable, home office...................   1,975   1,775     --
                                                        ------- ------- -------
    Total current assets...............................  40,228  29,234  31,252
Other assets
  Deposits.............................................     126     132     123
Property and equipment (Notes 3 & 6)...................   9,411   8,654   7,952
                                                        ------- ------- -------
    Total assets....................................... $49,765 $38,020 $39,327
                                                        ======= ======= =======
Liabilities and Net Assets
Current liabilities:
  Checks in excess of bank balance..................... $ 1,121 $   --  $   --
  Current maturities of long-term debt.................   2,232   1,728   1,375
  Accounts payable.....................................   8,238   4,587   3,871
  Accrued expenses.....................................   1,234     720     728
  Income tax payable, home office......................     --      --    1,746
                                                        ------- ------- -------
    Total current liabilities..........................  12,825   7,035   7,720
                                                        ------- ------- -------
Long-term debt, net of current portion (Note 4)........   4,530   4,442   4,985
                                                        ------- ------- -------
Commitments and contingencies (Note 5)
  Divisional equity (Note 7)...........................  32,410  26,543  26,622
                                                        ------- ------- -------
                                                        $49,765 $38,020 $39,327
                                                        ======= ======= =======
See accompanying notes.

                                      F-23
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.

                              STATEMENTS OF INCOME
                                 (in thousands)
December 31,
                                                    ---------------------------
                                                      1998      1997     1996
                                                    --------  --------  -------
Net sales (Note 9)................................. $ 86,099  $ 73,221  $92,131
Cost of sales......................................   84,030    70,344   80,203
                                                    --------  --------  -------
Gross profit.......................................    2,069     2,877   11,928
Corporate allocation...............................    1,761     2,367    1,618
Operating expenses.................................    3,566     3,459    4,818
                                                    --------  --------  -------
Operating income (loss)............................   (3,258)   (2,949)   5,492
Nonoperating income (expenses):
Loss on disposal of assets.........................      (20)      (2)      --
Interest expense...................................     (515)     (528)    (507)
Corporate allocations-interest.....................     (911)     (747)    (829)
                                                    --------  --------  -------
Income (loss) before income taxes..................   (4,704)   (4,226)   4,156
Allocation for income taxes (Note 5)...............   (1,975)   (1,775)   1,746
                                                    --------  --------  -------
Net income (loss).................................. $ (2,729) $ (2,451) $ 2,410
                                                    ========  ========  =======
STATEMENTS OF DIVISIONAL EQUITY
December 31,
                                                     -------------------------
                                                      1998     1997     1996
                                                     -------  -------  -------
Balance, beginning.................................. $26,543  $26,622  $35,429
  Net income (loss).................................  (2,729)  (2,451)   2,410
  Long-term working capital advanced from (repaid
   to) the home office..............................   8,596    2,372  (11,217)
                                                     -------  -------  -------
Balance, ending..................................... $32,410  $26,543  $26,622
                                                     =======  =======  =======
See accompanying notes.

                                      F-24
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.

                            STATEMENTS OF CASH FLOWS
                                 (in thousands)
December 31,
                                                    --------------------------
                                                     1998     1997      1996
                                                    -------  -------  --------
Cash flows from operating activities:
  Net income (loss)................................ $(2,729) $(2,451) $  2,410
  Adjustments to reconcile net income (loss) to net
   cash provided
   by (used in) operating activities:
    Depreciation and amortization..................   2,844    2,472     1,973
    Loss on sale of equipment......................      20        2       --
    Change in assets and liabilities:
      (Increase) decrease in trade receivables.....  (3,344)   1,071     6,176
      (Increase) decrease in inventories...........  (7,506)   2,314     1,838
      Increase in prepaid expenses.................     (15)     (34)     (195)
      Increase in income taxes receivable, home
       office......................................    (200)  (1,775)      --
      (Increase) decrease in deposits..............       6      (9)       (98)
      Increase (decrease) in accounts payable......   3,651      716      (244)
      Increase (decrease) in accrued expenses......     514      (8)       271
      Increase (decrease) in income taxes payable,
       home office.................................     --    (1,746)    1,746
                                                    -------  -------  --------
        Net cash provided by (used in) operating
         activities................................  (6,759)     552    13,877
Cash flows from investing activities:
  Purchase of property and equipment...............  (1,105)  (1,829)   (1,108)
  Proceeds from sale of property and equipment.....       3      --        375
                                                    -------  -------  --------
        Net cash used in investing activities......  (1,102)  (1,829)     (733)
Cash flows from financing activities:
  Working capital advance from (repayments to) the
   home office.....................................   8,596    2,372   (11,217)
  Principal payments on long-term borrowings.......  (1,927)  (1,537)   (1,600)
  Increase in checks in excess of bank balance.....   1,121      --        --
                                                    -------  -------  --------
        Net cash provided by (used in) financing
         activities................................   7,790      835   (12,817)
        Net increase (decrease) in cash............     (71)    (442)      327
Cash:
  Beginning........................................      71      513       186
                                                    -------  -------  --------
  Ending........................................... $   --   $    71  $    513
                                                    =======  =======  ========
  Cash payments for interest....................... $   515  $   528  $    507
                                                    =======  =======  ========
Supplementary schedule of noncash investing and
 financing activities;
  Capital lease obligations incurred for purchase
   of property and equipment....................... $ 2,519  $ 1,347  $  2,280
                                                    =======  =======  ========
See accompanying notes.

                                      F-25
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                                 (in thousands)

Note 1. Nature of Business and Significant Accounting Policies

   Nature of business--The Division's operations consist principally of
contract manufacturing. The Division also provides a variety of manufacturing
and value-added services to its customers, including the manufacturing of
board-level and systems products to customer specifications, and certain types
of component kits to customer specification.

   Significant accounting policies are as follows:

   Basis of presentation--The accompanying Divisional financial statements have
been prepared from the books and records maintained by Bell Microproducts, Inc.
The statements of income may not necessarily be indicative of the results of
operations that would have been obtained if the division had been operated as
an independent entity. The statements of income include allocation of certain
expenses which are material in amount. Such expenses are allocations for
corporate services, interest expense, and federal and state income taxes.

   Financial statement estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and 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. Actual results could differ from those estimates.

   Fair value of financial instruments--The fair value of cash, accounts
receivable, accounts payable and home office advance approximate the carrying
amount because of the short maturity of those instruments.

   Cash--The Division maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Division has not experienced
any losses in such accounts.

   Inventories--Inventories are stated at the lower of standard cost which
approximates actual cost on a first-in, first-out basis or market. Market is
based on estimated net realizable value. Work in process and finished goods
include materials, labor and allocated overhead.

   Property and equipment--Property and equipment is carried at cost.
Depreciation on property and equipment is computed by the straight line method
over the following estimated useful lives:
Years
                                                                          ------
Manufacturing equipment........................................... 3 to 5
       Office furniture and fixtures.....................................      5
       Computer hardware and software.................................... 3 to 5
Leasehold improvements are depreciated over the shorter of the term of the
lease or their estimated useful lives. The amortization of assets acquired
under capital leases is included with depreciation expense on owned assets.

Note 2. Inventories

   Inventories consist of the following:
December 31,
                                                         -----------------------
                                                          1998    1997    1996
                                                         ------- ------- -------
Raw materials........................................... $12,644 $ 7,833 $ 9,721
Work in process.........................................  10,713   7,853   8,234
Finished goods..........................................     702     867     912
                                                         ------- ------- -------
Total inventories....................................... $24,059 $16,553 $18,867
                                                         ======= ======= =======
F-26
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)
                                 (in thousands)

Note 3. Property and Equipment

   Property and equipment consists of the following:
December 31,
                                                        -----------------------
                                                         1998    1997    1996
                                                        ------- ------- -------
Asset Description:
     Leasehold improvements............................ $ 1,660 $ 1,568 $   332
     Manufacturing equipment...........................  13,353  10,435   9,604
     Office furniture and fixtures.....................     667     651     230
     Computer hardware and software....................   1,824   1,461   1,109
                                                        ------- ------- -------
       Total cost......................................  17,504  14,115  11,275
     Less: accumulated depreciation....................   8,093   5,461   3,323
                                                        ------- ------- -------
   Total property and equipment........................ $ 9,411 $ 8,654 $ 7,952
                                                        ======= ======= =======
Note 4. Long-Term Debt

   The Division has $6,762 of leases with various banks. Due to the terms of
the leases, they are all considered capital lease obligations. The Division has
the following capital lease obligations:
December 31,
                                                            --------------------
                                                             1998   1997   1996
                                                            ------ ------ ------
Capital lease obligations due in monthly payments of
    approximately $223 through October 2003, discounted at
    rates of 6.9% to 9.8%.................................  $6,762 $6,170 $6,360
     Less: current maturities.............................   2,232  1,728  1,375
                                                            ------ ------ ------
   Total long-term debt...................................  $4,530 $4,442 $4,985
                                                            ====== ====== ======
Aggregate maturities required on long-term debt at December 31, 1998 are due
as follows:
1999................................. $ 2,232
            2000.................................   2,180
            2001.................................   1,116
            2002.................................     706
            2003.................................     528
Note 5. Income Taxes

   The following table reconciles the expected amount from applying the
statutory federal income tax rate to income before income taxes.
December 31,
                                                     --------------------------
                                                       1998      1997     1996
                                                     --------  --------  ------
Computed "expected' income tax expense
    (benefit)......................................  $ (1,646) $ (1,437) $1,455
   State income taxes, net of federal tax benefit..      (193)     (177)    237
   Other...........................................      (136)     (161)     54
                                                     --------  --------  ------
   Total income taxes..............................  $ (1,975) $ (1,775) $1,746
                                                     ========  ========  ======
F-27
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)
                                 (In thousands)

Note 6. Lease or Other Commitments

   The Division leases a building under a 10 year triple net lease agreement.
Rental expense for the years ending December 31, 1998, 1997 and 1996 were
$1,046; $891 and $-0-, respectively. The total minimum rental commitment as of
December 31, 1998 is due in future years as follows:
Years ending December 31,
      1999.............................................................. $  969
      2000..............................................................    989
      2001..............................................................    989
      2002..............................................................  1,110
      2003..............................................................  1,120
      Thereafter........................................................  2,429
                                                                         ------
                                                                         $7,606
                                                                         ======
The Division leases manufacturing equipment under various leases which,
because of their terms, are recorded as capital leases.

   The following is a schedule by years of the future minimum lease payments
under the capital leases together with the present value of the minimum lease
payments as of December 31, 1998:
Years ending December 31,
      1999.............................................................. $2,689
      2000..............................................................  2,455
      2001..............................................................  1,255
      2002..............................................................    773
      2003..............................................................    536
                                                                         ------
        Total minimum lease payments....................................  7,708
        Less the amount representing interest...........................    946
                                                                         ------
        Present value of minimum lease payments......................... $6,762
                                                                         ======
At December 31, 1998, 1997 and 1996, property and equipment includes amounts
for assets acquired under capital leases of $12,561, $10,042 and $8,695,
respectively. Accumulated depreciation for the same periods includes amounts of
$6,036, $4,001 and $2,253, respectively.

Note 7. Divisional Equity

   Divisional equity balance was comprised of the following elements:
December 31,
                                                       ------------------------
                                                        1998     1997    1996
   (In thousands)                                      -------  ------- -------
Intercompany liability............................. $32,130  $21,759 $21,133
   Investment by home office..........................   1,759    1,759   1,759
   Retained earnings (deficit)........................  (1,479)   3,025   3,730
                                                       -------  ------- -------
                                                       $32,410  $26,543 $26,622
                                                       =======  ======= =======
F-28
QUADRUS MANUFACTURING, A DIVISION OF BELL MICROPRODUCTS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)
                                 (in thousands)

Note 8. Sale of Division

   On June 7, 1999 Bell Microproducts, Inc. sold the Quadrus Manufacturing
division to Pemstar Inc. Pemstar Inc. bought certain assets and assumed certain
liabilities as of that date. The adjusted sales price was $34,966. The
acquisition was funded through the increase in Pemstar Inc.'s operating line of
credit and from the sale of Pemstar Inc. preferred stock.

Note 9. Major Customers

   Net sales include sales to the following customers which accounted for 10%
or more of the total net sales of the Division. Information relating to these
customers is as follows:
Trade Receivable
                                     Net Sales for the Year    Balance as of
                                       Ended December 31,       December 31,
                                     ----------------------- -------------------
                                      1998    1997    1996    1998  1997   1996
                                     ------- ------- ------- ------ ----  ------
Customer A....................... $   --  $14,537 $38,165 $  --  $362  $5,999
   Customer B.......................     --      --   16,345    --   --    1,882
   Customer C.......................  10,986  20,315     --   1,235  (20)    --
   Customer D.......................  24,464     --      --   4,074  --      --
                                     ------- ------- ------- ------ ----  ------
                                     $35,450 $34,852 $54,510 $5,309 $342  $7,881
                                     ======= ======= ======= ====== ====  ======
Because of the nature of the Division's business, the major customers may
vary between years.

                                      F-29
[LOGO OF WATERMARK]
                                        Shares

                                  Common Stock

                                  -----------

                                   PROSPECTUS
                                        , 2000

                                  -----------

                                Lehman Brothers

                               Robertson Stephens

                                   Chase H&Q

                               CIBC World Markets

                            Fidelity Capital Markets
             a division of National Financial Services Corporation
PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   Except as set forth below the following fees and expenses will be paid by
Pemstar in connection with the issuance and distribution of the securities
registered hereby and do not include underwriting commissions and discounts.
All such expenses, except for the SEC registration, NASD filing and Nasdaq
listing fees, are estimated.
SEC registration fee.......................................... $   30,360
      NASD filing fee............................................... $   12,000
      Nasdaq National Market listing fee............................ $   95,000
      Legal fees and expenses....................................... $     *
      Accounting fees and expenses.................................. $     *
      Transfer Agent's and Registrar's fees......................... $     *
      Printing and engraving expenses............................... $     *
      Miscellaneous................................................. $     *
                                                                     ----------
      Total......................................................... $1,000,000
                                                                     ==========
--------
*  To be provided by amendment.

Item 14. Indemnification of Directors and Officers

   Section 302A.521 of the Minnesota Statutes provides that a corporation shall
indemnify any person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of such person against
judgments, penalties, fines (including, without limitation, excise taxes
assessed against such person with respect to any employee benefit plan),
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person (1) has not been indemnified therefore by another
organization or employee benefit plan for the same judgments, penalties or
fines; (2) acted in good faith; (3) received no improper personal benefit and
Section 302A.255 (with respect to director conflicts of interest), if
applicable, has been satisfied; (4) in the case of a criminal proceeding, had
no reasonable cause to believe the conduct was unlawful; and (5) in the case of
acts or omissions in such person's official capacity for the corporation,
reasonably believed that the conduct was in the best interests of the
corporation, or in the case of acts or omissions in such person's official
capacity for other affiliated organizations, reasonably believed that the
conduct was not opposed to the best interests of the corporation. Section
302A.521 also requires payment by a corporation, upon written request, of
reasonable expenses in advance of final disposition of the proceeding in
certain instances. A decision as to required indemnification is made by a
disinterested majority of the Board of Directors present at a meeting at which
a disinterested quorum is present, or by a designated committee of the Board,
by special legal counsel, by the shareholders or by a court.

   Provisions regarding indemnification of officers and directors of Pemstar to
the extent permitted by Section 302A.521 are contained in Pemstar's articles of
incorporation and bylaws.

Item 15. Recent Sales of Unregistered Securities

   During the past three years, the registrant sold the following securities
that were not registered under the Securities Act. No underwriting commission
or discount was paid in connection with any of the sales.

  (1)  Between May 16, 1997 and May 16, 2000, we sold 1,664,358 shares of
       common stock to various employees, directors, consultants and advisors
       pursuant to the exercise of outstanding options for an aggregate of
       $1,133,452.26 cash in reliance upon Rule 701 of the Securities Act.

                                      II-1
(2) On May 19, 1997 we sold 15,000 shares of common stock for $7,500 cash
      to one employee in reliance upon the exemption contained in Section
      4(2) of the Securities Act for transactions not involving a public
      offering.

  (3) In 1997 we entered into a joint venture with Italade Technology of
      Thailand to form Italade Pemstar Limited. Pursuant to the terms of the
      joint venture agreement, we acquired Italade Technology's joint venture
      interest in Italade Pemstar Limited in exchange for 2,610,000 shares of
      our common stock. The sales were made in reliance upon the exemptions
      contained in Regulation S of the Securities Act for sales to non U.S.
      persons and in Section 4(2) of the Securities Act for transactions not
      involving a public offering.

  (4) On September 30, 1997, we sold 270,000 shares of common stock for
      $221,400 cash to eight officers (who were also directors of the
      registrant) and to one other accredited investor in reliance upon the
      exemption contained in Section 4(2) of the Securities Act for
      transactions not involving a public offering.

  (5) In February 1998, we sold 285,102 shares of common stock for $1,425,510
      cash to various accredited investors in a private placement in reliance
      upon the exemptions contained in Section 4(2) of the Securities Act and
      Rule 506 of Regulation D thereunder.

  (6) In February and March 1998, we sold 569,966 shares of Series A
      preferred stock for $8,549,490 cash to two accredited investors in a
      private placement in reliance upon the exemptions contained in Section
      4(2) of the Securities Act and Rule 506 of Regulation D thereunder.

  (7) In June 1999, we sold 1,000,000 shares of Series B preferred stock for
      $18,000,000 cash to three accredited investors in a private placement
      in reliance upon the exemptions contained in Section 4(2) of the
      Securities Act and Rule 506 of Regulation D thereunder.

  (8)  In September 1999, we sold 300 shares of common stock for $1500 cash
       upon the exercise of a stock option previously granted to one employee
       in reliance upon the exemption contained in Section 4(2) of the
       Securities Act for transactions not involving a public offering.

  (9) In March 2000, we sold 332,250 shares of common stock for $348,750 cash
      and $1,312,500 in promissory notes to four officers and 11 managerial
      level employees in reliance upon the exemption contained in Section
      4(2) of the Securities Act for transactions not involving a public
      offering. The registrant believes that the Section 4(2) exemption was
      available based on the financial and other information provided to (or
      made available to) the purchasers and the representations made by the
      purchasers in their subscription agreements as to their knowledge and
      experience in financial and business matters, their ability to evaluate
      the risks and merits of the prospective investment, the suitability of
      the investment for them and their ability to bear the risks of the
      investment. All purchasers represented that they purchased for
      investment purposes only and received share certificates that were
      legended to restrict transferability except in compliance with the
      Securities Act.

  (10) In March 2000, we sold 296,298 shares of common stock for $1,481,490
       cash upon the exercise of stock options previously granted to four
       officers and eight managerial level employees in reliance upon the
       exemption contained in Section 4(2) of the Securities Act for
       transactions not involving a public offering. The registrant believes
       that the Section 4(2) exemption was available based on the financial
       and other information provided to (or made available to) the
       purchasers and based on the purchasers' position at the registrant.
       All purchasers represented that they purchased for investment purposes
       only and received share certificates that were legended to restrict
       transferability except in compliance with the Securities Act.

                                      II-2
Item 16. Exhibits and Financial Statement Schedules

(a)  Exhibits
Number Description
   ------ -----------
1.1*  Underwriting Agreement.
    3.1   Articles of Incorporation of the Company.
    3.2   Bylaws of the Company.
    4.1   Form of Certificate of Common Stock of the Company.
    4.2*  Rights Agreement, dated as of      , 2000, between the Company and
                  , as Rights Agent.
    4.3   Credit Agreement between the Company and U.S. Bank National
          Association, as amended on August 31, 1999, October 14, 1999,
          November 23, 1999, December 20, 1999, March 13, 2000 and May 5, 2000.
    4.4   Revolving Credit Agreement, dated as of May 5, 2000, between the
          Company and IBM Credit Corporation.
    4.5   ING Bank District Oost Nederland Credit Facility, dated May 26, 1999.
    4.6   The Company agrees to furnish supplementally to the Securities and
          Exchange Commission upon request a copy of any instrument defining
          the rights of holders of long-term debt not being filed as an exhibit
          in reliance on Item 601(b)(4)(iii)(A) of Regulation S-K.
    5.1*  Opinion of Dorsey & Whitney LLP.
   10.1   Joint Venture Agreement dated September 25, 1998, between the Company
          and Hongguan Technologies (S) Pte. Ltd.
   10.2   Asset Purchase Agreement dated as of April 30, 1999, by and between
          the Company and Bell Microproducts, Inc.
   10.3   Supply Agreement dated April 30, 1999, between the Company, Fluke
          Corporation and Fluke Industrial B.V.
   10.4   Form of Change in Control Agreement.
   10.5   Form of Promissory Note.
   10.6   Form of Promissory Note.
   10.7   Series A Stock Purchase Agreement, dated as of February 12, 1998,
          between the Company and the parties names therein.
   10.8   First Amendment to Series A Stock Purchase Agreement, dated as of
          March 27, 1998, between the Company and the parties named therein.
   10.9   Series B Stock Purchase Agreement, dated as of June 7, 1999, between
          the Company and the parties named therein.
   10.10  First Amended and Restated Investor Rights Agreement, dated as of
          June 7, 1999 between the Company and certain shareholders.
   10.11  First Amended and Restated Shareholders' Agreement dated June 7,
          1997, between the Company and certain shareholders.
   10.12  Pemstar Inc. 1994 Stock Option Plan.
   10.13  Pemstar Inc. 1995 Stock Option Plan.
   10.14  Pemstar Inc. 1997 Stock Option Plan.
   10.15  Pemstar Inc. Amended and Restated 1999 Stock Option Plan.
   10.16  Pemstar Inc. 2000 Stock Option Plan.
   10.17  Supplementary Contract, dated March 24, 2000, between Pemstar
          (Tianjin) Enterprise Co. Ltd. and Tianjin Yat-Sen Scientific-
          Industrial Park International, Inc.
   10.18  Lease Agreement, dated June 4, 1997, between Italade Technology
          (Thailand) Limited and Italade-Pemstar Limited.
   10.19  Lease, dated June 29, 1998, between the Company and Leslie E. Nelson
          as Trustee of the Leslie E. Nelson Revocable Trust dated December 20,
          1994, as amended.
II-3
Number Description
   ------ -----------
10.20  Sub-Lease Agreement, dated February 3, 1999, between Hongguan
          Technologies (S) Pte. Ltd. and Pemstar-Hongguan Pte. Ltd.
   10.21  Lease Agreement dated September 30, 1998, between Guadalajara
          Industrial Technologico, S.A. de C.V. and Pemstar de Mexico S.A. de
          C.V.
   10.22  Sublease for Office Premises, dated May 1, 1999, between Pemstar B.V.
          and Fluke Industrial B.V.
   10.23  Sublease Assignment Agreement dated June 8, 1999 between the Company
          and Bell Microproducts, Inc.
   10.24* Employee Stock Purchase Plan.
   16.1   Statement Regarding Change in Certifying Accountant.
   21.1   Subsidiaries of the Company.
   23.1   Consent of McGladrey & Pullen, LLP.
   23.2   Consent of Ernst & Young LLP.
   23.2   Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
   24.1   Powers of Attorney (included on signature page).
   27.1   Financial Data Schedule.
--------
*  To be filed by amendment.

(b)  Financial Statement Schedules

   The following financial statement schedules are filed herewith:

  Schedule II: Report of Independent Auditors--Ernst & Young LLP
  Schedule II: Report of Independent Auditors--McGladrey & Pullen, LLP
  Schedule II: Valuation and Qualifying Accounts

Item 17. Undertakings

   The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

   Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

   The undersigned registrant hereby undertakes that:

     (1) For purposes of determining any liability under the Securities Act
  of 1933, the information omitted from the form of prospectus filed as part
  of this registration statement in reliance upon Rule 430A and contained in
  a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
  (4) or 497(h) under the Securities Act shall be deemed to be part of this
  registration statement as of the time it was declared effective.

     (2) For the purpose of determining any liability under the Securities
  Act of 1933, each post-effective amendment that contains a form of
  prospectus shall be deemed to be a new registration statement relating to
  the securities offered therein, and the offering of such securities at that
  time shall be deemed to be the initial bona fide offering thereof.

                                      II-4
SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all if the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Rochester, State of Minnesota, on May 16, 2000.

                                          PEMSTAR INC.

                                                   /s/ Allen J. Berning
                                          By: _________________________________
                                             Allen J. Berning
                                             Chairman and Chief Executive
                                              Officer

   Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.
Signature                           Title                Date
                  ---------                           -----                ----
/s/ Allen J. Berning             Chairman, Chief           May 16, 2000
                                             Executive Officer and
                                             Director (principal
                                             executive officer)
 ___________________________________________
              Allen J. Berning
           /s/ William J. Kullback           Chief Financial Officer   May 16, 2000
                                             (principal financial
                                             officer and principal
                                             accounting officer)
 ___________________________________________
             William J. Kullback

            /s/ William B. Leary             Director                  May 16, 2000
 ___________________________________________
              William B. Leary

            /s/ Robert R. Murphy             Director                  May 16, 2000
 ___________________________________________
              Robert R. Murphy

            /s/ Gary L. Lingbeck             Director                  May 16, 2000
 ___________________________________________
              Gary L. Lingbeck

             /s/ Karl D. Shurson             Director                  May 16, 2000
 ___________________________________________
               Karl D. Shurson

            /s/ Robert D. Ahmann             Director                  May 16, 2000
 ___________________________________________
              Robert D. Ahmann

            /s/ Thomas A. Burton             Director                  May 16, 2000
 ___________________________________________
              Thomas A. Burton

               /s/ Paul Singh                Director                  May 16, 2000
 ___________________________________________
            Hargopal (Paul) Singh
II-5
Signature                    Title        Date
                  ---------                    -----        ----
/s/ Michael J. Odrich            Director   May 16, 2000
 ___________________________________________
              Michael J. Odrich

            /s/ Steve V. Petracca            Director   May 16, 2000
 ___________________________________________
              Steve V. Petracca

             /s/ Bruce M. Jaffe              Director   May 16, 2000
 ___________________________________________
               Bruce M. Jaffe
             /s/ David L. Sippel             Director   May 16, 2000
 ___________________________________________
               David L. Sippel
II-6
SCHEDULE II

                         REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Directors of Pemstar Inc.

   We have audited the consolidated financial statements of Pemstar Inc. as of
March 31, 2000, and for the year then ended, and have issued our report thereon
dated May 5, 2000 (included elsewhere in this Registration Statement). Our
audit also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

                                          /s/ ERNST & YOUNG LLP

Minneapolis, Minnesota
May 5, 2000

                                      S-1
SCHEDULE II

                         REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Directors of Pemstar Inc.

   Our audits were made for the purpose of forming an opinion on the 1999 and
1998 basic consolidated financial statements taken as a whole. The consolidated
supplemental schedule listed as Item 16(b) of the registration statement is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic consolidated financial
statements. The information for the years ended 1999 and 1998 in this schedule
has been subjected to the auditing procedures applied in our audits of the
basic consolidated financial statements and, in our opinion, is fairly stated
in all material respects in relation to the basic consolidated financial
statements taken as a whole.

                                          /s/ McGLADREY & PULLEN, LLP

Rochester, Minnesota
May 10, 1999

                                      S-2
Schedule II--Valuation and Qualifying Accounts

Pemstar Inc.
Col. A            Col. B          Col. C           Col. D     Col. E
        ------          ---------- --------------------- ----------- --------
                                         Additions
                                   ---------------------
                                              Charge to              Balance
                        Balance at Charged to   Other                 at End
                        Beginning  Costs and  Accounts-- Deductions     of
      Description       of Period   Expenses  Described  Described--  Period
      -----------       ---------- ---------- ---------- ----------- --------
YEAR ENDED MARCH 31,
 2000
Reserve and allowances
 deducted from
 accounts:
  Allowance for
   uncollectible
   accounts............  $53,136   $  545,079    $--     $   45,215  $553,000
  Allowance for
   inventory
   obsolescence........      --       572,656     --            --    572,656
YEAR ENDED MARCH 31,
 1999
Reserve and allowances
 deducted from
 accounts:
  Allowance for
   uncollectible
   accounts............    6,000       73,801     --         26,665    53,136
YEAR ENDED MARCH 31,
 1998
Reserve and allowances
 deducted from
 accounts:
  Allowance for
   uncollectible
   accounts............   12,000    1,546,244     --      1,552,244     6,000
S-3
EXHIBIT INDEX
Number Description
 ------ -----------
1.1*  Underwriting Agreement.
  3.1   Articles of Incorporation of the Company.
  3.2   Bylaws of the Company.
  4.1   Form of Certificate of Common Stock of the Company.
  4.2*  Rights Agreement, dated as of      , 2000, between the Company and
                , as Rights Agent.
  4.3   Credit Agreement between the Company and U.S. Bank National
        Association, as amended on August 31, 1999, October 14, 1999, November
        23, 1999, December 20, 1999, March 13, 2000 and May 5, 2000.
  4.4   Revolving Credit Agreement, dated as of May 5, 2000, between the
        Company and IBM Credit Corporation.
  4.5   ING Bank District Oost Nederland Credit Facility dated May 26, 1999.
  4.6   The Company agrees to furnish supplementally to the Securities and
        Exchange Commission upon request a copy of any instrument defining the
        rights of holders of long-term debt not being filed as an exhibit in
        reliance on Item 601(b)(4)(iii)(A) of Regulation S-K.
  5.1*  Opinion of Dorsey & Whitney LLP.
 10.1   Joint Venture Agreement dated September 25, 1998, between the Company
        and Hongguan Technologies (S) Pte. Ltd.
 10.2   Asset Purchase Agreement dated as of April 30, 1999, by and between the
        Company and Bell Microproducts, Inc.
 10.3   Supply Agreement dated April 30, 1999, between the Company, Fluke
        Corporation and Fluke Industrial B.V.
 10.4   Form of Change in Control Agreement.
 10.5   Form of Promissory Note.
 10.6   Form of Promissory Note.
 10.7   Series A Stock Purchase Agreement, dated as of February 12, 1998,
        between the Company and the parties names therein.
 10.8   First Amendment to Series A Stock Purchase Agreement, dated as of March
        27, 1998, between the Company and the parties named therein.
 10.9   Series B Stock Purchase Agreement, dated as of June 7, 1999, between
        the Company and the parties named therein.
 10.10  First Amended and Restated Investor Rights Agreement, dated as of June
        7, 1999 between the Company and certain shareholders.
 10.11  First Amended and Restated Shareholders' Agreement dated June 7, 1997,
        between the Company and certain shareholders.
 10.12  Pemstar Inc. 1994 Stock Option Plan.
 10.13  Pemstar Inc. 1995 Stock Option Plan.
 10.14  Pemstar Inc. 1997 Stock Option Plan.
 10.15  Pemstar Inc. Amended and Restated 1999 Stock Option Plan.
 10.16  Pemstar Inc. 2000 Stock Option Plan.
 10.17  Supplementary Contract, dated March 24, 2000, between Pemstar (Tianjin)
        Enterprise Co. Ltd. and Tianjin Yat-Sen Scientific-Industrial Park
        International, Inc.
 10.18  Lease Agreement, dated June 4, 1997, between Italade Technology
        (Thailand) Limited and Italade-Pemstar Limited.
 10.19  Lease, dated June 29, 1998, between the Company and Leslie E. Nelson as
        Trustee of the Leslie E. Nelson Revocable Trust dated December 20,
        1994, as amended.
 10.20  Sub-Lease Agreement, dated February 3, 1999, between Hongguan
        Technologies (S) Pte. Ltd. and Pemstar-Hongguan Pte. Ltd.
 10.21  Lease Agreement dated September 30, 1998 between Guadalajara Industrial
        Technologico, S.A. de C.V. and Pemstar de Mexico S.A. de C.V.
1
Number Description
 ------ -----------
10.22  Sublease for Office Premises, dated May 1, 1999, between Pemstar B.V.
        and Fluke Industrial B.V.
 10.23  Sublease Assignment Agreement dated June 8, 1999 between the Company
        and Bell Microproducts, Inc.
 10.24* Employee Stock Purchase Plan.
 16.1   Statement Regarding Change in Certifying Accountant.
 21.1   Subsidiaries of the Company.
 23.1   Consent of McGladrey & Pullen, LLP.
 23.2   Consent of Ernst & Young LLP.
 23.3   Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
 24.1   Powers of Attorney.
 27.1   Financial Data Schedule.
--------
*  To be filed by amendment.

                                       2