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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the period ended December 31, 2003

OR

For the period From                  to                 .

Commission file number 000-31223

PEMSTAR INC.

(Exact name of registrant as specified in its charter)

3535 TECHNOLOGY DRIVE N.W.

ROCHESTER, MN 55901

(Address of principal executive officers)

(Zip Code)

(507) 288-6720

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No ¨.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  x    No ¨.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practical date.

Common Stock, $0.01 Par Value—45,134,747 shares as of January 10, 2004.

Index

Pemstar Inc.

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Part I. Financial Information

Pemstar Inc.

Consolidated Balance Sheets

(In thousands, except per share data)

See notes to consolidated financial statements.

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Pemstar Inc.

Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)

See notes to consolidated financial statements.

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Pemstar Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

See notes to consolidated financial statements.

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Pemstar Inc.

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003

(In thousands, except per share data)

Note A—Basis of Presentation and Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended December 31, 2003, are not necessarily indicative of the results that may be expected for the year ending March 31, 2004.

The balance sheet at March 31, 2003 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

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

For further information, refer to the consolidated financial statements and footnotes thereto included in the Pemstar Inc. Annual Report on Form 10-K, as amended, for the year ended March 31, 2003, filed with the Securities and Exchange Commission.

Stock-Based Compensation

During the three and nine months ended December 31, 2003, employees exercised stock options to acquire 35 and 44 shares at an average exercise price of $0.75 and $0.87 per share, respectively, and purchased 98 shares under the employee stock purchase plan at an average price of $2.50 per share during the nine months ended December 31, 2003, of which none were purchased in the third fiscal quarter.

The Company has adopted the pro forma disclosure only requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, and accordingly, accounts for stock options issued to employees using the intrinsic value method of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” Compensation expense is recorded on the date stock options are granted only if the current fair market value of the underlying stock exceeds the exercise price of the option. Accordingly, no compensation cost has been recognized for grants under these stock option plans since the exercise price equaled the fair market value of the stock on the date of grant. Had compensation cost for stock option

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grants been based on the grant date fair values of awards (the method described in SFAS No. 123), reported net loss would have been changed to the pro forma amounts reported below.

Goodwill

Effective April 1, 2002, the Company adopted Statements of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized. This standard also requires, at a minimum, an annual assessment of the carrying value of goodwill and other intangibles with indefinite useful lives. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized. Intangible assets with finite lives are amortized over their estimated useful lives. Prior to fiscal 2003, goodwill and indefinite-lived intangible assets were amortized over periods not exceeding 40 years. Goodwill of $33,732 at December 31, 2003 and $33,771 at March 31, 2003 is net of accumulated amortization of $7,207.

SFAS No. 142 required the Company to complete a transitional impairment review of its goodwill assets. As a result of the Company’s completion of its transitional impairment test, the Company recorded as a cumulative effect of a change in accounting principle effective April 1, 2002 a write-off of goodwill in the amount of $5,346 on which the Company recognized no tax benefit. The consolidated statement of operations for the nine months ended September 30, 2002 has been changed to reflect the $5,346 amount as a cumulative effect of a change in accounting, which had not been reflected in the Form 10-Q when originally filed in fiscal 2003.

Note B—Inventories

The components of inventories consist of the following:

Note C—Comprehensive Income (Loss)

Total comprehensive income (loss) was $1,373 and $(1,108) for the three months ended December 31, 2003 and 2002, respectively, and $(14,531) and $(35,261) for the nine months ended December 31, 2003 and 2002, respectively. Comprehensive loss differs from net loss due to unrecognized foreign currency gains and losses.

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Note D—Financing Arrangements

In April 2003, the Company entered into a new revolving credit facility that provides up to $90,000 of revolving credit loans and letters of credit and expires in April 2006. The facility, which is limited to the lesser of the facility amount or the available borrowing base, calculated as a percentage of eligible accounts receivable and inventory balances, bears interest until January 4, 2004 at prime plus 1.5% and, thereafter, at prime or Eurodollar rate plus a margin from 0.75% to 1.5%, and 2.75% to 3.5%, respectively, depending on excess available borrowing capacity within the facility. The Company is obligated to pay a monthly fee of 0.5% on the unused portion of the facility. The Company used proceeds to pay off existing domestic revolving credit facilities with IBM Credit Corporation and US Bank. The revolving credit facility is collateralized by substantially all domestic assets and by investments in foreign subsidiaries. At December 31, 2003, the Company had available borrowing capacity of $24,375 in excess of outstanding borrowings under the facility.

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

In August and September 2003, the Company issued 6,500 and 975 common shares, respectively in a public offering that netted proceeds of $20,120. The Company used the funds to reduce borrowings under the revolving credit facility, but ultimately plans to use the proceeds to fund expansion and potential acquisition requirements.

Note E—Earnings Per Share Data

Except for the three months ended December 31, 2003, common stock equivalents and their impact on net loss have been excluded from the diluted per share calculation for all periods presented, since the Company incurred net losses and the inclusion of common stock equivalents would have had an anti-dilutive impact. Potentially dilutive securities consist of i) unexercised stock options and warrants to purchase 6,099 and 6,036 shares of the Company’s Common Stock as of December 31, 2003 and 2002, respectively, and ii) 2,193 shares of the Company’s Common Stock issuable upon conversion of convertible debt as of December 31, 2003 and 2002.

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Note F—Restructuring and Impairment Charges

A rollforward of restructuring provisions is as follows:

During the quarter ended June 30, 2003, the Company recorded charges of $3,455 for restructuring related costs as a result of a Company initiative based upon a strategic review of the Company’s primary products and business aimed at optimizing and aligning its manufacturing capacity with customer demand, while positioning the Company for stronger operating results. During the quarter ended September 30, 2003, the Company recorded charges of $4,757 for costs related to consolidation of the Mountain View, California facilities into the San Jose, California facilities. During the quarter ended December 31, 2003, the Company recorded an adjustment to reduce prior restructuring related costs by $546. The Company negotiated certain lease termination costs for one of the closed California facilities, reducing the prior estimate of expected future lease costs associated with that facility.

The fiscal 2004 restructuring charges consisted of asset write-downs of $1, 427 for machinery and equipment; $796 for employee termination and severance costs related to approximately 100 salaried and hourly employees located primarily at three domestic operating sites; and $5,443 for adjustment of expected future lease costs, associated with the closing of one California facility in fiscal 2003 and one additional California facility in fiscal 2004. The fiscal 2004 restructuring actions taken pertain to operations for those businesses and locations experiencing negligible or negative growth due to continued market declines in the Communications and Optical business sectors. Certain machinery and equipment were written down to their estimated fair values by recording a charge, in the nine months ended December 31, 2003, of $1,427. The write-down of these assets was primarily as a direct result of the continued decline in the optical business sector, which has resulted in excess capacity and under-utilized machinery and equipment.

During the quarter ended June 30, 2002, the Company recorded charges of $2,956 for restructuring consisting of $1,146 for employee termination and severance costs related to approximately 130 salaried and hourly employees located at various worldwide operating sites; and $1,037 for lease termination costs, net of anticipated sublease rental of $1,649, and $773 of asset write-downs, associated with the closing of one facility. During the quarter ended September 30, 2002, the Company recorded special charges of $924 for employee termination and severance costs related to approximately 120 salaried and hourly employees located at various worldwide operating sites.

As of December 31, 2003, approximately $3,634 and $1,595 of cash payments had been made against the accrual associated with the fiscal 2003 and 2004 charges, respectively.

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Note G—Cash Requirements

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred operating income (losses) of $1,631 and $(12,433) for the three and nine months ended December 31, 2003, which included $(546) and $7,666 of restructuring costs (cost reversals) during the respective periods. The Company continues to evaluate its operations to determine the need for further restructuring in response to market conditions. The Company’s ability to continue to fund its operations and to grow the business depends on its ability to generate positive cash flow from operations or obtain additional sources of funds for working capital.

The revolving credit facility requires the maintenance of certain minimum cash flow levels. The Company obtained an amendment from its lenders in January 2004, providing relief for the shortfall from these covenants with effect from September 30, 2003 (See Note D). Compliance by the Company with these covenants in its credit facility is dependent upon the Company achieving certain revenue and expense targets in its fiscal 2004 operating plan. The Company’s operating plan includes initiatives to maintain control over specific cash expenditures related to general and administrative expenses. The Company believes that, if necessary, it would be able to secure additional financing from its lenders or sell additional Company equity securities; however, there can be no assurance that such funding can be obtained or that future credit facility violations will be waived.

Management believes that, as a result of: i) the restructuring actions it has taken to reduce cash expenditures, ii) the efforts it continues to make to increase revenues from continuing customers and to generate new customers in various industry sectors, and iii) the execution of a new revolving credit facility that provides additional borrowing capacity, it will have sufficient cash flows to meet its revised operating plan. However, there can be no assurance that such revised financial plan will be met.

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Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Net sales—Net sales for the third quarter of fiscal 2004 increased 9.0% to $187.3 million from $171.8 million for the comparable three months of the prior fiscal year. Excluding amounts from net sales for sales of excess inventory of $1.4 million and $5.6 million, respectively, the Company experienced a $19.7 million, or 11.9%, increase in net sales. Third-quarter sales were higher than fiscal 2003 third-quarter sales due to strength in our computing and data storage business, as well as the ramp-up of numerous projects including our recent expansion in Austin, Texas. Net sales for the nine months ended December 31, 2003 decreased 3.6% to $483.4 million compared to $501.3 million for the same period last year. These totals include sales of excess inventory of $6.6 million and $21.5 million for fiscal 2004 and fiscal 2003, respectively. Excluding these inventory sales, net sales for the fiscal 2004 nine months are down slightly compared to the prior year due to slower than anticipated first-half revenues resulting from the impact of SARS and customer product readiness issues with a communications project, offset by the new operations in Austin, Texas. The Company’s five largest customers in the third quarter and first nine months of fiscal 2004 accounted for approximately 46.7% and 45.2%, respectively, with IBM comprising 24.1% of net sales in the third quarter of fiscal 2004.

Gross profit—Gross profit increased $1.1 million in the third quarter of fiscal 2004 to $13.7 million (7.3% of net sales) from $12.6 million (7.4% of net sales) in the same quarter of fiscal 2003. Gross profit increased $11.0 million during the first nine months of fiscal 2004 to $32.2 million (6.7% of sales) from $21.2 million (4.2% of sales) in the same period of fiscal 2003. Higher gross profit stemmed primarily from cost savings due to restructuring actions, decreased level of inventory write-offs, higher net sales and increased gross profit from a more diversified customer base, with these partially offset by disproportional sales strength in the lower margin computing and data storage business and start-up expenses associated with numerous programs including our Austin, Texas expansion.

Selling, general and administrative expenses—Selling, general and administrative expenses were $12.7 million (6.8% of net sales) in the third quarter of fiscal 2004, an increase of $.7 million from $11.8 million (6.9% of net sales) for the same quarter of fiscal 2003. Selling, general and administrative expenses were $37.0 million (7.6% of sales) during the first nine months of fiscal 2004, a decrease of $3.1 million from $40.1 million (8.0% of sales) for the same period of fiscal 2003. The increase during the three month period was due to the new Austin, Texas, operation and higher employee-related benefit costs. For the nine-month period ended December 31, 2003, SG&A decreased due to cost savings from current and prior year restructuring actions and a decrease in the amount of bad debt expense.

Restructuring costs—Restructuring costs of $4.8 million, consisting of $4.6 million for future lease costs, $.1 million for asset write-downs, and $.1 million for employee termination and severance costs were recognized in the second quarter of fiscal 2004. The costs represent the completion of restructuring costs totaling $8.2 million for the six months ended September 30, 2003, all of which are related to the decision to consolidate the San Jose and Mountain View, CA, operations into one site, to close four smaller, leased locations and make certain domestic workforce reductions. The full program was undertaken to rescale physical space and employee counts in businesses and locations experiencing negligible or negative growth due to the continued market declines in the Communications and Optical business sectors that we operate in. A restructuring benefit of $0.5 million was due to a reduction in reserve requirements associated with one of our San Jose, California operations.

Amortization—As a result of adopting SFAS No. 142, “Goodwill and Other Intangible Assets”, on April 1, 2002, the Company recorded an impairment charge of $5.3 million at the April 1, 2002 transition date for the cumulative effect of a change in accounting principle, which has been reflected in the nine months ended December 31, 2002 as a restatement of prior year reported results. On an ongoing basis, the

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company will perform its annual update to its assessment of the continuing value of the remaining goodwill as of January 1 of each year. If a valuation allowance is required as a result of such annual update, such allowance would be reflected in the results of the quarter ended March 31 of such year.

Interest expense—Our interest expense increased slightly to $1.8 million for the third quarter of fiscal 2004 from $1.7 million for the same period of fiscal 2003. Interest expense decreased $1.2 million to $5.9 million for the nine months ended December 31, 2003 from $7.1 million for the same period of fiscal 2003. The decreased level of interest expense for the nine month period was primarily due to reduced interest costs and fees from lower borrowing levels.

Other (income) expense—Other (income) expense net was ($0.2) million income for the third quarter of fiscal 2004 compared to $0.3 million expense for the third quarter of fiscal 2003. These changes consist primarily of exchange gains in certain international operations in fiscal 2004. Other (income) expense net changed from $.5 million expense to ($0.9) million income for the nine months ended December 31, 2002 and December 31, 2003 respectively, for similar reasons.

Income tax expense—Income tax expense was $.02 million for the third quarter of fiscal 2004, compared to $0.2 million for the third quarter of fiscal 2003. For the first nine months of fiscal 2004, the income tax expense was $0.3 million (1.7% effective tax rate) compared to $0.9 million (2.0% effective tax rate) for the first nine months of fiscal 2003. The effective rates remain very low, consistent with prior year results, given the current operating loss and the carryforward of prior net operating losses, primarily in the United States, and the inability to recognize the benefit of carryforward losses as well as the low or zero incentive income tax rates in most profitable foreign operations.

Liquidity and Capital Resources

The Company has historically funded its operations from the proceeds of bank debt, private offerings of debt, private and public offerings of equity, cash generated from operations and lease financing of capital equipment. Our principal uses of cash have been to finance working capital, acquisitions, new operations, capital expenditures and to fulfill debt service requirements. We anticipate these uses will continue to be our principal uses of cash in the future.

As of December 31, 2003, the Company had cash and cash equivalent balances of $18.9 million and total bank, other interest bearing debt and capital lease obligations totaling $89.4 million. Included therein, we had approximately $38.7 million outstanding under our domestic revolving credit facility, $24.3 million outstanding in facilities for our China operation and $5.3 million outstanding under our Thailand credit facility. Each credit facility bears interest on outstanding borrowings at variable interest rates, which as of December 31, 2003 were 5.5% for the domestic revolving credit facility, 5.0% for the China facilities and 5.0% for the Thailand facility. At January 31, 2003, the Company had available borrowing capacity of $17.9 million in excess of outstanding borrowings under the domestic facility. These credit facilities are secured by substantially all of our assets.

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

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Net cash (used in) operating activities for the first nine months of fiscal 2004 was $(11.4) million compared to net cash provided of $30.2 million for the comparable period of the prior fiscal year. Decreased net cash from operating activities in fiscal 2004 was attributable primarily to increased balances in accounts receivable, inventories and prepaid expenses and other current assets, partially offset by increased accounts payable and reduced net cash losses.

Net cash (used in) investing activities for the nine months ended December 31, 2003 was $(14.8) million compared to net cash used of $(11.7) million for the comparable period of the prior fiscal year. This increase in cash used resulted primarily from the increase in capital expenditures in our Asian operations, including buyouts of certain assets previously held under operating leases. During the remainder of fiscal 2004, the Company expects to satisfy its remaining obligations, of approximately $5.2 million for the Asian expansion, in a combination of cash and foreign debt financing.

Net cash (used in) provided by financing activities for the nine months ended December 31, 2003 was $11.9 million compared to net cash used of $(3.2) million for the comparable period of the prior fiscal year. Our cash provided from financing activities resulted from the completion of a 7.5 million share secondary offering of common stock offset by debt payments. The net proceeds of $20.1 million from the transaction were being used to reduce available lines of credit usage, pending their expected use to fund working capital and potential acquisitions.

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

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

Forward-looking Statements

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

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

Item 3—Quantitative and Qualitative Disclosure about Market Risk

The Company realized unrecognized gains of $1,348 and $3,239 for the first three and nine months of fiscal 2004, respectively, resulting in a net accumulated unrecognized other comprehensive gain of $3,226 as of December 31, 2003. These gains resulted primarily from changes in the exchange rate of the Thai Baht and the Euro in relationship to the United States dollar applied to our net invested asset currency exposure in Thailand and the Netherlands ($12,758 and $20,032, respectively, at December 31, 2003). Additional credit facilities denominated in local currencies of foreign locations are designed to limit these risks.

Item 4—Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure control and procedures (as defined in Exchange Act Rule 13a-15) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures, which include among other things, a disclosure committee made up of the General Counsel, Principal Accounting Officer and Executive Director of Planning and Investor Relations, are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

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Part II. Other Information

Item 1—Legal Proceedings

Not applicable.

Item 2—Changes in Securities and Use of Proceeds

Not applicable.

Item 3—Default on Senior Securities

Not applicable.

Item 4—Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5—Other Information

Not applicable.

Item 6—Exhibits and Reports on Form 8-K

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT INDEX

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