UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWashington, DC 20549

FORM 10-K

| | [X]         |  | Annual Report
      Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for
      the fiscal year ended September 29, 2007.                             
| | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |            
| | **[** **]** |  | Transition Report
      Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for
      the transition period from _______________ to
    _______________.

Commission File Number 0-13143

Innovex, Inc.(Exact
name of registrant as specified in its charter)

|Minnesota                                                            | 41-1223933                              | 
|-------------------------------------------------------------------- | --------------------------------------- | 
|(State or other
      jurisdiction of incorporation or organization) | (IRS Employer
      Identification No.) | 

3033 Campus Drive, Plymouth, MN
55441(Address of principal executive
offices)

(763) 383-4000(Registrants telephone number, including area code)

Securities registered pursuant to Section 12(b) of
the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.04 par value)


(Title of Class)


Indicate by check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act: Yes
[   ]No
[ x ]


Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the
Act:Yes [   ]No
[ x ]

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 period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. [X] Yes [   ]
No

Indicate by check mark if disclosure of delinquent filers
pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [   ] Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer or a non-accelerated filer. See
definition of accelerated filer and large accelerated filer in Rule 12b-2 of
the Exchange Act:


Large Accelerated
      Filer  [   ]
    Accelerated Filer  
      [   ]
    Non-Accelerated Filer
[X]


Indicate by check mark whether the
registrant is a shell company (as defined in Exchange Act Rule 12b-2): Yes
[   ] No [X]

The aggregate market value of shares held
by non-affiliates is $34,450,999 computed by reference to the last sale price of
the Companys Common Stock, as reported in the Nasdaq National Market system, of
$1.80 per share on March 30, 2007, the last business day of the Companys most
recently completed second fiscal quarter. As of November 12, 2007, the Company
had outstanding 19,407,966 shares of Common Stock.

DOCUMENTS INCORPORATED BY
REFERENCE:

Portions of the definitive Proxy Statement
to be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held January 15, 2008, are incorporated by reference into
Part III.

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Index

|PART I     |   
|---------- | --
|          
|Item 1.    |   
|Item
1A.   |   
|Item 1B.   |   
|Item 2.    |   
|Item 3.    |   
|Item 4.    |   
|Item 4A.   |   
|          
|PART II    |   
|          
|Item 5.    |   
|           |   
|Item 6.    |   
|Item 7.    |   
|Item
7A.   |   
|Item 8.    |   
|Item 9.    |   
|Item 9A.   |   
|Item
9B.   |   
|          
|PART III   |   
|          
|Item 10.   |   
|Item
11.   |   
|Item 12.   |   
|Item
13.   |   
|Item 14.   |   
|          
|PART IV    |   
|          
|Item 15.   |   
|          
|SIGNATURES | 57

2

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PART I

Item 1. BUSINESS

We maintain
a website at www.innovexinc.com. Our annual reports on Form 10-K, our quarterly
reports on Form 10-Q and our current reports on Form 8-K (and any amendments to
these reports) are available free of charge on our website as soon as reasonably
practical after we file these reports with the SEC.

Our Company

We are a
leading worldwide provider of flexible circuit interconnect solutions to
original equipment manufacturers ("OEMs") in the electronics industry. We offer
a full range of customized flexible circuit applications and services from
initial design, development and prototype to fabrication, assembly and test on a
global basis. We target high volume markets where miniaturization, form and
weight are driving factors and flexible circuits are an enabling technology.
Applications for flexible circuits currently addressed by us include data
storage devices such as hard disk drives ("HDDs"), flat panel displays (FPD)
including liquid crystal displays ("LCDs") for mobile communication devices and
large format plasma screens, tape drives and printers. Our customers include
Hitachi, HP, Philips/TPO, Quantum, SAE Magnetics (a subsidiary of TDK), Samsung,
Seagate, Staktek, StorageTek, Xerox and other leading electronic
OEMs.

Our Industry and Market
Trends

Flexible
circuit interconnects provide electrical connection between components in
electronic systems and are increasingly used as a platform to support the
attachment of electronic components. Flexible circuits consist of copper
conductive patterns on flexible substrate materials, such as polyimide. Flexible
circuit interconnects frequently incorporate components, such as integrated
circuits ("ICs"), connectors, stiffeners, resistors and capacitors mounted
directly on a flexible circuit. Generally, flexible circuits offer several
advantages over other technologies such as rigid printed circuit boards ("PCBs")
and ceramic hybrid circuits, particularly for small, complex electronic systems.
Flexible circuits, due to their mechanical flexure and three-dimensional shape,
accommodate packaging contours and motion in a manner that traditional
two-dimensional, rigid PCBs cannot, particularly in applications involving
smaller, more portable and complex electronic devices where space available to
designers is at a premium.

We believe
that the overall market for high density flexible circuits will continue to grow
over the next several years as a result of favorable technological and market
trends that are expected to drive increased adoption. These trends include the
following:

Miniaturization, Portability and Complexity of Electronic
Products. Electronics OEMs continue to design
and introduce more compact and portable high-performance products with greater
functionality. The complexity of these new products requires smaller size,
lighter weight, greater circuit and component density, better thermal
dissipation properties, higher frequencies and increased reliability as compared
to conventional rigid board assemblies. These requirements often necessitate the
use of high density flexible circuit interconnects.

Outsourcing. OEMs are
increasingly focusing on their core competencies and outsourcing their captive
component and subsystem manufacturing. To meet their rapidly changing electronic
interconnect requirements, many OEMs have moved to limit their vendor base to a
smaller number of technically qualified, strategically located suppliers capable
of providing both quick-turn prototype and pre-production quantities as well as
cost-competitive volume production quantities. This allows OEMs to reduce time
to market, avoid delays in new product introductions, reduce manufacturing costs
and avoid logistical complexities.

Increased Usage of HDD in Consumer and Non-traditional
Applications. The emerging consumer
electronics segment that includes devices such as the Xbox gaming console, TV
set top recorders and digital music and video players such as the iPod, is
emerging as a significant driver of growth for HDDs.

High density
flexible circuits are increasingly being used in high unit volume consumer
electronic products such as mobile communications devices, flat panel displays,
digital televisions and inkjet printers. This trend is driven by the end market,
which demands consumer products with additional functionality, availability in
lighter weight smaller packages, better performance and lower cost than previous
generations of systems. To meet this demand, OEMs will need to continually
evaluate more complex interconnect solutions that allow them to continue to
enhance their product offerings in a cost-effective manner.

3

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Competitive Strengths

We believe
our industry leadership is the direct result of our technological innovation and
our ability to provide comprehensive solutions that address our customers'
specific interconnect needs. Our key competitive strengths include:

*Cost
Leadership*. We believe we are one of the
lowest cost providers of high density flexible circuits in the world. Our low
cost structure is driven by low cost Thailand labor and our automated
roll-to-roll manufacturing processes.

Technology Leadership. Although there are a large number of flexible circuit manufacturers, only
a few compete with us in high-end, sub-100 micron applications. We believe that
technology, design capability, quality and price are key competitive factors in
this segment. Our manufacturing technology includes proprietary processes and
chemical recipes which, when combined with our design expertise and experience,
enable us to deliver high unit volumes of complex high density flexible circuits
at cost-effective prices.

Comprehensive Product Portfolio. Our products address a range of applications that include the following:
(i) actuator flex (AFC), which provides the back-end electrical interconnect
for hard disk drives; (ii) flat panel display (FPD) which provides the
electrical interconnect to LCDs for mobile communication devices; (iii ) flex
suspension assemblies (FSA), which provides the electrical interconnect from
the disk drive head to the back-end electronics of the disk drive; and (iv) a
variety of high-end, high density flexible circuits for markets such as
printers, semiconductor packaging and mobile phone camera modules.

Product Innovation. We are
recognized as a technology innovator with a history of developing products that
provide better performance at a lower cost than our competitors. The technical
expertise we have developed in serving the highly demanding HDD industry has
enabled us to introduce advanced products in other rapidly growing
markets.

*Leading Customer
Relationships.* We have developed strong
relationships with Seagate, Philips/TPO, Samsung,
Hitachi and other industry leaders. Our customer relationships represent
significant entry barriers as we believe that once a customer has selected us to
design and manufacture a flexible circuit interconnect, the customer generally
relies on our design for the life of that specific application and, frequently,
subsequent generations of similar applications.

Global Manufacturing and Supply Chain Efficiency.
Over the past three years we have expanded our Asian
facilities to perform all of our manufacturing processes. Our expanded Asian
based manufacturing structure has allowed us to shorten our supply chain,
improve yields as a result of more immediate processing feedback and utilize a
low cost labor base. These benefits result in a reduction of the overall costs
of our products.

Quick Turn Prototypes. Our
expanded Asian based manufacturing structure has also allowed us to provide our
customers quick turn prototypes which are critical to winning new customers and
product qualifications.

Implementation of Six Sigma. Through the introduction of the Six Sigma quality management program, we
are reducing the process variation in our manufacturing facilities, resulting in
improved quality, reliability and performance of our flexible circuit products.
Six Sigma is a highly disciplined quality management and process optimization
methodology that relies on the rigorous use of statistical techniques to assess
process variability and defects. Six Sigma has been adopted by many large
industrial companies to significantly improve their business
processes.

Our Strategy

To enhance
our position as a leading, low cost provider of flexible interconnect solutions
we intend to pursue the following business strategies:

Cost Leadership. Our
overriding strategic goal is to be the lowest cost provider of high density
flexible circuits in the world. Every decision we make is reviewed for its
impact on our cost structure. We believe that to be successful in the
hyper-competitive flexible circuit industry and insure long-term profitability
we must have the lowest cost structure.

4

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Increase
Manufacturing and Supply Chain Efficiencies and Flexibility.We intend to continue our manufacturing
improvement and cost reduction efforts. Through continued deployment of our Six
Sigmaquality management program, we intend to significantly improve our
efficiency, reduce our manufacturing and operating expenses and enhance the
quality of the products we manufacture by decreasing manufacturing defects and
improving product reliability. We expect to realize cost efficiencies by
applying more automation at all of our manufacturing facilities. We have
relocated our U.S. manufacturing operations to Thailand to improve our cycle
time performance, facilitate problem solving communications and reduce our fixed
cost structure. In addition, by further integrating our operations with our
suppliers and customers, we believe that we can continue to reduce our working
capital needs and improve our responsiveness to customer
requirements.

Continue to Expand Our Market Share in Our Core
Markets. We believe that we will be able to
continue to capture additional market share from leading OEMs in the HDD market
with our AFC solution. Certain HDD industry leaders have qualified our products
for a number of next generation applications and are currently evaluating our
product offerings for additional future applications. We have begun ramping
production on a number of new FPD programs, have been qualified on more than ten
additional new FPD programs and have a high level of FPD quoting and prototyping
activity which should lead to improved FPD market share.

Continue to Penetrate New Markets. We have proven our ability to leverage our expertise in high volume, high
density applications to address emerging growth opportunities. We believe the
technology, research and development and manufacturing capabilities we have
developed to serve our core markets have put us in a position to target
additional high volume applications. Our expanded Asian based manufacturing
structure has also allowed us to provide our customers quick turn prototypes
which are critical to winning new customers and product
qualifications.

Current Product Applications

We offer our
products to a broad range of markets including the hard disk drive, display,
semiconductor packaging and consumer electronics markets. We believe our
products are differentiated by their advanced process technology, innovative
design, low cost and the functional benefits they provide to our
customers.

Current markets addressed by our
products include:

Data Storage. The disk
drive market uses our AFC and FSA products. Our AFC flex product provides the
back-end electronic interconnect for hard disk drives. We are a leading provider
of flip chip interconnect solutions for these applications. Flip chip
technology, in which an unpackaged die is mounted directly onto the flexible
circuit substrate, is the predominant interconnect technology for these
applications. Our FSA product provides the electrical interconnect from the disk
drive head to the back-end electronics (actuator flex) of the disk drive. The
FSA is a flexible circuit that is bonded to a suspension.

Our other products for the data storage market include
interconnects used for tape drives, disk arrays and other interconnects used in
hard disk drives. We will continue to provide flexible circuit interconnect
solutions to the tape storage industry to address customers' continuing data
backup and archiving needs.

Flat Panel
Display. We supply flexible circuits to the
telecommunications market that provide interfaces between liquid crystal
displays and mobile communication devices. We are also pursuing other flat panel
display applications which provide efficient, cost-effective means of connecting
flat panel displays to the electronic devises they support.

Other Markets. We continue
to apply our technology and products to new markets. We produce advanced
flexible circuits for high-end consumer electronics markets and other markets
that could benefit from the technological advantages of our flexible
interconnect solutions. Based on our assessment of industry trends and market
indicators, we believe these markets will grow rapidly in the future. We are
currently offering or developing new product offerings for the following
applications: non-display mobile communication device interconnects, high-end
memory module interconnects, inkjet printer cartridges, mobile phone camera
modules, battery packs and smart cards.

Technology

We are
recognized as a technology leader in fine-line, single and double-sided flexible
circuit technology and flexible circuit assembly technology, including advanced
chip-on-flex, flip chip-on-flex and precision placement assembly technologies.
Our process technology includes proprietary processes and chemical recipes,
which coupled with our design expertise and experience, enables us to deliver
high unit volumes of complex high density flexible circuits at cost-effective
yields.

5

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Design Technology. The
flexible circuit interconnects we manufacture are designed specifically for each
application, requiring significant joint design activities with the customer at
the start of a project. We have developed design methodologies that solve
difficult interconnection problems and save our customers time and money. We
also design and produce, in volume, flexible circuits that range from high
density, single-sided circuits to more complex double-sided and multi-layer
circuits. We are continually investing in and improving our computer-based
design tools to more quickly design new flexible circuit interconnects, to
enhance cooperative design and communication with our customers and to more
closely link designs to our manufacturing process.

Circuit Fabrication Technology. We have extensive experience producing fine-line polyimide flexible
circuits and have pioneered manufacturing processes that deliver high unit
volumes at cost-effective yields. At the core of the process is roll-to-roll
fine-line circuit processing. The starting materials are flexible laminates
composed of a thin dielectric film that is either adhesive-bonded to treated
copper foil or metalized without the use of adhesives. Very accurate images
(down to 0.001 inches) are produced in volume in photoresist. Circuit conductors
are then formed by chemically etching the underlying copper. Coverfilm and
covercoat materials are adhered to the circuitry to provide an insulative
coating and to expose contact pads for surface metalization. The exposed copper
surfaces are then coated with solder, gold or another surface finish for
assembly or bonding applications. Laser processing is used to create various
openings such as vias and to cut contoured peripheries in substrate
materials.

Our key flexible circuit fabrication
technologies include:

Fine
Feature Wide-Width Roll-to-Roll Processing. Our process allows us to fabricate
circuits with very fine line widths and spaces at higher density of parts per
square foot which increases material and equipment utilization. Processing 250mm
to 500mm wide web (as opposed to the narrower industry standard) in a continuous
roll-to-roll format (as opposed to discrete panels) allows us to fabricate
higher volumes at lower cost.

Process
Technologies. We utilize the following process technologies in our circuit
fabrication process:

Semi-additive Metallization. Allows the fabrication of flexible circuits with finer lines and spaces
through the selective metalization of the conductors in the circuit fabrication
process.

*Laser
Processing.* Produces low cost, very fine
openings, small vias and contoured shapes that solve density problems while
avoiding more expensive traditional alternatives. Also, using a laser to cut the
periphery of parts allows prototypes and low volume production parts to be built
faster and without the cost of a blanking die.

*Bondable Gold Plating.* Prepares flexible circuit conductors and pads for various bonding
processes including chip-on-flex, which saves space and improves electrical
performance by wire bonding a semiconductor die directly to the flexible
circuit.

*Coverfilm and Covercoat Application.* Adheres coverfilm and covercoat materials to the circuitry to
provide an insulative coating and to expose contact pads for surface
metalization. This process allows accurate positioning of solder plated pads to
support fine pitch surface mount assembly to the finished circuits.

Assembly
and Test Technology. We differentiate
ourselves from our competitors by offering both assembly and test technology to
provide complete flexible circuit interconnect assemblies to our customers. We
assemble passive electrical and various mechanical components, including
connectors, stiffeners, diodes, formed metal parts and other devices to flexible
circuits in our plants in Thailand. We also perform advanced direct die attach
and assembly of integrated circuit devices as well as the functional testing of
these flexible circuit assemblies. Assembling these components directly onto the
flexible circuit increases performance and reduces space, weight and
cost.

Research and Development

We
continually engage in research, development and engineering activities. Our goal
is to utilize these activities to improve and enhance existing products and
processes and to develop new products and processes in order to expand our
market share. Our research and development effort is concentrated on improving
and increasing long run flexible circuit manufacturing capabilities for both
adhesiveless and adhesive based flexible circuits, developing processes for
manufacturing new products including flexible circuits for disk drive, display,
integrated circuit substrate and printer applications.

6

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Manufacturing

We have
developed a manufacturing system that combines the use of technology with the
deployment of human resources that we believe allows us to provide low-cost,
high technology flexible circuits. Quality systems in place are certified to
standards set by demanding customers in the electronics industry. All operations
have received ISO 9002 certification.

We believe
our manufacturing processes, in particular our 250mm and 500mm wide web roll
processing lines, are designed to optimize the utilization of automation, labor
and capital, and deliver better yield, material utilization and throughput
relative to our competitors. We expanded our Thailand manufacturing operations
in fiscal 2005 to include flexible circuit fabrication capabilities in addition
to the inspection, assembly and other secondary operations already located
there. We are now able to manufacture flexible circuits from start to finish in
our Thailand facilities.

Suppliers

We purchase
raw circuit materials, process chemicals and various components from multiple
outside sources. For components, we typically make short-term purchasing
commitments to key suppliers for specific customer programs. These commitments
are usually made for three to twelve month periods. These suppliers commit to
providing cooperative engineering, as required, and in some cases maintain a
local inventory to provide shorter lead times and reduced inventory levels for
us. In most cases, suppliers are approved, and are often dictated by our
customers. For process chemicals, we rely on a limited number of key suppliers.
We currently can obtain certain types of photoresist, a liquid compound used in
the photoetching process, certain polyimide materials, certain specialty
chemicals used in our manufacturing process and high end suspensions from only
one supplier of each such material. Alternate chemical products are available
from other sources, but process chemical changes would often require
requalification of the processes, which could take weeks or months to complete.
We mitigate these risks by identifying stable companies with leading technology
and delivery positions and by attempting to qualify two suppliers for all
critical raw materials and components.

Sales, Marketing and Customer
Support

We sell and
market our products directly to a number of industries requiring electronic
interconnects through the use of an internal sales staff. In addition, we
utilize sales representatives on a limited basis in several Asian countries
where it is advantageous to be represented locally. Historically, we have sold a
substantial portion of our flexible circuit interconnects to a limited number of
customers. We have benefited from early entry as a supplier to the disk drive
industry and have been able to leverage our relationships to supply other
integrated flexible circuit interconnects. Our relationships combined with our
reputation for high standards of quality and innovative manufacturing processes
have established us as a predominant supplier of interconnects for the HDD
industry.

We provide
our customers' product design support from our locations in Minnesota and
Thailand and from our sales and customer support offices in California, China,
Singapore and the United Kingdom. In addition, we provide on-site customer
design support for our customers as required.

Even though
our customer mix will change from period to period, we expect that sales to
relatively few customers will continue to account for a high percentage of our
net sales in the foreseeable future. Sales to our three largest customers,
Seagate/Maxtor, Hitachi and Philips/TPO, constituted 66%, 17% and 11% of net
sales, respectively, for fiscal 2007, 73%, 6% and 14% of net sales,
respectively, for fiscal 2006 and 73%, 2% and 15% of net sales, respectively,
for fiscal 2005. Seagate acquired Maxtor in May 2006 and have combined their
operations. The merger of Philips Mobile Display Systems business unit with
Toppoly Optoelectronics Corporation of Taiwan to create a new company called TPO
was announced in November 2005 and completed in June 2006.

Sales to our
five largest customers constituted 99%, 94% and 93% of net sales for fiscal
2007, 2006 and 2005, respectively. The loss of a significant customer or a
substantial reduction in orders by any significant customer, including
reductions due to market, economic or competitive conditions in the computer,
computer peripheral, mobile communication devices and consumer markets has had
and may continue to have a material adverse effect on our business, financial
condition and results of operations.

Environmental Controls

Flexible
circuit interconnect manufacturing requires the use of chemicals. As a result,
we are subject to a variety of environmental laws relating to the storage,
discharge, handling, emission, generation, manufacture, use and disposal of
chemicals, solid and hazardous waste and other toxic and hazardous materials
used to manufacture our products. We believe we have been operating our
facilities in substantial compliance in all material respects with existing
environmental laws and regulations. However, we cannot predict the nature, scope
or effect of legislation or regulatory requirements that could be imposed or how
existing or future laws or regulations will be administered or interpreted with
respect to products or activities to which they have not previously been
applied. For this reason, we implemented procedures geared toward minimizing the
negative impacts and reducing potential financial risks arising from
environmental issues. Compliance with more stringent laws or regulations, or
more vigorous enforcement policies of regulatory agencies could require
substantial expenditures by us and could adversely affect our business, results
of operations and financial condition. We do not anticipate any material amount
of environmental-related capital expenditures in fiscal 2008.

7

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Intellectual Property

We believe
that, due to our customers' demands for rapid technological advances and the
resulting limited product life cycles, the success of our business generally
depends more on the technical and engineering expertise, creativity and
marketing and service abilities of our employees than on patents, trademarks and
copyrights. Nevertheless, we own patents and have a policy of seeking patents
when appropriate on inventions concerning new products and improvements as part
of our ongoing research, development and manufacturing activities. There can be
no assurance that any patents issued to us or licensed by us will provide a
competitive advantage or will not be challenged by third parties, or that the
patents of others will not have an adverse effect on our ability to do business.
Furthermore, there can be no assurance that others will not independently
develop similar products, duplicate our products or design around the patents
issued to us or licensed by us. In addition, there can be no assurance that
foreign intellectual property laws or our agreements will protect our
intellectual property rights in any foreign country. Any failure to protect our
intellectual property rights could have a material adverse effect on our
business, results of operations and financial condition.

We had a 35%
investment in AKI, the company that developed the unique manufacturing process
technology utilized by our FSA products. Although we have sold our equity
position in AKI we continue to have a license to use this technology in our
products for disk drive applications until 2012. The rights granted to us by AKI
are royalty-bearing and may not be sublicensed without the consent of
AKI.

Employees

As of
September 29, 2007, we had a total of 3,247 employees. Of these, 20 employees
were based in the U.S., primarily in Plymouth, Minnesota, 3,215 were based in
Thailand and 12 were based in other Asian and European locations. Our future
operating results depend in part upon our ability to attract and retain other
qualified management, technical, manufacturing, sales and support personnel for
our operations. Competition for such personnel is intense and there can be no
assurance that we will be successful in attracting or retaining such personnel.
The failure to attract or retain such persons could materially adversely affect
our business, results of operations and financial condition.

Competition

The flexible
circuit interconnect market is differentiated by customers, markets and
geography with each niche having its own combination of complex packaging and
interconnection requirements. We believe the market competes principally on the
basis of design capability, price, quality, flexibility and technological
advancements in underlying applications. During periods of economic slowdown in
the electronics industry and other periods when excess capacity exists,
electronic OEMs become more price sensitive. We believe that once a customer has
selected a particular vendor to design and manufacture a flexible circuit
interconnect, the customer generally relies upon that vendor's design for the
life of that specific application and, frequently, subsequent generations of
similar applications. Accordingly, it is difficult to achieve significant sales
to a particular customer with respect to any application once another vendor has
been selected to design and manufacture the flexible circuit interconnect used
in that application. While this market paradigm may provide a barrier to our
competitors in the markets served by us, it also may present an obstacle to our
entry into other markets.

The flexible
circuit interconnect market is highly competitive. We experience competition
world-wide from a number of leading foreign and domestic providers including 3M
Company for high-end technology applications, and NOK ("Nippon Mektron"),
Fujikura Ltd., Multi-Fineline Electronix, Inc. ("M-Flex") and Sumitomo for
standard flex and assembly applications. 3M, Sumitomo, NOK and Fujikura are
substantially larger than us and possess greater financial and other resources.
There are a number of other flexible circuit manufacturers that target other
flexible circuit markets and rarely compete directly with us. In addition,
competitors for disk drive market integrated suspension assembly applications
include Hutchinson Technology Incorporated, Magnecomp International Limited,
Nihon Hatsujo Kabusikigaisha ("NHK") and Optimal Technology Limited. Expansion
of our existing products or services could expose us to new competition.
Moreover, new developments in the consumer electronics industry could render
existing technology obsolete or less competitive and could potentially introduce
new competition into the market. There can be no assurance that our competitors
will not develop enhancements to, or future generations of, competitive products
or services that will offer superior price or performance features to those
offered by us or that new competitors will not enter our markets. Finally, as
many of our competitors are based in foreign countries, they have cost
structures and prices based on foreign currencies. Accordingly, currency
fluctuations could cause our U.S. dollar-priced products to be less competitive
than our competitors' products priced in other currencies.

8

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Backlog

The backlog
for our continuing operations was $14.1 million, $21.6 million and $39.0 million
at September 29, 2007, September 30, 2006 and October 1, 2005, respectively. Our
backlog fluctuates based on the timing of the receipt of orders from customers.
Backlog is defined by us as firm orders that are scheduled to be delivered
within 12 months from the date of the order. While we believe substantially all
of our current backlog will be delivered within 12 months, customers may
determine not to release orders into production, may extend requested delivery
dates or cancel orders. In such cases, we may not realize the revenue indicated
by the backlog.

Item 1A. RISK FACTORS

An
investment in our common stock involves a high degree of risk. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties that we are unaware of, or that we may currently deem
immaterial, may become important factors that harm our business, financial
condition or results of operations. If any of the following risks actually
occurs, our business, financial condition or results of operations could suffer.
In that case, the trading price of our common stock could decline, and you may
lose all or part of your investment.

***Our sales are
concentrated in a small customer base and in the HDD
industry.***

Sales to our
largest customer constituted 66% of net sales for fiscal 2007, 73% for fiscal
2006 and 73% for fiscal 2005, respectively. Sales to our five largest customers
constituted 99%, 94% and 93% of net sales for fiscal 2007, 2006 and 2005,
respectively. Because our largest customer has increased utilization of an
alternative interconnect technology that competes with our FSA product, our FSA
product will reach the end of its life by the end of our fiscal 2008 second
quarter and we expect sales to our largest customer to continue to decrease. The
loss of FSA sales to our largest customer or the loss of one or more of our
major customers or a substantial reduction in orders by any other significant
customer, for any reason, could have a material adverse effect on our business,
financial condition and results of operations. Various factors, many of which
are outside our control, could cause a loss of customers or reduction in orders
include market, economic or competitive conditions in the computer, computer
peripheral, mobile communication device and high-end consumer markets, the
development by a customer of the capability to produce flexible circuits in high
volume for its own products, a transfer of manufacturing operations by a
customer to a lower-cost country, a change in the type of interconnect or
suspension assembly used by our largest customers or the failure of a customer
to pay its account balance with us.

Sales of our
FSA and AFC products to the hard disk drive industry accounted for 84%, 80% and
76% of our net sales in fiscal 2007, 2006 and 2005, respectively. The disk drive
industry is intensely competitive and technology changes rapidly. The industry's
demand for disk drive components also fluctuates. The disk drive industry
experiences periods of increased demand and rapid growth followed by periods of
oversupply and subsequent contraction. These cycles may affect suppliers to this
industry because disk drive manufacturers tend to order more disk drive
components than they may need during growth periods, and reduce orders for these
components during periods of contraction. Fluctuations in the hard disk drive
industry may result in fluctuations in our operating results, but these
fluctuations are difficult to predict and are likely to vary in the future. If
our operating results are below financial analysts or investors expectations,
the market price of our common stock may fall abruptly and
significantly.

***Our largest customer has
increased utilization of an alternative interconnect technology that competes
with our FSA products and we expect our FSA product will reach the end of its
life by the end of the fiscal 2008 second quarter.***

Because our
largest customer has increased utilization of alternative interconnect
technology that competes with our FSA product, our FSA product will reach the
end of its life by the end of the fiscal 2008 second quarter and we expect
revenue generated from FSA product to continue to decrease. Sales of our FSA
product accounted for 49%, 58% and 65% of our net sales in fiscal 2007, 2006 and
2005, respectively. Revenue generated from the sale of our FSA product was $43.3
million, $100.4 million and $129.7 million in fiscal 2007, 2006 and 2005
respectively. The value added or revenue excluding pass-through components
portion of the FSA product relates to the flexible circuit of the FSA which we
manufacture. FSA revenue excluding pass- through components has ranged from 34%
to 37% of the FSA selling price in the past three fiscal years. The remaining
non-value added portion of the FSA product selling price is related to the cost
of the suspension attached to the flexible circuit. To date, increases in
revenue excluding pass-through components from other products have not been
sufficient to replace the decreases in FSA revenue excluding pass-through. As a
result, we have taken a number of steps to reduce our cost structure including
the closure of our U.S. manufacturing facilities. If we cannot increase our
revenue excluding pass-through to replace the reductions in FSA revenue
excluding pass-through or reduce our cost structure to correspond to decreases
in revenue excluding pass-through, our business, financial condition and results
of operations would be materially adversely affected.

9

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Our
selling prices are subject to pricing pressure from our customers and market
pressure from our competitors.

We deal with
a limited number of large customers who are able to exert significant pricing
pressure on our products. Our selling prices are affected by changes in overall
demand for our products, changes in the specific products our customers buy and
our products' life cycles. A typical life cycle for our products begins with
higher pricing when a product is introduced and decreasing prices as it matures.
To offset price decreases during a product's life, we rely primarily on higher
sales volume and improving our manufacturing yield and productivity to reduce a
product's cost. If we cannot reduce our manufacturing costs as prices decline
during our products' life cycles, our business, financial condition and results
of operations could be materially adversely affected.

***The markets in which we
operate are highly competitive.***

We operate
in highly competitive markets and our competitors can be expected to continue to
improve the design and performance of their products and to introduce new
products with competitive price/performance characteristics. Competitive
pressures often necessitate price reductions that adversely affect operating
results. We will be required to make a continued high level of investment in
product development and research, sales and marketing and ongoing customer
service and support to remain competitive. There can be no assurance that
existing or future competitors will not be able to duplicate our strategies or
that competitive pressures faced by us will not have a material adverse effect
on our business, financial condition and results of operations.

***Our operating results
are subject to fluctuations.***

Our past
operating results, and our gross margins, have fluctuated from fiscal period to
fiscal period. Our future operating results and gross margins may continue to
fluctuate from fiscal period to fiscal period due to a number of factors, many
of which are outside our control and any of which could cause our stock price to
fluctuate.

The primary factors that affect us
include the following:

- changes in overall demand for our products;
- technological changes (such as data density
  improvements) that reduce the number of suspension assemblies per disk drive required by disk drive makers;
- changes in expected customer timing of new product
  introductions;
- changes in OEM customer manufacturing yields
  throughout their products' life cycles;
- changes in the specific products our customers
  buy;
- changes in our selling prices;
- changes in utilization of our production
  capacity;
- changes in our infrastructure costs;
- changes in our manufacturing process, or problems
  related to our manufacturing process;
- changes in our manufacturing yields;
- changes in our production efficiency;
- long disruptions in operations at any of our
  plants for any reason; and
- changes in the cost of, or limits on, available
  materials and labor.

Difficulties in forecasting demand for our products make it challenging
to utilize our capacity efficiently.

If customer
demand for our FSAs or actuator flex, display flex, stacked memory flex or tape
storage flex products weakens, or if one or more customers reduce, delay or
cancel orders, our business, financial condition and results of operations could
be materially adversely affected. Decreases in our FSA revenue excluding
pass-through have resulted in us taking a number of steps to reduce our cost
structure related to underutilized capacity. These steps have included the
closure of our U.S. based manufacturing facilities. If we cannot increase our
revenue excluding pass-through to replace the reductions in FSA revenue
excluding pass-through or reduce our cost structure to correspond to decreases
in revenue excluding pass-through, our business, financial condition and results
of operations could be materially adversely affected.

10

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We typically
allow customers to change or cancel orders on short notice. We plan our
production and inventory based primarily on forecasts of customer demand,
including forecasts of customer pulls of product out of our just-intime
inventory hubs. Our customers typically prefer a dual source supply, and
therefore allocate their demand among suppliers. Both customer demand and the
resulting forecasts often fluctuate substantially. These factors, among others,
create an environment where scheduled production and capacity utilization can
vary significantly from week to week, leading to variability in gross
margins.

The following factors complicate accurate
capacity planning for market demand:

- changes in the specific products our customers
  buy;
- the pace of technological change;
- variability in our manufacturing yields and
  productivity; and
- long lead times for most of our plant and
  equipment expenditures, requiring major financial commitments well in advance of actual production
  requirements.

We have at
times increased our production capacity and the overhead that supports
production based on anticipated market demand which has not always developed as
expected. Our inability to plan our capacity requirements accurately, or our
failure to put in place the technologies and capacity necessary to meet market
demand, could have a material adverse effect on our business, financial
condition and results of operations.

Competing technologies have resulted in the end of our FSA product and
may reduce demand for our other products.

Flexible
circuit interconnects provide electrical connections between components in
electrical systems and are used as a platform to support the attachment of
electronic devices. While flexible circuits offer several advantages over
competing printed circuit board and ceramic hybrid circuit technologies, our
customers may consider changing their designs to use these alternative
technologies for future applications. In particular, our largest customer has
increased utilization of an alternative interconnect technology that competes
with our FSA products and our FSA product is expected to reach its end of life
by the end of our fiscal 2008 second quarter. If our customers switch
significant portions of their business to alternative technologies, our
business, financial condition and results of operations could be materially
adversely affected.

Future
technological innovations may reduce demand for disk drives. Data storage
alternatives that compete with disk drive-based data storage currently exist.
These storage alternatives include semiconductor (flash) memory, tape memory and
optical (DVD and CD) drives. The current core technology for disk drive data
storage has been the dominant technology in the industry for many years. This
technology could be replaced by an alternate technology in the future. Our
business, financial condition and results of operations could be materially
adversely affected if the computer industry adopts technology that replaces disk
drives as a computer data storage medium.

We
have experienced annual losses from operations in the fiscal year ended
September 29, 2007 and in prior years, and we may not achieve net income on a
consistent basis.

We had net
losses of $29.1 million for fiscal 2007, $17.0 million for fiscal 2006 and $25.0
million for fiscal 2005. Whether we achieve net income on a consistent basis
will depend on a number of factors, including:

- the level of revenue in any given period;
- our expense levels, particularly for manufacturing
  costs;
- our manufacturing efficiency, particularly with respect to
  new product introductions and high volume products;
- increasing revenue from existing AFC and FPD
  customers;
- cultivating new AFC and FPD customers; and
- the qualification of new products, including new
  semiconductor packaging, phone camera modules and printer flex
  products.

To
meet industry requirements and remain competitive, we must continue to improve
our process capabilities and develop and qualify new
products.

Our
continued success depends on our ability to continue to develop manufacturing
processes that are capable of tighter tolerances and to develop and rapidly
bring to volume production new products that meet increasingly higher
performance specifications. A number of risks are inherent in this process.
Increasingly higher performance specifications, as well as transitions to new
product platforms and materials, initially can lower our overall manufacturing
yields and efficiencies. This in turn can cause us to delay or miss product
shipments. We also may incur higher manufacturing costs and sales returns or we
may need to change or develop new manufacturing processes. If processes change,
we may need to replace, modify or design, build and install equipment. These
changes may require additional capital.

11

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We may need
to increase our research and development and engineering expenses to support
technological advances and to develop and manufacture new products and product
features. We expect future flexible circuits to require higher performance
specifications and thinner or tighter lines and spaces and to incorporate new
material sets.

If we fail
to successfully introduce new products or product features on a regular and
timely basis, demand for our existing products could decline, and our business,
financial condition and results of operations could be materially adversely
affected. If higher performance specifications and tighter lines and spaces are
required and we are not able to meet those requirements, our business, financial
condition and results of operations could be materially adversely
affected.

We must
qualify our products with our customers. The qualification process for these
products can be time-consuming, complex and difficult. We cannot be sure that
our products will continue to be selected for design into our customers'
products. If we are unable to obtain additional customer qualifications, or if
we cannot qualify our products for high volume production quantities, our
business, financial condition and results of operations could be materially
adversely affected.

We may
not be able to manufacture our products efficiently due to changes in demand or
technology, or other unforeseen events.

We
manufacture a wide variety of products with different selling prices and
manufacturing costs. Our product mix varies weekly as market demand changes. Any
substantial variation in product mix can lead to changes in utilization of our
equipment and tooling, inventory obsolescence and overstaffing in certain areas,
all of which could adversely impact our business, financial condition and
results of operations.

Rapid
technological change in the various electronics industries we serve has led to
numerous design changes and tighter performance specifications. The resulting
new product designs with tighter performance specifications initially are more
difficult to manufacture, could require additional capital expenditures and may
require increased development and support expenses. Manufacturing yields and
efficiencies also vary from product to product. Newer products typically have
lower initial manufacturing yields and efficiencies as we commence volume
manufacturing and thereafter ramp to full production. We have experienced sales
returns in the past and as we commence volume manufacturing, as new features for
our products are introduced or as new manufacturing processes are implemented,
we may experience increased sales returns in the future. We cannot be sure that
we will attain our output goals and be profitable with regard to any of our new
products.

Our
manufacturing plants are located in Korat and Lamphun, Thailand, which can
experience severe weather. Severe weather has, at times, resulted in lower
production and decreased our shipments.

***We may not be able to
adequately protect our intellectual property.***

We attempt
to protect our intellectual property rights through patents, copyrights, trade
secrets and other measures. We may not, however, be able to protect our
technology adequately. In addition, competitors may be able to develop similar
technology independently. Our success depends in large part on trade secrets
relating to our proprietary manufacturing processes. We seek to protect these
trade secrets and our other proprietary technology in part by requiring each of
our employees to enter into non-disclosure and non-competition agreements. In
these agreements, the employee agrees to maintain the confidentiality of all of
our proprietary information and, subject to certain exceptions, to assign to us
all rights in any proprietary information or technology made or contributed by
the employee during his or her employment. In addition, we regularly enter into
non-disclosure agreements with third parties, such as consultants, suppliers and
customers. These agreements may, however, be breached, and we may not have an
adequate remedy for any such breach. In addition, our competitors may otherwise
learn or independently develop our trade secrets.

We believe
that the patents we hold, control and may obtain are valuable, but that they
will not independently determine our success. Moreover, we may not receive
patents for our pending patent applications, and our issued patents may not be
broad enough to protect our technology adequately. We compete in industries with
rapid development and technological innovation. We cannot be sure that we will
be able to protect our future technology or that any patent issued to us will
not be challenged, invalidated, circumvented or infringed. In addition, we have
only limited patent rights outside the United States, and the laws of certain
foreign countries may not protect our intellectual property rights to the same
extent as do the laws of the United States.

Defending against intellectual property claims may have a material
adverse effect on our business.

We and certain users of our
products, have received, and may receive, communications from third parties
asserting patent claims against us or our customers that may relate to our
manufacturing equipment or to our products or to products that include our
products as a component. If any third party makes a valid infringement claim
against us and we are unable to obtain a license on terms acceptable to us, our
business, financial condition and results of operations could be materially
adversely affected. We expect that, as the number of patents issued continues to
increase, the volume of intellectual property claims made against us could
increase.

12

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***We may have difficulty
obtaining an adequate supply of raw materials at reasonable
prices.***

We currently
can obtain certain types of photoresist, a liquid compound used in the
photoetching process, certain polyimide materials, certain specialty chemicals
used in our manufacturing process and high end suspensions from only one
supplier of each such material. If we could not obtain the materials referred to
above in the necessary quantities, with the necessary quality and at reasonable
prices, our business, financial condition and results of operations could be
materially adversely affected.

***The loss of key
personnel could adversely affect our business.***

Our success
depends upon the efforts, contributions and abilities of our senior management.
We cannot be sure that the services of our key personnel will continue to be
available to us. The loss of services of any of these employees could have a
material adverse effect on our business, financial condition and results of
operations.

We
might not realize the benefits we are seeking from the corporate restructuring
plan announced on October 1, 2007 and our corporate restructuring plan might
have a negative effect on our efforts to maintain our customers and product
quality.

On October
1, 2007, we announced that we are implementing a corporate restructuring plan
intended to reduce costs and improve the efficiency of our operations. As part
of that plan, we will be relocating many of our corporate business functions,
including most administrative, sales and engineering, to Lamphun, Thailand by
January 2008. We expect to retain key sales and engineering resources in the
U.S. to support our U.S. based customers. In addition, we plan to achieve
additional cost savings by discontinuing manufacturing activity at our Korat,
Thailand facility as the FSA product reaches its end of life by the end of the
fiscal 2008 second quarter.

There are
several risks inherent in our efforts, including the risk that cost-cutting
plans will impair our ability to effectively develop new products, to remain
competitive, and to operate effectively, which could have a negative effect on
our efforts to maintain our customers or on product quality. Further, we may not
be able to complete our corporate restructuring by January 2008. We may not be
able to retain key employees and if we are not able to retain key employees, we
may not have sufficient resources to successfully manage our business in the
U.S. or in Thailand.

Our
corporate restructuring could have long-term effects on our business, decreasing
or slowing product development, making it more difficult for us to respond to
customers and maintain product quality, and limiting our ability to hire and
retain key personnel. If any of the risks associated with our corporate
restructuring plan materialize, our business, financial condition and results of
operations could be materially adversely affected.

***We rely on our existing
credit facilities to finance cash required for our
operations.***

We have
historically financed our operations primarily through cash from operating
activities, sales of equity securities, bank credit facilities and employee
stock option exercises. Cash and equivalents were $10.5 million at September 29,
2007 and $9.8 million at September 30, 2006. Long-term debt was $15.5 million at
September 29, 2007 and $19.8 million at September 30, 2006 less current
maturities of $11.0 and $9.0, respectively. During the years ended September 29,
2007 and September 30, 2006, the Company incurred losses from continuing
operations of $29.1 million and $17.0 million, respectively. Operating
activities used $17.6 million and provided $18.1 million during the years ended
September 29, 2007 and September 30, 2006, respectively. As of September 29,
2007, the Company had a working capital deficit of $12.2 million. Total unused
debt availability as of September 29, 2007 was approximately $8.0 million under
the Companys long-term Thailand credit facilities and approximately $14.6
million under its short-term packing credit and working capital
facilities.

We believe
that with the existing Thailand credit facilities and cash generated from
operations, we will have adequate funds to support projected working capital and
capital expenditures for the next twelve months. Any change to our existing
credit facilities could have a material adverse effect on our business,
financial condition and results of operations.

13

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***We may not be able to
obtain the capital we need to maintain or grow our
business.***

Our ability
to execute our long-term strategy may depend on our ability to obtain additional
long-term debt and equity capital. We have no commitments for additional
borrowings, other than our existing credit facilities, or for sales of equity,
other than under our existing employee benefit plans. We cannot determine the
precise amount and timing of our funding needs at this time. We may be unable to
obtain future additional financing on terms acceptable to us, or at all. If we
fail to comply with certain covenants relating to our indebtedness, we may need
to refinance our indebtedness to repay it. We also may need to refinance our
indebtedness at maturity. We may not be able to obtain additional capital on
favorable terms to refinance our indebtedness.

The following factors could affect
our ability to obtain additional financing on favorable terms, or at
all:

- our results of operations;
- general economic conditions and conditions in the
  disk drive industry;
- the perception in the capital markets of our
  business;
- our ratio of debt to equity;
- our financial condition;
- our business prospects; and
- changes in interest rates.

In addition,
certain covenants relating to our existing indebtedness impose certain
limitations on additional indebtedness. If we are unable to obtain sufficient
capital in the future, we may have to curtail our capital expenditures and
reduce research and development expenditures. Any such actions could have a
material adverse effect on our business, financial condition and results of
operations.

***Servicing our existing
debt may constrain our future operations.***

Our ability
to satisfy our obligations to pay interest and to repay debt is dependent on our
future performance. Our performance depends, in part, on prevailing economic
conditions and financial, business and other factors, including factors beyond
our control. To the extent that we use a portion of our cash flow from
operations to pay the principal of, and interest on our indebtedness, that cash
flow will not be available to fund future operations and capital expenditures.
We cannot be sure that our operating cash flow will be sufficient to fund our
future capital expenditure and debt service requirements or to fund future
operations.

***Our financing agreements
contain restrictive covenants with which we may not be able to
comply.***

We have
entered into financing agreements that contain restrictive financial covenants.
These covenants require us, among other things, to maintain specified levels of
net income, tangible net worth and interest and leverage ratios, and also impose
certain limitations on additional indebtedness, leases, guarantees and the
payment of dividends. Our ability to comply with restrictive financial covenants
depends upon our future operating performance. Our future operating performance
depends, in part, on general industry conditions and other factors beyond our
control. We cannot be sure that we will be able to comply with these covenants
in the future, and we may not be successful in renegotiating our financing
agreements or otherwise obtaining relief from the covenants. If we default under
some or all of our financing agreements, our lenders may require that we
immediately repay the full outstanding amount we owe to them. In such event, we
may have to pursue alternative financing arrangements. If we are not in
compliance with financial covenants in our financing agreements at the end of
any fiscal year, our business, financial condition and results of operations
could be materially adversely affected.

We may
not be able to successfully address problems encountered in connection with any
future acquisitions.

We expect to
consider opportunities to acquire or make investments in other technologies,
products and businesses that could enhance our technical capabilities,
complement our current products and services, or expand the breadth of our
markets. Acquisitions and strategic investments involve numerous risks,
including:

- problems maintaining uniform standards,
  procedures, controls and policies;
- unanticipated costs associated with the
  acquisition, including accounting charges and transaction expenses;
- problems assimilating the purchased technologies,
  products or business operations;
- diversion of management's attention from our core
  business;
- adverse effects on existing business relationships
  with suppliers and customers;
- risks associated with entering markets in which we
  have no or limited prior experience; and
- potential loss of key employees of acquired
  organizations.

If we fail
to properly evaluate and execute acquisitions and strategic investments, our
management team may be distracted from our day-to-day operations, our business
may be disrupted and our operating results may suffer. In addition, if we
finance acquisitions by issuing equity or convertible debt securities our
existing shareholders would be diluted.

14

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***We face risks from doing
business internationally.***

We have
manufacturing facilities in Thailand and design, sales and customer support
operations in the United Kingdom, Taiwan, Singapore, China and South Korea. Our
business is subject to certain risks inherent in international business, many of
which are beyond our control. These risks include:

- changes in local regulatory requirements,
  including restrictions on product content;
- changes in the laws and policies affecting trade,
  investment and taxes (including laws and policies relating to the repatriation of funds and to withholding taxes);
- differing degrees of protection for intellectual
  property;
- foreign labor issues;
- difficulties in coordinating and managing foreign
  operations;
- potential cross border shipment delays;
- instability of foreign economies and
  governments;
- cultural barriers; and
- wars and acts of terrorism.

On September
19, 2006, the Royal Thai military overthrew Thailands prime minister and
elected government. Although the coup has not impacted our Thailand operations,
we cannot predict the future impact of the coup or the consequences to our
business of instability in Thailand. Any of the risks associated with
international operations could have a material adverse effect on our business,
financial condition and results of operations.

We
face risks from fluctuations in the value of foreign currency versus the U.S.
dollar and the cost of currency exchange.

While we
transact business predominantly in U.S. dollars, a large portion of our debt,
sales and expenses are denominated in foreign currencies. Changes in the
relation of foreign currencies to the U.S. dollar will affect our cost of sales
and operating margins and could result in exchange losses. To reduce the impact
of certain foreign currency fluctuations, we enter into short-term forward
foreign currency exchange contracts in the regular course of business. The
forward exchange contracts generally require us to exchange Thailand baht for
U.S. dollars or U.S. dollars for Thailand baht at maturity, at rates agreed to
at inception of the contracts. These contracts are not designed as hedges,
therefore, the gains and losses on foreign currency transactions are included in
income as incurred. No assurance can be given that our strategies will prevent
future currency fluctuations from having a material adverse effect on our
business, financial condition and results of operations.

***A prolonged economic
downturn could materially harm our business.***

Negative
trends in the general economy, including trends resulting from actual or
threatened military action by the United States and threats of terrorist attacks
on the United States and abroad, could cause a decrease in consumer and business
spending in general.

***We may not be able to
maintain good relations with our employees.***

Our ability
to conduct business would be impaired if our workforce were to be unionized or
if a significant number of our specialized employees were to leave and we could
not replace them with comparable personnel. Our business may be adversely
affected if we need to adjust the size of our workforce due to fluctuating
demand. The locations of our plants and the broad span and technological
complexity of our products and processes limit the number of satisfactory
engineering and other candidates for key positions.

***We could incur
substantial costs as a result of violations of or liabilities under
environmental laws.***

Our
operations are subject to laws and regulations relating to the protection of the
environment, including those governing the discharge of pollutants into the air
or water, the management and disposal of hazardous substances or wastes and the
cleanup of contaminated sites. Some of our operations require environmental
permits and controls to prevent and reduce air and water pollution, and these
permits are subject to modification, renewal and revocation by issuing
authorities. We could incur substantial costs, including cleanup costs, fines
and civil or criminal sanctions and third-party claims for property damage and
personal injury as a result of violations of or liabilities under environmental
laws or non-compliance with environmental permits.

Failure to achieve and maintain effective internal controls in accordance
with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect
on our business and stock price.

Section 404
of the Sarbanes-Oxley Act requires annual management assessments of the
effectiveness of our internal controls over financial reporting and a report by
our Independent Registered Public Accountants addressing these assessments. If
we fail to maintain the adequacy of our internal controls, as such standards are
modified, supplemented or amended from time to time, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal
control environment could have a material adverse effect on our stock
price.

15

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We
currently fail to meet one of Nasdaqs listing requirements and if our common
stock is delisted it may then become illiquid.

Our common
stock is listed on The Nasdaq Global Market. On November 21, 2007, we received a
Staff Deficiency Letter from The Nasdaq Stock Market which stated that for the
last 30 consecutive business days the bid price of our common stock has closed
below the minimum $1.00 per share required for continued inclusion on the Nasdaq
Global Market. Therefore, we are not in compliance with the requirements for
continued listing of the Nasdaq Global Market. If, at anytime before May 19,
2008, the bid price of our common stock closes at $1.00 per share or more for a
minimum of 10 consecutive business days, the staff of The Nasdaq Stock Market
will provide us written notification that we have achieved compliance with this
requirement for continued listing.

If we fail
to regain compliance with the minimum bid price requirement or if at any time we
fail to satisfy each of the other requirements for continued listing, our common
stock will be delisted from The Nasdaq Global Market. If delisted from The
Nasdaq Global Market, our common stock will likely be quoted in the
over-the-counter market in the so-called pink sheets or quoted in the OTC
Bulletin Board. In addition, our common stock would be subject to the rules
promulgated under the Securities Exchange Act of 1934 relating to penny
stocks. These rules require brokers who sell securities that are subject to the
rules, and who sell to persons other than established customers and
institutional accredited investors, to complete required documentation, make
suitability inquiries of investors and provide investors with information
concerning the risks of trading in the security. Consequently, we believe an
investor would find it more difficult to buy or sell our common stock in the
open market if it were quoted on the over-the-counter market or the OTC Bulletin
Board. There can be no assurance that our common stock may be sold without a
significant negative impact on the price per share that may make it more
difficult for us to meet the minimum bid price requirement or that any market
will continue to exist for our common stock.

Item 1B. UNRESOLVED STAFF
COMMENTS

None.

Item 2. PROPERTIES

At September
29, 2007, we owned an aggregate of approximately 381,100 square feet of
manufacturing and other space. Our significant facilities are as follows:

|Functions                                 |  |                               | Location (number of
      facilities) |         |  | Square
      Feet
|----------------------------------------- |  | ----------------------------- | ------------------------------------- | ------- |  | -----------------
|Circuit inspection and finishing          |  | Korat, Thailand (two)         |                                       | 55,100 
|                                         
|Circuit finishing and assembly, sales and |  | Lamphun, Thailand (three)     |                                       | 141,800
|support                                   |  |                               |                                       | 88,600 
|                                          |  |                               |                                       | 19,600 
|                                         
|Held for disposition                      |  | Litchfield, Minnesota (three) |                                       | 15,000 
|                                          |  |                               |                                       | 10,000 
|                                          |  |                               |                                       | 51,000 

We plan on
disposing of our Korat manufacturing locations once our FSA product currently in
production at those locations reaches its end of life by the end of the fiscal
2008 second quarter. We have a purchase agreement in place to sell our
Litchfield facilities. The sale is expected to close once the buyer arranges
financing.

Item 3. LEGAL PROCEEDINGS

We are party
to certain lawsuits in the ordinary course of business. We do not believe that
these proceedings, individually or in the aggregate, will have a material
adverse effect on our business, financial condition or results of
operations.

16

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Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS

We did not
submit any matter to a vote of our security holders during the fourth quarter of
the fiscal year covered by this Report.

Item 4A. EXECUTIVE OFFICERS OF
REGISTRANT

Below are
the name, age, position and a brief account of the business experience of each
of our executive officers and key employees as of September 29, 2007.

Name
    
    **Age**
    
    Position(s)William P. Murnane
    
    45
    
    Chairman, Chief Executive Officer and DirectorTerry M.
      Dauenhauer
    
    54
    
    Senior Vice
      President and Chief Operating OfficerKeith Foerster
    
    44
    
    Senior Vice President, SalesE. Thomas
      Atchison
    
    58
    
    Vice President
      and Managing Director, InnovexThailandBrian R. Dahmes
    
    47
    
    Vice President, TechnologyDouglas W.
      Keller
    
    49
    
    Vice President,
      FinanceNicholas J. Tomashot
    
    44
    
    Vice President, Finance, Innovex
Thailand


William
Murnane was elected Chairman in 2007.
Previously Mr. Murnane was promoted to President and Chief Operating Officer in
July 1998 and to Chief Executive Officer in January 2000. He was named Chairman
of the Board on January 17, 2007. He has been a director since 1999. Mr. Murnane
joined us in July 1995 as Vice President. From June 1993 to June 1995, Mr.
Murnane was Chief Operating Officer of Boutwell, Owens & Co., a private
manufacturer of packaging, in Fitchburg, Massachusetts. From June 1992 to June
1993, Mr. Murnane was Director of Operations for Uniform Printing & Supply,
Inc. in Acton, Massachusetts. Prior to that, he held various operating and
corporate planning positions during a ten-year career at United Parcel
Service.

Terry
Dauenhauer joined Innovex in January 2004 as
Senior Vice President and Chief Operating Officer. Prior to joining Innovex, he
spent five years with Seagate Technology as Vice President of Thailand
Operations and World Wide Product Performance. Prior to that, he was President
and Director, AlphaSource Electronics, Alphatel, Alphatec Electronics and NS
Electronics from 1993 to 1997. Mr. Dauenhauer held various positions with
National Semiconductor from 1987 to 1993, Fairchild Semiconductor from 1983 to
1987 and Texas Instruments from 1976 to 1983.

Keith
Foerster joined us in May 1992 as a Sales and
Marketing Engineer. He has held the following positions with us: National Sales
ManagerMay 1995 to July 1997; Director, Hard Disk Drive SalesJuly 1997 to
August 1999; Senior Director, FSA DevelopmentAugust 1999 to May 2000; Senior
Director, Minnesota OperationsMay 2000 to June 2002; Senior Director and
General Manager of the Data Storage DivisionSeptember 2001 to June 2003; Vice
President and General Manager of the Data Storage Division from June 2003 to
June 2004; Vice President, U.S. Operations June 2004 to July 2005, Vice
President, Development and Sales July 2005 to November 2005 and Senior Vice
President, Development and Sales from November 2005 to date.Previously, Mr. Foerster held positions as a Sales Engineer at
Quannon CAD Systems from September 1990 to May 1992 and as a Mechanical Design
Engineer at Control Data Corporation from May 1986 to September 1990.

Thomas
Atchison joined Innovex in September 2004 as
Vice President/General Manager, Innovex (Thailand) Limited. Prior to joining us,
Mr. Atchison was the Vice President and Chief Financial Officer of Evans &
Sutherland from 2003-2004 and Vice President and General Manager, Manufacturing,
Service & Support for Evans & Sutherland from 1998 to 2003. Prior to
that Mr. Atchison was the Chief Operating Officer and Chief Financial Officer of
Silicon Reality Inc. from 1997 to 1998. Prior to that Mr. Atchison held various
positions with Alphatec from 1993 to 1997; National/Fairchild Semiconductor from
1984 to 1993; DSC Communications from 1982 to 1984; and Texas Instruments from
1978 to 1982.

*Brian Dahmes* joined us in
July 1997 as Plant Manager. Mr. Dahmes was promoted to Director of Manufacturing
in July 1998 and to Vice President, Quality in March of 1999. In November 1999,
he was promoted to Vice President, Managing Director Innovex (Thailand). In
August 2001, Mr. Dahmes was named Vice President, Research and Development and
in August 2005 he was named Vice President, Technology. From 1992 to 1995, Mr.
Dahmes served as Process Engineering Manager for Sheldahl, Inc., and from 1995
to 1997 he was an Engineering Manager with Sheldahl, Inc.

17

---

Douglas
Keller joined us in January 1990 as Corporate Controller. In May 1992, Mr.
Keller was made an officer and in October 1996, he was promoted to Vice
President, Finance. From July 1988 to January 1990, Mr. Keller was Manager of
Financial Accounting and Tax for UFE, Inc., a manufacturer of injection molded
plastic components. From 1983 to 1988, Mr. Keller was a Senior Auditor for The
Pillsbury Company. From 1980 to 1983, he was a Senior Accountant with Deloitte
Haskins & Sells, a CPA firm.

Nick
Tomashot joined us in April 2001 as Director
of Planning and Analysis. In June 2003, he was promoted to Vice President of
Planning and Analysis and he was named Vice President, Finance Thailand in July
2004. Prior to joining us, Mr. Tomashot was Director of Finance of Rooster.com
from 2000 to March, 2001, and was Senior Finance Manager of Diageo PLC,
Pillsbury North America in the Non-Dough Foods Division from 1999 to 2000. Prior
to that, Mr. Tomashot held various finance positions at Procter & Gamble
from 1993 to 1999 and at The NCR Corporation from 1986 to 1991.

18

---

PART II

Item 5. MARKET FOR REGISTRANTS COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES

Performance Graph

The graph
below sets forth a comparison of the cumulative shareholder return of the
Companys common stock over the last five fiscal years with the cumulative total
return over the same periods for the Nasdaq Stock Market (U.S. and Foreign
Companies) Index and the Nasdaq Electronic Components Index. The graph compares
the cumulative total return of the Companys common stock as of the end of each
of the Companys last five fiscal years on $100 invested as of September 30,
2002, assuming the reinvestment of all dividends:



|                  | **2002** | **2003** | **2004** | **2005** | **2006** | **2007**
|----------------- | -------- | -------- | -------- | -------- | -------- | --------
|Innovex,
    Inc. | $100.00  | $423.40  | $173.19  | $180.85  | $88.51   | $52.77  
|Nasdaq            |          |          |          |          |          |         
|Electronic        |          |          |          |          |          |         
|Components        | 100.00   | 193.05   | 162.88   | 181.55   | 185.75   | 240.77  
|Nasdaq Stock      |          |          |          |          |          |         
|Market            | 100.00   | 153.46   | 163.09   | 186.57   | 197.29   | 237.61  

Common Stock
Information

Our common
stock is traded on the National Market System of the Nasdaq Stock Market under
the symbol "INVX." As of September 29, 2007, there were 19,407,966 shares of
common stock outstanding, held by approximately 424 shareholders of
record.

19

---

Price Range of Common
Stock

The table
below sets forth the high and low sale prices of our Common Stock as reported on
the Nasdaq National Market for the periods indicated.

2007
    
    2006High
    
    Low
    
    High
    
    LowFirst Quarter
    $
    2.54
    
    $
    1.70
    
    $
    4.34
    
    $
    2.88Second
      Quarter
    
    2.40
    
    
    1.74
    
    
    5.46
    
    
    3.45Third Quarter
    
    1.91
    
    
    1.33
    
    
    5.85
    
    
    3.57Fourth
      Quarter
    
    1.57
    
    
    0.82
    
    
    4.15
    
    
    2.07


Dividend Policy

We currently
intend to retain all available funds, after repayment of the debt, to support
our operations and to finance growth and development of our business. We do not
anticipate paying any cash dividends in the foreseeable future. Any future
determination relating to the dividend policy will be made at the discretion of
our board of directors and will depend on a number of factors, including our
future earnings, credit facility restrictions, capital requirements, financial
condition, future prospects and other factors as the board of directors may deem
relevant.

Securities Authorized for Issuance
Under Equity Compensation Plans

The
following table sets forth information regarding our equity compensation plans
in effect as of September 29, 2007. Each of our equity compensation plans is an
"employee benefit plan" as defined by Rule 405 of Regulation C of the Securities
Act of 1933.

|                          | Number of shares of common         |  | Weighted-average exercise |       | Number of shares of common   
|------------------------- | ---------------------------------- |  | ------------------------- | ----- | -----------------------------
|                          | stock to be issued upon            |  | price of outstanding      |       | stock remaining available
for
|                          | exercise of outstanding            |  | options, warrants and     |       | future issuance under equity 
|Plan category             | options,
      warrants and rights |  | rights                    |       | compensation
      plans(1)  
|Equity compensation       |                                    |  |                           |       |                              
|plans approved by         |                                    |  |                           |       |                              
|stockholders:             | 1,977,968                          |  |                           | $5.25 |                              
|Equity
      compensation |                                    |  |                           |       |                              
|plans not approved by     |                                   |  |                           |      |                              
|stockholders:             |                                    |  |                           |       |                              
|Total                     | 1,977,968                          |  |                           | $5.25 |                              

(1) Excludes shares of stock listed in
first column.

The equity
compensation plans approved by our shareholders are the 1987 Employee Stock
Option Plan, 1994 Stock Option Plan, and the 2000 Restricted Stock
Plan.

The Company also maintains an
Employee Stock Purchase Plan, participation in which is available to
substantially all of the Companys employees. Participating employees may
purchase the Companys common stock at the end of each participation period at a
purchase price equal to 85% of the lower of the fair market value of the stock
at the beginning or end of the period. The six-month participation period runs
from April 1 to September 30 and from October 1 to March 31 each year. Employees
may contribute up to 10% of their base compensation to the plan subject to
certain IRS limits on stock purchases through the plan. This plan has been
approved by the Companys shareholders.

20

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Item 6. SELECTED CONSOLIDATED FINANCIAL
DATA

The
following selected consolidated financial data as of the end of each fiscal year
has been derived from our consolidated financial statements for each of the
years in the five-year period ended September 29, 2007. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes appearing elsewhere in this
report.

|                                              | For the Years
    Ended
|--------------------------------------------- | -----------------------
|                                              | September 27,          
|                                              | 2003                   
|(In thousands, except per share data)         |                        
|                                             
|Consolidated Statement of Operations Data:    |                        
|Net
    sales                                 | $                      
|Cost of sales                                 |                        
|Gross profit                                  |                        
|Operating expenses:                           |                        
|Selling, general, administrative and          |                        
|Royalty                                       |                        
|Engineering                                   |                        
|Restructuring and goodwill impairment         |                        
|Net (gain) loss on sale of assets             |                        
|Total operating expenses                      |                        
|Income (loss) from operations                 |                        
|Interest and other income (expense)           |                        
|Income (loss) before provision for            |                        
|income taxes                                  |                        
|Benefit (provision) for income taxes          |                        
|Net income (loss)                             | $                      
|Net income (loss) per share                   |                        
|Basic                                         | $                      
|Diluted                                       | $                      
|                                             
|                                              | For the Years
    Ended
|                                              | September 27,          
|                                              | 2003                   
|(In thousands)                                |                        
|Consolidated
      Balance Sheet Data:        |                        
|Total assets                                  | $                      
|Long-term debt,
      less current maturities |                        
|Stockholders' equity                          |                        

21

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Item 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You
should read the following discussion of our financial condition and results of
operations in conjunction with the consolidated financial statements and notes
to those statements included elsewhere in this report. This discussion may
contain forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, such as those set
forth under Part I, Item 1A Risk Factors of this Annual Report on Form 10-K
and elsewhere in this report.

We
utilize a fiscal year that ends on the Saturday nearest to September 30. For
clarity of presentation, we have described all periods as if they end at the end
of the calendar quarter.

Overview

We are a
leading worldwide provider of flexible circuit interconnect solutions to
original equipment manufacturers ("OEMs"), in the electronics industry. We offer
a full range of customized flexible circuit applications and services from
initial design, development and prototype to fabrication, assembly and test on a
global basis. We target high volume markets where miniaturization, form and
weight are driving factors and flexible circuits are an enabling technology.
Applications for flexible circuits currently addressed by us include data
storage devices such as hard disk drives ("HDDs"), flat panel displays (FPD)
including liquid crystal displays ("LCDs") for mobile communication devices,
tape drives and printers. Our customers include Hitachi, HP, Philips/TPO,
Quantum, SAE Magnetics (a subsidiary of TDK), Samsung, Seagate, Staktek,
StorageTek, Xerox and other leading electronic OEMs

Net Sales and Revenue
Recognition

We
manufacture flexible circuits and perform certain additional assembly and test
functions on these flexible circuits based on customer specifications. We sell
our products direct throughout the world, primarily in North America, Europe and
the Pacific Rim countries. We use non-exclusive sales representatives to augment
our direct sales efforts, with sales through distributors representing less than
3% of our total net sales for fiscal years 2007, 2006 and 2005. We recognize
revenue from the sale of our products upon shipment or delivery of our product
to our customers, depending on the customer agreement or shipping terms. We
store some inventory in third party owned warehouses that are located close to
customers' manufacturing facilities. Sales from third party warehouses are
recognized upon the transfer of title and risk of loss, following the customer's
acknowledgment of the receipt of the goods.

Costs and
Expenses

Cost of sales consists primarily
of:

- material costs for raw materials and semi-finished
  components used for assembly of our products;
- labor costs directly related to manufacture,
  assembly and inspection of our products;
- costs of general utilities, production supplies
  and chemicals consumed in the manufacturing processes;
- costs related to the maintenance of our
  manufacturing equipment and facilities;
- costs related to material and product handling and
  shipment;
- depreciation costs related to facilities,
  machinery and equipment used to manufacture, assemble and inspect our products; and
- salaries and overhead attributed to our supply
  chain, process engineering and manufacturing personnel.

Selling, general, administrative and
royalty expenses primarily consist of:

- salaries and related selling (commissions, travel,
  business development and program management), administrative, finance, human resources, regulatory, information
  services and executive personnel expenses;
- other significant expenses related to external
  accounting, software maintenance and legal and regulatory fees;
- overhead attributed to our selling, general and
  administrative personnel; and
- royalties related to FSA net sales

Engineering
expenses include costs associated with the design, development and testing of
our products and processes. These costs consist primarily of:

- salaries and related development personnel
  expenses;
- overhead attributed to our development and test
  engineering personnel; and
- prototyping costs related to the development of
  new products.

22

---

Restructuring charges are those costs primarily related to manufacturing
facility closures, severance and product discontinuations. On October 1, 2007,
we announced a plan to relocate our corporate offices to Thailand and
discontinue manufacturing activity at our Korat, Thailand location as the Flex
Suspension Assembly product reaches its end of life by the end of the fiscal
2008 second quarter. On January 16, 2006, we announced a plan to transfer our
high volume manufacturing operations from Litchfield, Minnesota to Thailand. On
September 25, 2006, we announced a plan to accelerate the end of life production
for our FSA flexible circuits in Litchfield and discontinue the use of that
facility by the end of March 2007. Concurrently, we also planned to accelerate
the end of life production of flexible circuit laminate material at our
Eastlake, Ohio facility and reduce indirect labor and general and administrative
expenses at our other U.S. and Thailand locations. In the third quarter of
fiscal 2004, we announced the planned closure of our Maple Plain, Minnesota
facility and the plan to discontinue the support of the FSA attachment process
once all current program qualifications have reached their end of
life.

Results of Operations

The following table sets forth
certain operating data as a percentage of net sales for the periods
indicated:

|                                                   | **For the Years
      Ended,**
|-------------------------------------------------- | ------------------------------
|                                                   | **October 1, 2005**           
|Net sales                                          | 100.0                         
|Cost of
      sales                                | 92.5                          
|Gross profit                                       | 7.5                           
|Operating expenses:                                |                               
|Selling, general,
      administrative and royalty | 8.1                           
|Engineering                                        | 3.5                           
|Restructuring and
      asset impairment           | 1.4                           
|Net (gain) loss
      on sale of assets            | 0.4                           
|Total operating expenses                           | 13.4                          
|Income (loss) from operations                      | (5.9                          
|Net interest and other expense                     | (0.2                          
|Income (loss) before provision for income taxes    | (6.1                          
|Benefit (provision) for income taxes               | (6.4                          
|Net income (loss)                                  | (12.5                         

Comparison of the Fiscal Years Ended
September 29, 2007 and September 30, 2006

Net Sales

Our net
sales were $87.8 million for the year ended September 29, 2007, compared to
$173.1 million for the year ended September 30, 2006, a decrease of 49%. This
decrease primarily reflects lower flex suspension assembly (FSA) and flat panel
display (FPD) revenue, with a smaller decrease in actuator flex circuit (AFC)
revenue. The decline in FSA revenue from $100 million to $43 million in fiscal
2007 reflects our FSA customers transition to their next generation of desktop
disk drive products which uses an alternative technology. Fiscal 2007 FPD
revenue of $10 million was down from $24 million in fiscal 2006 related to our
largest FPD customer experiencing lower demand from their customers and slower
than expected new program transitions. New FPD programs did not begin a
significant ramp up until the fourth quarter of fiscal 2007. AFC revenue
decreased to $30 million in fiscal 2007, driven by a program transition gap in
the fiscal 2007 second and third quarters as we experienced delays at one
customer in qualifying on their next generation disk drive programs which were
ramping to volume production.

23

---

FSA sales to
the disk drive industry generated 49% of our net sales for fiscal 2007, compared
to 58% for fiscal 2006. Sales of AFCs to the disk drive industry were 35%,
compared to 22%, FPD application net sales were 11% compared to 14% and sales
from integrated circuit packaging, network system application and other industry
applications were 5% compared to 6% for the fiscal years ended September 29,
2007 and September 30, 2006, respectively.

We expect
our FPD revenue to increase in fiscal 2008 as our largest FPD customer has begun
ramping up a number of new programs and we have been qualified on a number of
other programs which should also ramp during the fiscal year. Additionally,
while we expect lower FSA revenue as it reaches its end of life by the end of
the fiscal 2008 second quarter, the decrease should be partially offset by an
increase in our AFC revenue reflecting the ramp up of several new AFC programs
and our qualification at a new AFC customer.

Gross Profit (Loss)

Our gross
loss was $2.7 million for the fiscal year ended September 29, 2007 compared to a
gross profit of $18.8 million for the fiscal year ended September 30, 2006. Our
gross margin for the fiscal year ended September 29, 2007 decreased to (3%),
compared to 11% for the fiscal year ended September 30, 2006. The decrease in
gross profit and gross margin as compared to the prior year reflects the
decreased fixed cost absorption driven by lower revenue resulting in a higher
level of excess manufacturing capacity. Spending levels were lower as a result
of cost reductions related to the transfer of operations from the U.S.
facilities to our Thailand facilities, but not low enough to offset the impact
of the lower revenue.

We
anticipate that gross margins in fiscal 2008 will improve related to higher
revenue, cost structure reductions from having all manufacturing operations in
Asia and improved operating efficiencies.

Selling, General, Administrative and
Royalty

Selling,
general, administrative and royalty expenses for the fiscal year ended September
29, 2007 were $12.3 million, a decrease of 23% as compared to $16.0 million for
the fiscal year ended September 30, 2006. As a percentage of net sales, selling;
general; administrative and royalty expenses were 14% in fiscal 2007 and 9% for
fiscal 2006. The dollar decrease in selling, general and administrative expenses
from the prior year primarily reflects lower payroll expenses related to
reductions in U.S. sales and administrative positions and an $800,000 reduction
in royalty expense related to the reduction in FSA revenue. The increase as a
percentage of net sales from the prior year primarily reflects the decrease in
revenue.

Selling,
general, administrative and royalty expenses for fiscal 2008 are expected to
decrease as a result of restructuring related cost reductions primarily related
to our plan to relocate our corporate offices to Thailand and lower royalty
expense on FSA revenue.

Engineering

Engineering
expenses for the fiscal year ended September 29, 2007 were $3.4 million,
compared to $5.1 million for the fiscal year ended September 30, 2006, a
decrease of 33%. The decrease in engineering expenses in fiscal 2007 was
primarily the result of transferring engineering positions to our lower salary
base Thailand facility related to our U.S. facility closures. As a percentage of
net sales, engineering expenses were 4% of sales in fiscal 2007 and 3% in fiscal
2006. Engineering expenses for fiscal 2007 are expected to decrease as a result
of restructuring related cost reductions.

Restructuring and Goodwill
Impairment

Corporate office
relocation:

On October
1, 2007, we announced a plan to relocate our corporate offices to Thailand and
discontinue manufacturing activity at our Korat, Thailand facilities as the FSA
product reaches its end of life by the end of the fiscal 2008 second quarter.
The restructuring was triggered by the previous move of our manufacturing
operations to Thailand and the presence of our banking sources and most of our
customers and suppliers in Asia. In addition, incremental cost reductions are
required for us to return to profitability.

Actions
related to the restructuring plan are expected to be substantially completed by
the end of fiscal 2008 second quarter. These actions are expected to result in
annual operating expense reductions of at least $6 million. Approximately $5.7
million of the annualized savings are expected to have a positive impact on cash
flow. These cash related savings are comprised of $3.7 million related to
compensation reductions and $2 million related to other spending. The $0.3
million remaining savings are depreciation related and have no impact on cash
flow.

24

---

Asset
impairment charges of $400,000 related to the plan were recorded in the fiscal
2007 fourth quarter. The impaired assets were primarily equipment used in the
FSA manufacturing process at the Korat facility. The assets were written down to
their estimated net realizable value which is negligible as a result of their
age and specialized nature. Total cash related restructuring charges excluding
asset impairments of approximately $3.6 million are expected related to the
plan. The $3.6 million is comprised of $2.9 million for one-time termination
benefits and $0.7 million related to moving and closing costs associated with
transferring the corporate offices to Thailand, terminating the Plymouth,
Minnesota office lease and transferring equipment from Korat Thailand to
Lamphun, Thailand. Restructuring charges of $43,000 for severance related to the
plan were recorded in fiscal 2007.Remaining
anticipated expenditures related to the plan of approximately $3.6 million are
expected to be incurred prior to the end of our fiscal 2008 second
quarter.

The
restructuring plan calls for the elimination of 611 positions in the U.S. and
Thailand consisting of 475 direct labor positions, 104 indirect labor production
support positions and 32 administrative positions. As of September 29, 2007, 2
of these positions have been eliminated.

Litchfield and Eastlake
restructuring:

On January
16, 2006, we announced a plan to move prototyping and high volume manufacturing
from our Litchfield, Minnesota facilities to our Lamphun, Thailand facilities.
On September 25, 2006, we expanded the previously announced Litchfield
restructuring to close the entire Litchfield facility and move the remaining
development efforts to our Thailand facilities. The plan announced in September
2006 was to accelerate the end of life production for FSA flexible circuits in
Litchfield and discontinue use of that facility by the end of April 2007. The
plan also included acceleration of production end-of-life at our Eastlake, Ohio
laminate material manufacturing facility. In June 2006, as part of the plan, we
divested our low-volume etched metal product line also located at our Litchfield
facilities. In addition to closing our Litchfield and Eastlake facilities, we
continue to selectively reduce our indirect labor and general and administrative
expenses at both our U.S. and Thailand locations. The restructuring was
triggered by our need to reduce our cost structure in order to compete
effectively and as a result of our lower than expected level of
revenue.

While
several action items related to the expanded restructuring plan remain open, all
of the expected savings have been realized as of September 29, 2007. The actions
resulted in an annual operating expense reduction of approximately $20 million
based on a comparison of the fiscal 2007 fourth quarter spending to the fixed
cost structure in place on December 31, 2005. Approximately $19.0 million of the
annualized savings have a positive impact on cash flow. These cash related
savings are comprised of $14.0 million related to compensation reductions and $5
million related to other spending. The $1.0 million remaining savings are
depreciation related and have no impact on cash flow. The impact of these
reductions in our fixed cost basis has not been evident in our operating results
as a result of concurrent reductions in revenue.

Asset
impairment charges related to the expanded restructuring plan of $8.1 million
and $2.0 million were recorded in the first and fourth quarters, respectively,
of fiscal 2006 for a total of $10.1 million. The assets that were impaired
include the Litchfield facilities and related equipment. The fair value of these
assets was determined using appraised values. The fair value of the Litchfield
facility impairment was determined from an independent appraisal performed by
Ruhland Commercial Consultants, Ltd. The fair value of the equipment located at
the facilities was determined from appraisals performed by Asset Reliance
International, LLC. Assets that were not transferred to Lamphun, Thailand were
sold or disposed. A $900,000 loss on the sale of assets was recorded during the
fiscal 2007 third quarter as the remaining assets were sold.

Manufacturing operations were completed in the Eastlake facility in
February 2007 and decommission of the facility is expected to be complete by the
end of December 2007. Manufacturing operations in the Litchfield facilities were
completed during April 2007 and decommission of the facilities was completed by
the end of the fiscal 2007 third quarter. A purchase agreement has been signed
to sell the Litchfield facilities for $2.4 million. The sale is expected to
close after the buyer arranges financing. Efforts are being made to sublease the
Eastlake facility in fiscal 2008.

Total cash
related restructuring charges excluding asset impairments of approximately $8.3
million are expected. The $8.3 million is comprised of $3.3 million for one-time
termination benefits and $5.0 million related to moving and closing costs
associated with transferring portions of the Litchfield operation to Thailand
and the disposition of the Eastlake and Litchfield facilities not being
retained. Restructuring charges of $5.6 million related to the Litchfield and
Eastlake restructuring were recorded in fiscal 2007. These charges were
comprised of $2.4 million for one time termination benefits and $3.2 million for
moving and closing costs. Total restructuring charges through September 29, 2007
were $7.6 million. These charges were comprised of $3.3 million for one time
termination benefits, $3.5 million for moving and closing costs and $781,000
contract termination costs related to the Eastlake facility lease. Remaining
expenditures of approximately $700,000 are expected as part of the plan
primarily related to completing the transfer of equipment to
Thailand.

25

---

The
restructuring plan calls for the elimination of 323 positions in the U.S. and
Thailand consisting of 90 direct labor positions, 173 indirect labor production
support positions and 60 administrative positions. As of September 29, 2007, all
of these positions have been eliminated and the overall restructuring plan
remains substantially unchanged.

Maple Plain
restructuring:

In order to
reduce our cost structure, we closed our Maple Plain facility and consolidated
its operations with our Lamphun, Thailand facility. In addition, we planned to
discontinue supporting the FSA attachment process in order to utilize our
resources in other growth areas where we believe we have an
advantage.

As of
September 29, 2007, all of the actions and related charges under the plan have
been completed and all of the expected savings have been realized. The actions
resulted in an annual operating expense reduction of approximately $9.1 million
based on a comparison of the fiscal 2007 fourth quarter spending to the fixed
cost structure in place on June 30, 2004. Approximately $5.3 million of the
annualized savings have a positive impact on cash flow. These cash related
savings are comprised of $1.9 million related to compensation reductions and
$3.4 million related to other spending. The $3.8 million remaining savings are
depreciation related and have no impact on cash flow. The impact of these
reductions in our fixed cost basis has not been evident in our operating results
as a result of concurrent reductions in revenue.

During
fiscal 2004, we recorded asset impairment of $13.1 million related to the
planned closure of the Maple Plain facility and the plan to discontinue support
of the FSA attachment process. Additional asset impairment charges of
approximately $1.0 million were recorded in fiscal 2006 related to the
disposition of the Maple Plain assets. The Maple Plain facility was sold in the
fiscal 2007 third quarter for $4.25 million and an additional $0.8 million asset
impairment charge was recorded in the fiscal 2007 second quarter to reduce the
net book value of the facility to its net realizable value. Total asset
impairment charges related to the Maple Plain restructuring since its inception
were $14.9 million. The assets that were impaired included the Maple Plain
facility and related equipment and equipment used in the FSA attachment process.
The manufacturing operation has been transferred from the Maple Plain facility
to the Lamphun, Thailand facility.

During
fiscal 2004, we recorded restructuring charges of $1.7 million related to the
Maple Plain restructuring and additional restructuring charges of $2.8 million
were recorded in fiscal 2005. During fiscal 2006, restructuring charges of
approximately $1.6 million were recorded under the restructuring plan. Excluding
asset impairment charges, restructuring charges were approximately $6.1 million.
The $6.1 million was comprised of $1.9 million for one-time termination
benefits, $0.4 million for contract termination costs and $3.8 million for other
moving and closing costs associated with closing the Maple Plain
location.

Goodwill

Goodwill
represents the excess of the purchase price over the fair value of the net
assets acquired. We have determined goodwill relates to one reporting unit for
purposes of impairment testing. Goodwill and other intangible assets with
indefinite lives are tested for impairment annually or whenever an impairment
indicator arises. One of the impairment criteria used for evaluation of goodwill
is the stock price of the Company. We consider our stock price to be the best
independent valuation measure. While other criteria used to evaluate goodwill
did not indicate an impairment, our stock traded below our book value from
November 7, 2007 through December 7, 2007. As a result, we considered our
goodwill to be impaired and wrote it down from its recorded value of $3 million
to a value of $-0- as of September 29, 2007.

Net (Gain) Loss on the Sale of
Assets

Net gain or
loss on sale of assets for fiscal 2007 was a loss of $1.3 million compared to a
gain of $2.9 million for fiscal 2006. The change was a result of the loss
generated in fiscal 2007 on the sale or disposal of the remaining U.S equipment
that was not transferred to Thailand while fiscal 2006 included a gain from the
sale of the business, facility and assets of our Litchfield etched metal
components business.

Net Interest and Other
Expense

Net interest
expense was $2.3 million in the fiscal year ended September 29, 2007, compared
to $2.1 million for the fiscal year ended September 30, 2006, an increase of 9%.
The increase is the result of higher average levels of debt outstanding during
fiscal 2007. Net other expense was $212,000 in the fiscal year ended September
29, 2007 as compared to $589,000 in the fiscal year ended September 30, 2006.
The change was a result of smaller losses on foreign currency transactions
occurring in fiscal 2007.

26

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Income Taxes

Income tax
expense for the fiscal year ended September 29, 2007 was $11,000, compared to
$9,000 for the fiscal year ended September 30, 2006. The tax expense for fiscal
2007 and 2006 related to state tax payments. No tax benefit was recorded for
fiscal 2007 or 2006 as the deferred tax valuation allowance was increased to
offset the tax benefit generated during that period.

Comparison of the Fiscal Years Ended
September 30, 2006 and October 1, 2005

Net Sales

Our net
sales were $173.1 million for the year ended September 30, 2006, compared to
$200.2 million for the year ended October 1, 2005, a decrease of 14%. This
decrease primarily reflects lower flat panel display (FPD) and flex suspension
assembly (FSA) revenue, partially offset by an increase in actuator flex circuit
(AFC) revenue. AFC revenue increased to $38 million in fiscal 2006, driven by
next generation disk drive programs ramping to volume production. The decline in
FSA revenue from $130 million to $100 million in fiscal 2006 reflects our FSA
customers transition to their next generation of desktop disk drive products
which uses an alternative technology. Fiscal 2006 FPD revenue of $24 million was
down from $31 million in fiscal 2005 related to our largest FPD customer
experiencing lower demand from their customers, a merger related inventory
rationalization and new program transitions.

FSA sales to
the disk drive industry generated 58% of our net sales for fiscal 2006, compared
to 65% for fiscal 2005. Sales of AFCs to the disk drive industry were 22%,
compared to 12%, FPD application net sales were 14% compared to 15%, sales from
stacked memory applications were 3% compared to 4%, and sales from other
industry applications were 3% compared to 4% for the fiscal years ended
September 30, 2006 and October 1, 2005, respectively.

Gross Profit

Our gross
profit was $18.8 million for the fiscal year ended September 30, 2006 compared
to $15.0 million for the fiscal year ended October 1, 2005, an increase of 26%.
Our gross margin for the fiscal year ended September 30, 2006 increased to 11%,
compared to 8% for the fiscal year ended October 1, 2005. The higher gross
margin reflects improved operating efficiency, a lower cost structure related to
the transfer of production operations from Minnesota to Lamphun, Thailand and
lower pass-through component material costs as a percent of revenue. The fiscal
2005 gross margin reflects numerous start-up issues and inefficiencies caused by
the sharp increase in new products entering production during the fiscal 2005
second quarter and higher pass-through material content for those new
programs.

Selling, General, Administrative and
Royalty

Selling,
general, administrative and royalty expenses for the fiscal year ended September
30, 2006 were $16.0 million, down slightly as compared to $16.2 million for the
fiscal year ended October 1, 2005. As a percentage of net sales, selling,
general, administrative and royalty expenses were 9% in fiscal 2006 and 8% for
fiscal 2005. The change in selling, general, administrative and royalty expenses
from the prior year primarily reflects fiscal 2006 increased incentive
compensation expense of $600,000 and the adoption of SFAS 123R requiring us to
record $700,000 of compensation expense for stock options issued to employees.
This increase was offset by a $500,000 reduction in royalty expense over the
same period related to lower FSA revenue and lower payroll expenses driven by
restructuring related headcount reductions.

Engineering

Engineering
expenses for the fiscal year ended September 30, 2006 were $5.1 million,
compared to $7.0 million for the fiscal year ended October 1, 2005, a decrease
of 26%. The decrease in engineering expenses in fiscal 2006 was primarily the
result of transferring engineering positions to our lower salary base Thailand
facility related to our U.S. facility closures or dispositions. As a percentage
of net sales, engineering expenses were 3% of sales in fiscal 2006 and fiscal
2005.

Restructuring

Litchfield and Eastlake
restructuring:

27

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As discussed above, on
January 16, 2006, we announced a plan to move prototyping and high volume
manufacturing from our Litchfield, Minnesota facilities to our Lamphun, Thailand
facilities. On September 25, 2006, we expanded the previously announced
Litchfield restructuring to close the entire Litchfield facility and our
Eastlake, Ohio facility. Restructuring charges of $2.0 million were recorded
during fiscal 2006 related to the Litchfield and Eastlake restructuring. These
charges were comprised of $0.9 million for one time termination benefits and
$1.1 million for moving and closing costs. Asset impairment charges of $10.1
million were recorded in fiscal 2006 related to the Litchfield facilities and
the Litchfield and Eastlake equipment.

Maple Plain restructuring:

In fiscal 2004, in
order to reduce our cost structure, we announced a plan to close our Maple Plain
facility and consolidate its operations with our Lamphun, Thailand facility. In
addition, we planned to discontinue supporting the FSA attachment process in
order to utilize our resources in other growth areas. In fiscal 2005,
restructuring charges of $2.8 million were recorded related to the plan and
additional restructuring charges of $1.6 million were recorded under the plan in
fiscal 2006. Additional asset impairment charges of $1.0 million were recorded
under the plan in fiscal 2006.

Net (Gain) Loss on the Sale of
Assets

Net gain or loss on
sale of assets for fiscal 2006 was a gain of $2.9 million compared to a loss of
$745,000 for fiscal 2005. The gain in fiscal 2006 relates to the sale of the
business, facility and assets of our etched metal component business. The loss
in fiscal 2005 relates to the loss on building sale from the July 8, 2005 sale
of a building in Eastlake, Ohio which we purchased from Gould
Electronics.

Net Interest and Other Expense

Net interest expense
was $2.1 million in the fiscal year ended September 30, 2006, compared to $1.5
million for the fiscal year ended October 1, 2005, an increase of 39%. The
increase is the result of higher interest rates and higher average levels of
debt outstanding during fiscal 2006 even though interest bearing debt was
reduced by $18.9 million during fiscal 2006. Net other expense was $589,000 in
the fiscal year ended September 30, 2006 as compared to other income of $1.1
million in the fiscal year ended October 1, 2005. The change was a result of the
losses on foreign currency transactions occurring in fiscal 2006 while we
experienced a small foreign currency gain in fiscal 2005. Additionally we also
recorded income of $800,000 on our 35% equity holding in Applied Kinetics, Inc
during fiscal 2005. We sold that equity holding on March 6, 2006 as part of a
settlement agreement for a $6,000 loss.

Income Taxes

Income tax expense for
the fiscal year ended September 30, 2006 was $9,000, compared to $12.9 million
for the fiscal year ended October 1, 2005. The tax expense for fiscal 2006
related to state tax payments. No tax benefit was recorded for fiscal 2006 as
the deferred tax valuation allowance was increased to offset the tax benefit
generated during that period. The tax expense for fiscal 2005 related to a
charge to increase the deferred tax asset valuation allowance to reduce the
carrying value of the deferred tax asset to zero as a result of our net
operating loss position.

Critical Accounting Policies

Management's Discussion
and Analysis of Financial Condition and Results of Operations is based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, sales and
expenses and related disclosure of contingent assets and liabilities. On an
on-going basis, estimates are evaluated based on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.

We
apply the following critical accounting policies in the preparation of our
consolidated financial statements:

| | l Allowance for Excess and Obsolete Inventory. Inventories, which are composed of raw materials, work
      in process and finished goods, are valued at the lower of cost or market
      with cost being determined by the first-in, first-out method. On a
      periodic basis, we analyze the level of inventory on hand, our cost in
      relation to market value and estimated customer requirements to determine
      whether write-downs for excess or obsolete inventory are required. Actual
      customer requirements in any future periods are inherently uncertain and
      thus may differ from estimates. If actual or expected requirements were
      significantly different than the established write-down, a revision to the
      obsolescence write-down would be recorded in the period in which such a
      determination was made.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28

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| | l Goodwill. We have determined goodwill relates to
      one reporting unit for purposes of impairment testing. Goodwill and other
      intangible assets with indefinite lives are tested for impairment annually
      or whenever an impairment indicator arises. One of the impairment criteria
      used for evaluation of goodwill is the stock price of the Company. We
      consider our stock price to be the best independent valuation measure.
      While other criteria used to evaluate goodwill did not indicate an
      impairment, our stock traded below our book value from November 7, 2007
      through December 7, 2007. As a result, we considered our goodwill to be
      impaired and wrote it down from its recorded value of $3 million to a
      value of $-0- as of September 29, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | l Deferred Income Taxes. We account for income
      taxes using the liability method. Deferred income taxes are provided for
      temporary differences between the financial reporting and tax bases of
      assets and liabilities. A valuation allowance is established where the
      realization of any deferred taxes becomes less likely than not to occur.
      We analyze the valuation allowance periodically which may result in income
      tax expense being different than statutory rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | l *Revenue Recognition.* We make electronic
      components (flexible circuits) based on customer specifications. Our
      revenue recognition policy is consistently applied regardless of sales
      channels utilized and product destination. We have an implied warranty
      that the products meet our customers specification. Credits only are
      issued for customer returns. In recognizing revenue in any period, we
      apply the provisions of SEC Staff Accounting Bulletin 104, "Revenue
      Recognition." Revenue from product sales is recognized when persuasive
      evidence of an arrangement exists, the product has been delivered, the fee
      is fixed and determinable and collection of the resulting receivable is
      reasonably assured. For all sales, a binding purchase order is used as
      evidence of an arrangement. We recognize revenue from the sale of our
      products upon shipment or delivery of our products to our customers,
      depending upon the customer agreement or shipping terms. We also store
      inventory in warehouses (JIT hubs  third party owned warehouses) that are
      located close to our customers manufacturing facilities. Revenue is
      recognized on sales from JIT hubs upon the transfer of title and risk of
      loss which follows our customers acknowledgement of the receipt of the
      goods.
| | l *Stock based Compensation.* For purposes of
      determining estimated fair value of stock-based payment awards on the date
      of grant under SFAS 123(R), the Company used the Black-Scholes Model. The
      Black-Scholes Model requires the input of certain assumptions that require
      subjective judgment. Because employee stock options have characteristics
      significantly different from those of traded options, and because changes
      in the input assumptions can materially affect the fair value estimate,
      the existing models may not provide a reliable single measure of the fair
      value of the employee stock options. Management will continue to assess
      the assumptions and methodologies used to calculate estimated fair value
      of stock-based compensation. Circumstances may change and additional data
      may become available over time, which could result in changes to these
      assumptions and methodologies and thereby materially impact our fair value
      determination. If factors change and the Company employs different
      assumptions in the application of SFAS 123(R) may differ significantly
      from what was recorded in the current period.                                                                                                                                                                    

Liquidity and Capital Resources

We have
historically financed our operations primarily through cash from operating
activities, sales of equity securities, bank credit facilities and employee
stock option exercises. Cash and equivalents were $10.5 million at September 29,
2007 and $9.8 million at September 30, 2006.

Net cash
used in operating activities was $17.6 million in the fiscal year ended
September 29, 2007. For fiscal 2007, net cash used in operating activities was
the result of the net loss for the period and the decrease in accounts payable
more than offsetting non-cash charges and decreases in accounts receivable and
inventory. Accounts receivable, inventory and accounts payable decreased related
to the lower level of fiscal 2007 fourth quarter revenue as compare to the
fiscal 2006 fourth quarter revenue.

Net cash
provided by operating activities was $18.1 million in the fiscal year ended
September 30, 2006. For fiscal 2006, net cash provided by operating activities
was the result of the non-cash charges and decreases in accounts receivable and
inventory more than offsetting the net loss for the period and the decrease in
accounts payable. Accounts receivable decreased related to improved payment
terms from a significant customer and the lower level of fiscal 2006 fourth
quarter revenue.

29

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Net cash
used by operating activities was $6.3 million in the fiscal year ended October
1, 2005. For fiscal 2005, net cash used by operating activities was the result
of increases in accounts receivable and inventory morethan offsetting
increased accounts payable and the net of the pretax loss and non-cash charges
for deferred tax allowance charges and depreciation. Accounts receivable,
inventory and accounts payable all increased as a result of the increased level
of pass-through material content in the new FSA and FPD programs which entered
production during the year.

Net cash
provided by investing activities was $8,000 in the fiscal year ended September
29, 2007, compared to net cash used in investing activities of $2.8 million in
fiscal 2006 and $25.9 million in fiscal 2005. In fiscal 2007, net cash provided
by investing activities was attributed to the $4.8 million proceeds from the
sale of the U.S. based assets including the Maple Plain facility more than
offsetting the capital spending related to process improvements at our Thailand
facility. In fiscal 2006, net cash used in investing activities was attributed
to capital spending of $8.1 million related to the expansion of our Thailand
facility and increases in our Thailand panel processing capability offset
partially by the $5 million proceeds from the sale of our etched metal business,
facility and related equipment. In fiscal 2005, net cash used in investing
activities was attributed to the purchase of equipment to manufacture copper
clad polyimide, spending related to the expansion of our Thailand facility and
the purchase of equipment required to meet our expected increase in production
of flexible circuits for FPD applications net of proceeds from the sale of the
acquired Eastlake, Ohio facility.

Net cash
provided by financing activities was $18.2 million in fiscal 2007, compared to
net cash used in financing activities of $18.4 million in fiscal 2006. Fiscal
2007 net cash provided by financing activities was the result of the $20.4
million borrowed under our short-term Thailand packing credit facilities and a
$9.0 million draw down under our new long term Thailand credit facilities and a
$2.5 million increase in the U.S. dollar foreign exchange valuation of the
Thailand baht denominated debt partially offset by the $4 million pay down of
the US facility from the Maple Plain facility sale proceeds and scheduled debt
payments on our existing Thailand debt facilities and US based debt and capital
leases.

Fiscal 2006
net cash used in financing activities was primarily related to the $13.9 million
pay down of the balance outstanding on our short-term Thailand revolving packing
credit facility made possible by the cash provided by operations, normally
scheduled debt payments and a principal payment of $1.5 million made on June 27,
2006 related to sale of the business, facility and assets of our etched metal
components business. During fiscal 2005, net cash provided by financing
activities was the result of the $13.9 million borrowed under our short-term
Thailand credit facilities, $7.1 borrowed under our new US Federal Credit Union
credit facility and a $15.7 million draw down under our long-term Thailand
credit facilities partially offset by scheduled debt payments on our existing
Thailand debt facilities and US based capital leases.

In December
2006, we entered into a new credit facility with Bank of Ayudhya Public Company
Limited (BAY) and TMB Bank Public Company Limited (TMB) which expanded our
existing credit facilities with these banks. The new Third Credit Facilities
Agreement provides for an additional 600 million baht facility to be used for
procurement of equipment within 24 months from the December 19, 2006 effective
date. We drew down approximately $9.5 million under this new credit facility in
fiscal 2007. In June 2004, we entered into the Second Credit Facilities
Agreement with BAY and TMB which expanded the existing credit facility with
these banks. The Second Credit Facilities Agreement is now comprised of a 660
million baht long-term facility, a 400 million baht long-term facility, packing
credit facilities totaling 1,100 million baht, short-term working capital
facilities totaling 90 million baht and a 10 million baht overdraft facility.
The Thailand facilities are secured by certain receivables, inventory and assets
held by us in Thailand. As of September 29, 2007, we had approximately $25.5
million outstanding under our long-term Thailand credit facilities and a 20.4
million outstanding balance under our short-term Thailand credit facilities.
Total unused availability as of September 29, 2007 was approximately $8.0
million under our long-term Thailand credit facilities and approximately $14.6
million under our short-term packing credit and working capital facilities.
Utilization of the $8.0 million available under our long-term credit facility is
based on capital expenditures and utilization of our packing credit facility
availability is based on qualifying customer purchase orders. As of September
29, 2007, we were in compliance with covenants under our Thailand credit
facilities.

In January
2005, we entered into a financing agreement with US Federal Credit Union under
which we borrowed $4.0 million. An additional $3.1million was borrowed under
that agreement on April 15, 2005. In addition to normally scheduled payments, a
principal payment of $1.5 million was made on June 27, 2006 related to sale of
the business, facility and assets of our etched metal components business. An
additional principal payment of $4 million was made on May 18, 2007 related to
the sale of the Maple Plain facility. As of September 29, 2007, $1.1 million was
outstanding under our US Federal credit facility. The note is due February 1,
2010 with principal amounts under the arrangement bearing interest at a rate of
7% per annum. Payments under the underlying note are calculated using a 25 year
amortization with the remaining principal amount due at maturity. The note is
secured by our Litchfield facilities and any proceeds from the sale of those
facilities will be used to pay down the outstanding note balance.

30

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We believe
that with the existing Thailand credit facilities and cash generated from
operations, we will have adequate funds to support projected working capital and
capital expenditures for the next twelve months. We are considering alternatives
for generating additional working capital and long-term financing and will
continue to pursue financing opportunities to better leverage our assets. We
also filed a shelf registration statement with the Securities and Exchange
Commission on January 12, 2005 under which we may offer up to an aggregate of
3,500,000 shares of our common stock in one or more offerings from time to time.
Our financing needs and the financing alternatives available to us are subject
to change depending on, among other things, general economic and market
conditions, changes in industry buying patterns, customer demand for our AFC,
stacked memory flex, FPD flex and other new products, our ability to meet our
loan covenant requirements and cash flow from operations.

Contractual Obligations

The table
below discloses a summary of the Companys specified contractual obligations at
September 29, 2007 (in thousands):

|                 |  | **Under
      1 Year** |  | **1 to
      3 Years** |  | **3 to
      5 Years** |  | **After
      5 Years** |  | **Total**
|---------------- |  | ---------------------- |  | ---------------------- |  | ---------------------- |  | ----------------------- |  | ---------
|Long-term Debt   |  | $11,109                |  | $13,762                |  | $1,806                 |  | $                      |  | $26,677  
|Obligations (1)  |  |                        |  |                        |  |                        |  |                         |  |          
|Operating Leases |  | 341                    |  | 699                    |  | 389                    |  | 129                     |  | 1,558    
|Purchase orders  |  | 2,053                  |  |                       |  |                       |  |                        |  | 2,053    
|Total            |  | $13,503                |  | $14,461                |  | $2,195                 |  | $129                    |  | $30,288  

(1) Includes interest at fixed rate of 7%
on a portion of the debt and excludes interest on all debt with variable
interest rates.

Recent Accounting
Pronouncements

Fair
Value Measurements: In September 2006, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurement (SFAS 157). This standard clarifies the principle that
fair value should be based on the assumptions that market participants would use
when pricing an asset or liability. Additionally, it establishes a fair value
hierarchy that prioritizes the information used to develop those assumptions.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. We have not yet determined the impact that the
implementation of SFAS 157 will have on our results of operations or financial
condition.

Fair Value Option: The Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 159, Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). This standard addresses earnings volatility caused
by existing accounting standards that require related financial assets and
liabilities to be measured using different measurement attributes (such as
historical cost and fair value). SFAS 159 is intended to improve financial
reporting by giving all entities the option to recognize most financial assets
and liabilities and certain other items at fair value. Unrealized gains and
losses on items for which the fair value option has been elected should be
reported in earnings. SFAS 159 is effective for the first quarter of our fiscal
2009 beginning October 1, 2008. We do not expect SFAS 159 to have a material
effect on our financial condition or results of operations.

Accounting for Uncertainty in Income Taxes: In July 2006, the
Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No 109, (FIN 48). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprises financial statements and prescribes a
recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This Interpretation also provides related guidance on derecognition,
classification, interest and penalties, accounting in interim periods and
disclosure. FIN 48 is effective for the first quarter of our fiscal 2008
beginning September 30, 2007. We do not expect FIN 48 to have a material effect
on our financial condition or results of operations.

31

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Forward Looking
Statements

Statements
included in this Managements Discussion and Analysis of Financial Condition and
Results of Operations, elsewhere in this report and in future filings by the
Company with the SEC, except for the historical information contained herein and
therein, are forward-looking statements that involve risks and uncertainties.
These risks and uncertainties include: the increased utilization by our largest
customer of alternative interconnect technologies that compete with our FSA
product, AFC revenue may not increase enough to offset decreases in our FSA
revenue, any interruption in the operations of the Companys single source
suppliers or any failure of any of the Companys single source suppliers to
timely deliver an adequate supply of components, the timely availability and
acceptance of new products, the impact of competitive products and pricing,
changes in our customers market share, impact of restructuring charges, changes
in manufacturing efficiencies, continued cash availability under our credit
facilities and other risks detailed from time to time in our reports filed with
the Securities and Exchange Commission, including those risks described under
Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year
ended September 29, 2007. In addition, a significant portion of the our revenue
is generated from the disk drive, flat panel display, stacked memory substrate,
consumer electronics and data storage industries and the global economic
softness has had and may have in the future, an adverse impact on our
operations. We disclaim any obligation subsequently to revise any
forward-looking statements to reflect subsequent events or circumstances or the
occurrence of unanticipated events.

ITEM 7A: QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK

The
following discusses our exposure to market risk related to changes in interest
rates and foreign currency exchange rates. These exposures may change over time
as business practices evolve and could have a material adverse impact on our
business, financial condition and results of operations.

Our earnings
and cash flows are subject to fluctuations due to changes in foreign currency
exchange rates. While we transact business predominately in U.S. dollars a
portion of our sales and expenses are denominated in foreign currencies. Changes
in the relation of foreign currencies to the U.S. dollar will affect our cost of
sales and operating margins and could result in exchange gains or losses. To
reduce the impact of certain foreign currency fluctuations, we enter into
short-term forward foreign currency exchange contracts in the regular course of
business to manage our risk exposure, not as speculative instruments. Typically,
these contracts have maturities of 6 months or less. The forward exchange
contracts generally require us to exchange Thailand baht for U.S. dollars or
U.S. dollars for Thailand baht at maturity, at rates agreed to at inception of
the contracts. These contracts are not designated as hedges, therefore, the
gains and losses on foreign currency transactions are included in
income.

We
periodically review the outlook for expected currency exchange rate movements as
well as the policy on desired future foreign currency cash flow positions (long,
short or balanced) for those currencies in which we have significant activity.
Expected future cash flow positions and strategies are continuously monitored.
At September 29, 2007, we had open forward exchange contracts to buy Thailand
baht maturing November 9, 2007; November 15, 2007; November 26, 2007; December
11, 2007 and December 19, 2007 with notional amounts of 435 million baht, 325
million baht, 62 million baht, 61 million baht and 75 million baht,
respectively. The total open contracts for 958 million baht equates to
approximately $28.0 million. No assurance can be given that our strategies will
prevent future currency fluctuations from adversely affecting our business,
financial condition and results of operations.

We are
exposed to interest rate risk as a large portion of our interest-bearing debt is
subject to interest rates which fluctuate with changes in market interest rates
or are periodically reset based on market interest rates. A large change in
market interest rates could have an adverse impact on our business, financial
condition and results of operations.

32

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ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|Report of Independent Registered Public Accounting Firm (regarding
      Financial Statements)                   | 34
|---------------------------------------------------------------------------------------------------------------- | --
|Report of
      Independent Registered Public Accounting Firm (regarding Internal Control
      Over Financial   |   
|Reporting)                                                                                                       | 35
|Consolidated Balance Sheets as of September 29, 2007 and September
      30, 2006                                | 36
|Consolidated
      Statements of Operations for the years ended September 29, 2007: September
      30, 2006 and |   
|October 1,
      2005                                                                                            | 37
|Consolidated Statements of Stockholders' Equity for the years ended
      September 29, 2007; September 30,      |   
|2006 and October 1, 2005                                                                                         | 38
|Consolidated
      Statements of Cash Flows for the years ended September 29, 2007; September
      30, 2006 and |   
|October 1,
      2005                                                                                            | 39
|Notes to Consolidated Financial Statements                                                                       | 40
|Quarterly
      Financial Data (unaudited)                                                                       | 52

33

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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

Board of Directors
and Shareholders Innovex, Inc.

We have audited the accompanying consolidated balance sheets of Innovex,
Inc. and subsidiaries (the Company) as of September 29, 2007 and September 30,
2006, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended September
29, 2007. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Innovex,
Inc. and subsidiaries as of September 29, 2007 and September 30, 2006, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 29, 2007 in conformity with accounting
principles generally accepted in the United States of America.

As
stated in note N, Liquidity, of the consolidated financial statements, the
Company has suffered recurring losses from operations and has historically
financed its operations through cash from operating activities and bank credit
facilities. The Companys financing alternatives are also described in Note
N.

Our audits were conducted for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The accompanying
Schedule II is presented for purposes of additional analysis and is not a
required part of the basic financial statements. The information for each of the
three years in the period ended September 29, 2007 in this schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.

We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Companys internal control over financial
reporting as of September 29, 2007, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated December
12, 2007 expressed an unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.

Minneapolis, Minnesota December 12,
2007

34

---

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Innovex, Inc.

We have audited the internal control over
financial reporting of Innovex, Inc. and subsidiaries (the Company) as of
September 29, 2007, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control
over Financial Reporting under Item 9A of this Form 10-K. Our responsibility is
to express an opinion on the effectiveness of the Companys internal control
over financial reporting based on our audit.

We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A companys internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys
assets that could have a material effect on the financial statements.

Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, Innovex, Inc. and
subsidiaries maintained in all material respects effective internal control over
financial reporting as of September 29, 2007, based on criteria established in
Internal ControlIntegrated Framework issued by COSO.

We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Innovex, Inc. and subsidiaries as of
September 29, 2007 and September 30, 2006, and the related consolidated
statements of operations, shareholders equity and cash flows for each of the
three years in the period ended September 29, 2007, and our report dated
December 12, 2007, which contained an emphasis of matter paragraph related to
the Companys liquidity, expressed an unqualified opinion on those consolidated
financial statements.

Minneapolis, Minnesota December 12,
2007

35

---

INNOVEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                                            | As of        
|--------------------------------------------------------------------------- | -------------
|                                                                            | September 29,
|                                                                            | 2007         
|ASSETS                                                                     
|Current
      assets:                                                       |              
|Cash
      and equivalents                                                  | $            
|Accounts receivable, less allowance for doubtful
      accounts of $217,000 |              
|(2006$273,000)                                                             |              
|Inventories                                                                 |              
|Other current assets                                                        |              
|Total current assets                                                        |              
|Property, plant
      and equipmentat cost:                                |              
|Land
      and land improvements                                            |              
|Buildings and leasehold improvements                                        |              
|Machinery and equipment                                                     |              
|Office furniture and fixtures                                               |              
|                                                                            |              
|Less accumulated depreciation and amortization                              |              
|Net property, plant and equipment                                           |              
|Assets held for
      sale                                                  |              
|Goodwill                                                                    |              
|Other
      assets                                                          |              
|Total
      assets                                                          | $            
|**LIABILITIES AND STOCKHOLDERS'
      EQUITY**                             
|Current liabilities:                                                        |              
|Current maturities of long-term
    debt                                    | $            
|Line
      of credit                                                        |              
|Accounts payable                                                            |              
|Accrued compensation                                                        |              
|Other accrued liabilities                                                   |              
|Total current liabilities                                                   |              
|Long-term debt, less current maturities                                     |              
|Commitments and contingencies                                               |              
|Stockholders' equity:                                                       |              
|Common stock, $.04 par value; 30,000,000 shares
    authorized,             |              
|19,407,966 shares issued and outstanding
      (200619,380,558)            |              
|Capital in excess of par
    value                                          |              
|Retained earnings (Accumulated
      deficit)                               |              
|Total stockholders' equity                                                  |              
|Total liabilities and stockholders'
    equity                              | $            

See accompanying notes to consolidated
financial statements.

36

---

INNOVEX, INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                  | For the Years
      Ended,
|------------------------------------------------- | --------------------------
|                                                  | **September 29,**         
|                                                  | **2007**                  
|Net sales                                         | $                         
|                                                 
|Costs and expenses:                               |                           
|Cost of sales                                     |                           
|Selling, general and administrative               |                           
|Royalty expense to equity investee                |                           
|Engineering                                       |                           
|Restructuring and goodwill impairment
    charges |                           
|Net
      (gain) loss on sale of assets           |                           
|Interest expense                                  |                           
|Interest income                                   |                           
|Other (income) expense, net                       |                           
|                                                  |                           
|                                                 
|Income (loss) before provision for income taxes   |                           
|Benefit
      (provision) for income taxes        |                           
|Net income (loss)                                 | $                         
|                                                 
|Net income (loss) per share:                      |                           
|Basic                                             | $                         
|Diluted                                           | $                         
|                                                 
|Weighted average shares outstanding:              |                           
|Basic                                             |                           
|Diluted                                           |                           

See accompanying notes to consolidated
financial statements.

37

---

INNOVEX, INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY

For the Years Ended September 29,
2007, September 30, 2006 and October 1, 2005

|                                           |        |         |           |            |              | Retained |                   |      
|------------------------------------------ | ------ | ------- | --------- | ---------- | ------------ | -------- | ----------------- | -----
|                                           |        |         |           | Capital in |              | Earnings |                   | Total
|                                           | Common |         | Excess of |            | (Accumulated |          | **Stockholders'**
|                                           | Stock  |         | Par Value |            | Deficit)     |          | **Equity**       
|Balance at October 3, 2004                 | $      | 764,339 |           | $          | 60,771,551   |          |                   | $    
|Shares issued
      through exercise       |        |         |           |            |              |          |                   |      
|of stock
      options                     |        | 2,991   |           |            | 156,913      |          |                   |      
|Valuation allowance provided               |        |         |           |            |              |          |                   |      
|for tax benefits from exercise             |        |         |           |            |              |          |                   |      
|of stock options                           |        |        |           |            | (992,715     | )        |                   |      
|Shares issued
      through                |        |         |           |            |              |          |                   |      
|employee stock
      purchase plan         |        | 1,524   |           |            | 112,773      |          |                   |      
|Net loss                                   |        |        |           |            |             |          |                   |      
|Balance at
      October 1, 2005           |        | 768,854 |           |            | 60,048,522   |          |                   |      
|Shares issued through exercise             |        |         |           |            |              |          |                   |      
|of stock options                           |        | 5,489   |           |            | 372,084      |          |                   |      
|Stock based
      compensation             |        |         |           |            |              |          |                   |      
|expense                                    |        |        |           |            | 670,635      |          |                   |      
|Shares issued through                      |        |         |           |            |              |          |                   |      
|employee stock purchase plan               |        | 879     |           |            | 53,194       |          |                   |      
|Net
    loss                               |        |        |           |            |             |          |                   |      
|**Balance at September 30,****2006**       |        | 775,222 |           |            | 61,144,435   |          |                   |      
|Shares issued
      through exercise       |        |         |           |            |              |          |                   |      
|of stock
      options                     |        | 193     |           |            | 2,525        |          |                   |      
|Stock based compensation                   |        |         |           |            |              |          |                   |      
|expense                                    |        |        |           |            | 529,397      |          |                   |      
|Shares issued
      through                |        |         |           |            |              |          |                   |      
|employee stock
      purchase plan         |        | 904     |           |            | 33,134       |          |                   |      
|Net loss                                   |        |        |           |            |             |          |                   |      
|**Balance
      at September 29,****2007** | $      | 776,319 |           | $          | 61,709,491   |          |                   | $    

See accompanying notes to consolidated
financial statements.

38

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INNOVEX, INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                    | For the Years
    Ended
|--------------------------------------------------- | -----------------------
|                                                    | September 29,          
|                                                    | 2007                   
|Cash Flows From Operating Activities:               |                        
|Net income
      (loss)                             | $                      
|Adjustments to reconcile net income (loss) to net   |                        
|cash provided by (used in) operating activities:    |                        
|Depreciation and amortization                       |                        
|Asset impairment changes                            |                        
|Deferred income taxes                               |                        
|Stock based compensation                            |                        
|Other non-cash items                                |                        
|Changes in operating assets and liabilities:        |                        
|Accounts receivable, net                            |                        
|Inventories                                         |                        
|Income taxes                                        |                        
|Other current assets                                |                        
|Other long-term assets                              |                        
|Accounts payable                                    |                        
|Other current and long-term liabilities             |                        
|Net cash provided (used in) operating activities    |                        
|                                                   
|Cash Flows From Investing Activities:               |                        
|Capital
      expenditures                          |                        
|Proceeds from sale of
      assets                  |                        
|Net cash used in investing activities               |                        
|                                                   
|Cash Flows From Financing Activities:               |                        
|Principal
      payments on long-term debt          |                        
|Net (payments) proceeds on
      line of credit     |                        
|Issuance of
      long-term debt                    |                        
|Proceeds from exercise of
      stock options       |                        
|Proceeds from
      employee stock purchase plans   |                        
|Net cash provided by (used in) financing activities |                        
|Increase (decrease) in cash and equivalents         |                        
|Cash and equivalents at beginning of year           |                        
|Cash and equivalents at end of year                 | $                      

Supplemental
Disclosures:

Cash paid for interest was approximately
$2,661,000; $2,306,000; and $1,594,000 in 2007, 2006 and 2005.

Income tax payments were approximately
$11,000; $20,000; and zero in 2007, 2006 and 2005.

See accompanying notes to consolidated
financial statements.

39

---

INNOVEX, INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

September 29, 2007, September 29,
2006 and October 1, 2005

Note A.Summary of Significant
Accounting Policies

Innovex,
Inc. and Subsidiaries (the "Company") is a diversified manufacturer of
electrical components for the computer, data storage, consumer, medical,
telecommunications and other electronic industries. Substantially all of the
Company's revenues, operating profits and assets relate to one operating segment
involved in the manufacture of flexible circuit interconnects. Company customers
are located throughout the United States, Europe and the Pacific Rim. The
Company has manufacturing facilities in Lamphun and Korat, Thailand. The Company
operates in one business segment.

A summary of
the significant accounting policies consistently applied in the preparation of
the accompanying consolidated financial statements follows:

Principles of Consolidation and Fiscal YearThe consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany transactions have
been eliminated in consolidation.

The Company
utilizes a fiscal year that ends on the Saturday nearest to September 30 which
results in a 52 or 53 week year rather than a twelve-month fiscal year. The
Companys actual fiscal quarters end on the Saturday closest to the end of the
calendar quarter. Fiscal years ended September 29, 2007, September 30, 2006 and
October 1, 2005 included 52 weeks of operations.

Foreign
Currency TranslationThe Company uses the
United States dollar as its functional currency for its subsidiary in Thailand.
Re-measurement gains and losses, resulting from the process of re-measuring the
foreign currency denominated assets and liabilities of these foreign
subsidiaries into U.S. dollars, are included in operations.

Foreign
Exchange InstrumentsThe Company enters into
short-term forward foreign currency exchange contracts in the regular course of
business to manage its exposure against foreign currency fluctuations, primarily
relating to nonfunctional currency monetary assets and liabilities. The forward
exchange contracts generally require the Company to exchange Thailand baht for
U.S. dollars or U.S. dollars for Thailand baht at maturity, at rates agreed to
at the inception of the contracts. The contracts are not designated as hedges,
therefore, the gains and losses on foreign currency exchange contracts are
included in other income (expense). The Company does not enter into forward
exchange contracts for trading purposes.

Cash and
Cash EquivalentsThe Company considers all
highly liquid temporary investments with an original maturity of three months or
less to be cash equivalents. The Company had no cash equivalents at September
29, 2007 and September 30, 2006. Cash of approximately $8.3 million and $7.6
million was on deposit in foreign financial institutions at September 29, 2007
and September 30, 2006. The Company maintains cash balances at several financial
institutions, and at times, such balances exceed insured limits. The Company has
not experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash.

Accounts
ReceivableThe Company grants credit to
customers in the normal course of business and generally does not require
collateral or any other security to support amounts due. Management performs
ongoing credit evaluations of customers. The Company maintains allowances for
potential credit losses.

InventoriesInventories which are
composed of raw materials, work-in-progress and finished goods are stated at the
lower of cost or market, with cost determined by the first-in, first-out
method.

Property,
Plant and EquipmentDepreciation is provided
using the straight-line method over the estimated useful lives of the assets for
financial reporting and accelerated methods for tax purposes. Estimated service
lives range from 5 to 30 years for buildings and leasehold improvements, from 2
to 7 years for machinery and equipment and from 3 to 7 years for office
furniture and fixtures.

40

---

GoodwillGoodwill represents the
excess of the purchase price over the fair value of the net assets acquired.
Goodwill and any other intangible assets determined to have indefinite useful
lives are not amortized. The Companyhas determined goodwill relates to
one reporting unit for purposes of impairment testing. Goodwill and other
intangible assets with indefinite lives are tested for impairment annually or
whenever an impairment indicator arises. One of the impairment criteria used for
evaluation of goodwill is the stock price of the Company. The Companys stock
price is considered the best independent valuation measure. While other criteria
used to evaluate goodwill did not indicate an impairment, the Companys stock
traded below the Companys book value from November 7, 2007 through December 7,
2007. As a result, the Companys goodwill was considered impaired and written
down to a value of $-0- as of September 29, 2007.

Fair
Values of Financial InstrumentsDue to their
short-term nature, the carrying value of current financial assets and
liabilities approximates their fair values. The fair value of borrowings, if
recalculated based on current interest rates, would not significantly differ
from the recorded amounts.

Net
Income (Loss) Per ShareThe Company's basic
net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of outstanding common shares. The Company's diluted net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of outstanding common shares and common share
equivalents related to stock options, when dilutive. Options to purchase
1,976,815, 1,416,536 and 1,268,456 shares of common stock were outstanding
during 2007, 2006 and 2005, but were excluded from the computation of common
share equivalents because they were antidilutive.

Revenue
Recognition The Company makes electronic
components (flexible circuits) based on customer specifications. The Companys
revenue recognition policy is consistently applied regardless of sales channels
utilized and product destination. In recognizing revenue in any period, the
company applies the provisions of SEC Staff Accounting Bulletin 104, "Revenue
Recognition." Revenue from product sales is recognized when persuasive evidence
of an arrangement exists, the product has been delivered, the fee is fixed and
determinable and collection of the resulting receivable is reasonably
assured.

For all
sales, a binding purchase order is used as evidence of an arrangement. The
Company also stores inventory in warehouses (JIT hubs  third party owned
warehouses) that are located close to the customer's manufacturing facilities.
Revenue is recognized on sales from JIT hubs upon the transfer of title and risk
of loss, following the customer's acknowledgement of the receipt of the goods.
The Company has an implied warranty that the products meet the customers
specification. Credits are issued for customer returns.

Use of
EstimatesPreparation of the Company's
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities
and related revenues and expenses and disclosure about contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from these estimates.

Income
TaxesThe Company records income taxes in
accordance with the liability method of accounting. Deferred taxes are
recognized for the estimated taxes ultimately payable or recoverable based on
enacted tax law. The Company establishes a valuation allowance to reduce the
deferred tax asset to an amount that is more likely than not to be realizable.
Changes in enacted tax rates are reflected in the tax provision as they
occur.

Stock
Based CompensationCommencing on October 2,
2005, the Company adopted Statement of Financial Accounting Standard No. 123R,
Share Based Payment (SFAS 123R), which requires all share-based payments,
including grants of stock options, to be recognized in the income statement as
an operating expense, based on their fair values over the requisite service
period. The Company recorded $529,000 and $653,000 of related compensation
expense in fiscal years 2007 and 2006. This expense is included in selling,
general and administrative expense. There was no tax benefit from recording this
non-cash expense. The compensation expense increased both basic and diluted net
loss per share by $0.03 for fiscal years 2007 and 2006.

Prior to adopting SFAS 123R, the Company
accounted for stock-based compensation under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. The Company has applied the
modified prospective method in adopting SFAS 123R. Accordingly, periods prior to
adoption have not been restated. The following table illustrates the effect on
net income (loss) and income (loss) per share if the fair value based method had
been applied to the year ending:

41

---

|(in thousands
      except for per share                                   |                |         |  
|-------------------------------------------------------------------------- | -------------- | ------- | -
|amounts)                                                                   | October 1,2005
|Net income (loss) as reported                                              | $              | (24,987 | )
|Less total
      stock-based employee compensation expense determined      |                |         |  
|under the fair value based method for all awards, net of
      tax effects |                | (645    | )
|Net income (loss)- pro forma                                               | $              | (25,632 | )
|                                                                          
|Basic and
      diluted net income (loss) per common share  as reported   | $              | (1.34   | )
|Basic and diluted net income (loss) per common share  pro
      forma     | $              | (1.34   | )

The Company uses the Black-Scholes option
pricing model to determine the weighted average fair value of options. The
weighted average fair value of options granted in 2007, 2006 and 2005 were
$0.85, $1.17 and $1.62, respectively. The total intrinsic value of options
exercised during the years ended September 29, 2007, September 30, 2006 and
October 1, 2005, was $6,000 $366,000, and $211,000, respectively. The
assumptions utilized to determine the fair value of options at the date of grant
are indicated in the following table. No adjustment was made to the Black
Scholes calculation to reflect that the options are not freely traded. Expected
volatilities are based on implied volatilities from traded options on the
Companys stock, historical volatility of the Companys stock, and other
factors. The Company uses historical data to estimate option exercise and
employee termination within the valuation model; separate groups of employees
that have similar historical exercise behavior are considered separately for
valuation purposes. The expected term of options granted is derived from the
output of the option valuation model and represents the period of time that
options granted are expected to be outstanding; the range given below results
from certain groups of employees exhibiting different behavior. The risk-free
rate for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant. The Company uses its actual
forfeiture rate.

|                          | 2007 | 2006 | 2005
|------------------------- | ---- | ---- | ----
|Risk-free interest rate   | 4.5% | 4.3% | 3.0%
|Expected
      volatility | 50%  | 48%  | 48% 
|Expected life (in years)  | 3.0  | 3.0  | 3.0 
|Dividend
      yield      |     |     |    

**New
Pronouncements**

Fair
Value Measurements: In September 2006, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurement (SFAS 157). This standard clarifies the principle that
fair value should be based on the assumptions that market participants would use
when pricing an asset or liability. Additionally, it establishes a fair value
hierarchy that prioritizes the information used to develop those assumptions.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. We have not yet determined the impact that the
implementation of SFAS 157 will have on our results of operations or financial
condition.

Fair
Value Option: The Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 159, Fair Value Option for
Financial Assets and Financial Liabilities (SFAS 159). This standard
addresses earnings volatility caused by existing accounting standards that
require related financial assets and liabilities to be measured using different
measurement attributes (such as historical cost and fair value). SFAS 159 is
intended to improve financial reporting by giving all entities the option to
recognize most financial assets and liabilities and certain other items at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected should be reported in earnings. SFAS 159 is effective for the first
quarter of our fiscal 2009 beginning October 1, 2008. We do not expect SFAS 159
to have a material effect on our financial condition or results of
operations.

Accounting for Uncertainty in Income Taxes: In July 2006, the
Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No 109, (FIN 48). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprises financial statements and prescribes a
recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This Interpretation also provides related guidance on derecognition,
classification, interest and penalties, accounting in interim periods and
disclosure. FIN 48 is effective for the first quarter of our fiscal 2008
beginning September 30, 2007. We do not expect FIN 48 to have a material effect
on our financial condition or results of operations.

42

---

Note B.Inventories -

Inventories are comprised of the
following in thousands:

**September 29,**
    
    September 30,**2007**
    
    2006Raw materials and purchased parts
    $
    4,549
    
    $
    5,370Work-in-process
      and finished goods
    
    6,506
    
    
    6,639$
    11,055
    
    $
    12,009


Note C.Line of Credit and Long-Term
Debt -

In December
2006, the Company entered into a new credit facility with Bank of Ayudhya Public
Company Limited (BAY) and TMB Bank Public Company Limited (TMB) which expanded
our existing credit facilities with these banks. The new Third Credit Facilities
Agreement provides for an additional 600 million baht facility to be used for
procurement of equipment within 24 months from the December 19, 2006 effective
date. We drew down approximately $9.5 million under this new credit facility
during fiscal 2007. In June 2004, the Company entered into the Second Credit
Facilities Agreement with BAY and TMB which expanded the existing credit
facility with these banks. The Second Credit Facilities Agreement is now
comprised of a 660 million baht long-term facility, a 400 million baht long-term
facility, packing credit facilities totaling 1,100 million baht, short-term
working capital facilities totaling 90 million baht and a 10 million baht
overdraft facility. The Thailand credit facilities are secured by certain
receivables, inventory and assets held by the Company in Thailand with a book
value of $65.9 million at September 29, 2007. As of September 29, 2007, we had
approximately $25.5 million outstanding under our long-term Thailand credit
facilities and a 20.4 million outstanding balance under our short-term Thailand
credit facilities. Total unused availability as of September 29, 2007 was
approximately $8.0 million under our long-term Thailand credit facilities and
approximately $14.6 million under our short-term packing credit and working
capital facilities. Utilization of the $8.0 million available under our
long-term credit facility is based on capital expenditures and utilization of
our packing credit facility availability is based on qualifying customer
purchase orders.

Under the
terms of the Thailand based credit facility, any outstanding balance on the 400
and 660 million baht term loans had interest rates of 5.7813% and 5.8125%,
respectively, at September 29, 2007. The 400 and 660 million baht facilities
bore interest at the one year fixed deposit rate plus 3% until June 2007 when
they began bearing interest at the one year fixed deposit rate plus 3.5%. The
packing credit bears interest at the BAY minimum loan rate (MLR) less 1.75%,
which ranged from 5.3725 to 6.125 for the tranches outstanding at September 29,
2007. Funds are available under the packing credit facility on a revolving
basis. Amounts are drawn on the packing credit facility upon presentation of an
open customer purchase order. The amounts drawn on the packing credit facility
mature within 180 days of the draw date. The working capital and overdraft
facilities bear interest at the TMB and BAY minimum overdraft rate (MOR),
7.625% at September 29, 2007. The Company is required to maintain certain
financial ratios and meet certain net worth levels. The Company was in
compliance with all covenants as of September 29, 2007. As of September 30,
2006, the interest rate on the 400 and 660 million baht term loans had interest
rates of 7.1875% and 7.25%, respectively.

In January
2005, the Company entered into a financing agreement with US Federal Credit
Union under which the Company borrowed $4.0 million. An additional $3.1million
was borrowed under that agreement on April 15, 2005 for a total of $7.1 million.
In addition to normally scheduled payments, a principal payment of $1.5 million
was made on June 27, 2006 related to sale of the business, facility and assets
of the Companys etched metal components business. An additional principal
payment of $4 million was made on May 18, 2007 related to the sale of the Maple
Plain facility. As of September 29, 2007, $1.1 million was outstanding under the
US Federal credit facility. The note is due February 1, 2010 with principal
amounts under the arrangement bearing interest at a rate of 7% per annum.
Payments under the underlying note are calculated using a 25 year amortization
with the remaining principal amount due at maturity. The note is secured by the
Litchfield facilities and any proceeds from the sale of those facilities will be
used to pay down the outstanding note balance.

43

---

Long-term obligations consist of the
following:

September 29,
    
    September 30,(in thousands of U.S dollar
      equivalents)
    2007
    
    2006Thailand BAY and TMB facilities:400 million baht term loan
    $
    6,712
    
    $
    9,046660
      million baht term loan
    
    9,339
    
    
    14,367600 million baht term loan
    
    9,467
    
    
    U.S. based facilities:US Federal Credit Union
    
    1,080
    
    
    5,399Various capital leases
    
    
    
    
    3326,598
    
    
    28,845Less current portion
    
    11,049
    
    
    9,045$
    15,549
    
    $
    19,800


At September
29, 2007, the outstanding balance under the packing credit facility was $20.4
million while there were no outstanding balances under the working capital and
overdraft facilities. At September 30, 2006, there were no outstanding balances
under the packing credit, working capital and overdraft facilities.

Aggregate
maturities of long-term debt including capitalized leases for the next five
years are as follows (in thousands): 2008$11,049; 2009$8,635; 2010$5,107;
2011$1,807; and none thereafter. The recorded value of long-term debt
approximates fair market value.

Note D.Stockholders' Equity

Stock Option Plans

The Company
has stock option plans that provide for incentive and non-qualified stock
options to be granted to directors, officers and other key employees or
consultants. The stock options granted generally have a ten-year life, vest over
a period of six months to five years, and have an exercise price equal to the
fair market value of the stock on the date of grant. New shares are issued under
existing registration statements upon exercise. At September 29, 2007, the
Company had 766,316 shares of common stock available for issuance under the
plans.

Restricted Stock Plan

The Company
also has a restricted stock plan that provides for grants of common stock to key
employees of the Company other than the Chief Executive Officer and the four
highest paid executives of the Company other than the Chief Executive Officer.
The common stock grants generally vest over three to five years. At September
29, 2007, the Company had 107,300 shares of common stock available for issue
under the plan.

44

---

Transactions
under the stock option and restricted stock plans during each of the three years
in the period ending September 29, 2007 are summarized as follows:

**Weighted****Number of**
    
    **Average****Shares Under**
    
    **Exercise****Option**
    
    **Price**Balance at October 3, 2004
    
    2,008,218
    
    
    7.55Granted
    
    527,150
    
    
    4.55Forfeited
    
    (363,425
    )
    
    7.46Exercised
    
    (74,785
    )
    
    1.81Balance at
      October 1, 2005
    
    2,097,158
    
    
    6.99Granted
    
    574,850
    
    
    3.11Forfeited
    
    (399,456
    )
    
    5.88Exercised
    
    (136,575
    )
    
    2.66Balance at
      September 30, 2006
    
    2,135,977
    
    
    6.43Granted
    
    474,250
    
    
    2.33Forfeited
    
    (627,445
    )
    
    7.09Exercised
    
    (4,814
    )
    
    0.56Balance at
      September 29, 2007
    
    1,977,968
    
    
    5.25


Options exercisable at:

WeightedNumber
    
    Average**Exercisable**
    
    Exercise
    PriceOctober 1, 2005
    1,008,735
    
    $
    8.78September 30,
      2006
    1,064,527
    
    
    8.48September 29, 2007
    1,061,211
    
    
    6.70


The following table summarizes
information concerning currently outstanding and exercisable stock
options:

|                    |  |                 |  | Options
    Outstanding |  | **Options
Exercisable**
|------------------- |  | --------------- |  | ----------------------- |  | -----------------------
|                    |  |                 |  | Weighted                |  |                        
|                    |  |                 |  | **Average**             |  | **Weighted**           
|**Range of**        |  |                 |  | **Remaining**           |  | **Average**            
|**Exercise**        |  | **Number**      |  | **Contractual**         |  | **Exercise**           
|**Prices**          |  | **Outstanding** |  | Life                    |  | **Price**              
|$0.00 - $2.41       |  | 687,346         |  | 7.6 years               |  | $                      
|2.70  -4.84         |  | 683,000         |  | 7.5 years               |  |                        
|5.28  -7.82         |  | 166,822         |  | 4.5 years               |  |                        
|8.71  -9.80         |  | 209,800         |  | 6.2 years               |  |                        
|11.49 - 11.51       |  | 102,900         |  | 1.1 years               |  |                        
|12.59 -
      13.79 |  | 103,100         |  | 3.1 years               |  |                        
|28.75 - 28.76       |  | 25,000          |  | 0.1 years               |  |                        
|                    |  | 1,977,968       |  |                         |  |                        

45

---

A summary of the status of the Companys
nonvested shares as of September 29, 2007, and changes during the year ended
September 29, 2007, is presented below:

WeightedAverage Grant**Nonvested
      Shares**
    **Shares
      (000)**
    
    Date Fair
    ValueNonvested at October 1, 2006
    1,071,450
    
    
    $
    1.74Granted
    474,250
    
    
    
    0.85Vested
    (388,183
    )
    
    
    1.36Forfeited
    (240,760
    )
    
    
    1.63Nonvested at September 29, 2007
    916,757
    
    
    $
    1.37


As of September 29, 2007, there was
$858,000 of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the Plan. That cost is
expected to be recognized over a weighted-average period of 1.3 years. The total
fair value of shares vested during the years ended September 29, 2007, September
30, 2006, and October 1, 2004, was $529,000, $653,000, and $645,000,
respectively.

Employee Stock Purchase
Plan

The Company
has an Employee Stock Purchase Plan (ESPP) which is available to eligible
employees. Under terms of the plan, eligible employees may designate from 1% to
10% of their compensation to be withheld through payroll deductions for the
purchase of common stock at 85% of the lower of the market price on the first or
last day of the offering period. Under the plan, 500,000 shares of common stock
have been reserved for issuance. As of September 29, 2007, 335,533 shares have
been issued under the plan. Fair value disclosures under SFAS No. 123 have not
been disclosed for shares under the ESPP as such values are
immaterial.

Note E.Income Taxes

The
effective income tax rates differed from the federal statutory income tax rate
as follows for the years ended:

|                                             | **September 29,** |       | **September 30,** |  | **October 1,**
|-------------------------------------------- | ----------------- | ----- | ----------------- |  | --------------
|                                             | **2007**          |       | **2006**          |  | **2005**      
|Federal statutory rate                       |                   | (34.0 | )%                |  |               
|State income
      taxes                     |                   |      |                   |  |               
|Foreign operating income benefit             |                   | 3.5   |                   |  |               
|Change in
      valuation allowance          |                   | 29.9  |                   |  |               
|Adjustments to income tax provision accruals |                   |      |                   |  |               
|Permanent
      differences                  |                   | 0.6   |                   |  |               
|                                             |                   |      | %                 |  |               

46

---

Components of the (benefit) provision for
income taxes are as follows for the years ended (thousands of
dollars):

**September 29,**
    
    **September 30,**
    
    October 1,**2007**
    
    **2006**
    
    2005Current:Federal
    $
    
    
    $
    
    
    $
    Foreign
    
    
    
    
    
    
    
    State
    
    11
    
    
    9
    
    
    411
    
    
    9
    
    
    4Deferred
    
    
    
    
    
    
    
    12,856$
    11
    
    $
    9
    
    $
    12,860


Deferred
taxes recognize the impact of temporary differences between the amounts of
assets and liabilities recorded for financial statement purposes and such
amounts measured in accordance with tax laws. Realization of net operating loss
carryforwards and other deferred tax temporary differences are contingent on
future taxable earnings. The Company's deferred tax asset was reviewed for
expected utilization using a "more likely than not" approach by assessing the
available positive and negative evidence surrounding its recoverability. As a
result of the Companys net operating loss position, the Company recorded a
valuation allowance of $62,177,000 at September 29, 2007 and $51,796,000 at
September 30, 2006. The Company continues to assess and evaluate strategies that
will enable the deferred tax asset, or portion thereof, to be utilized, and will
reduce the valuation allowance appropriately at such time when it is determined
that the "more likely than not" approach is satisfied. The net operating loss
and tax credit carry-forwards of $156,037,000 expire at various dates from
September 2018 through September 2027.

The
cumulative temporary differences between the tax bases of assets and liabilities
and their carrying amounts for financial statement purposes are as follows at
(thousands of dollars):

September 29,
    
    September 30,2007
    
    2006Current deferred tax assets:Inventories
    $
    35
    
    
    $
    117Receivables
    
    53
    
    
    
    74Other current assets
    
    (55
    )
    
    
    (243
    )Compensation and benefits
    
    41
    
    
    
    155Restructuring
    
    225
    
    
    
    154Other accruals
    
    105
    
    
    
    68Valuation allowances
    
    (404
    )
    
    
    (325
    )$
    
    
    
    $
    Long-term
      deferred tax assets (liabilities)net:Accelerated depreciation
    $
    345
    
    
    $
    1,559Intangibles
    
    3,016
    
    
    
    2,746Prepaid royalties
    
    
    
    
    
    (173
    )Tax credit and NOL carryforwards
    
    58,412
    
    
    
    47,339Valuation allowances
    
    (61,773
    )
    
    
    (51,471
    )$
    
    
    
    $
    


Note F.Derivative Instruments 
Foreign Currency Transactions

The Company
enters into forward exchange contracts that are recorded at fair value, with
related fair value gains or losses recorded in income within the caption net
other (income) expense. Generally, these contracts have maturities of six months
or less. These contracts are entered into to offset the gains or losses on
foreign currency denominated assets and liabilities. The Company does not enter
into forward exchange contracts for trading

47

---

purposes and the contracts are not
designated as hedges. At September 29, 2007, the Company had open forward
exchange contracts to buy Thailand baht maturing November 9, 2007; November 15,
2007; November 26, 2007; December 11, 2007 and December 19, 2007 with notional
amounts of 435 million baht, 325 million baht, 62 million baht, 61 million baht
and 75 million baht, respectively. The total open contracts for 958 million baht
equates to approximately $28.0 million.

Foreign currency transaction gains
or (losses) included in net other (income) expense (in thousands):

September 29,
    
    
    September 30,
    
    
    **October 1,**(in
      thousands)
    2007
    
    
    2006
    
    
    **2005**Gain or (loss) from forward exchange
    $
    2,775
    
    
    $
    1,998
    
    
    $
    (839
    )contractsOther foreign
      currency gain or (loss)
    
    (3,024
    )
    
    
    (2,594
    )
    
    
    949Net gain or
      (loss) from foreign currencytransactions
    $
    (249
    )
    
    $
    (596
    )
    
    $
    110


Note G.Retirement and Profit-Sharing
Plans

The Company
sponsors a 401(k) retirement plan for all of its employees meeting minimum
eligibility requirements. The plan provides Company matching contributions of
50% of each dollar of employee elective deferral contributions, up to 3% of the
employees compensation. Company contributions for this plan were approximately
$210,000, $299,000 and $372,000 for the years ended September 29, 2007,
September 30, 2006 and October 1, 2005.

Note H.Research and Development Costs

The Company
incurred research and development costs of approximately $3,401,000, $4,538,000
and $5,839,000 for the years ended September 29, 2007, September 30, 2006 and
October 1, 2005.

Note I.Foreign Operations and
Significant Customers

The Company
continues to increase the functions performed in its Asian operation located in
Lamphun, Thailand in order to take advantage of the proximity to customers and
favorable labor and operating costs. The Company had aggregate export sales of
$84,328,000; $164,089,000 and $185,964,000 for the years ending September 29,
2007; September 30, 2006 and October 1, 2005, principally to Pacific Rim
customers. With respect to foreign operations for the years ended September 29,
2007 and September 30, 2006, long-lived assets of $44,324,000 and $43,351,000
were located in Thailand.

International net sales
concentrations for fiscal years in excess of 10% were:

2007
    
    
    2006
    
    
    2005Thailand
    
    54
    %
    
    62
    %
    
    65
    %Republic of
      China
    
    25
    
    
    26
    
    
    26Singapore
    
    16
    
    
    6
    
    
    1


Revenues from three customers made up a
significant portion of the Company's total net sales during the years
ending:

September
      29,
    
    
    September
      30,
    
    
    October
      1,2007
    
    
    2006
    
    
    2005Seagate
    66
    %
    
    73
    %
    
    73
    %Hitachi Global
      Storage
    17
    
    
    6
    
    
    2Philips/TPO
    11
    
    
    14
    
    
    15


48

---

Seagate
acquired Maxtor in May 2006. Maxtor activity has been combined with Seagate
activity for prior year presentation purposes. Philips Mobile Display Systems
business unit was merged with Toppoly Optoelectronics Corporation of Taiwan to
create a new company called TPO in November 2005.

Accounts receivable from the above
three customers are 93% and 79% of the Company's accounts receivable at
September 29, 2007 and September 30, 2006.

Note J.Commitments and Contingencies

The Company
paid rent of $1,431,000, $1,664,000 and $1,212,000 in fiscal 2007, 2006 and 2005
under facility and equipment operating leases that expire at various dates
through December 2012. As of September 29, 2007, the future minimum lease
commitments under the operating leases are payable as follows (in thousands):
2008$341; 2009$348; 2010$351; 2011$289; 2012$100; and beyond $129. The
operating lease commitments relate to the Eastlake, Ohio facility and the
Plymouth, Minnesota office lease. The Company is no longer using the Eastlake
facility and expects to vacate the Plymouth facility by the end of the fiscal
2008 second quarter. The Company is attempting to sublease both these
facilities.

The nature
of the Company's business exposes the Company to potential environmental
remediation liabilities arising from the manufacture, use and disposal of
hazardous materials used to manufacture flex interconnect products. Management
believes that any cost associated with maintaining the Company's compliance with
current environmental remediation laws will not have a material adverse effect
on the Company's financial statements.

The Company
is party to certain other lawsuits in the ordinary course of business.
Management does not believe that these proceedings, individually or in the
aggregate, will have a material adverse effect on the Companys business,
financial condition, results of operations or cash flows.

Purchases
from Hutchinson Technology Inc. comprised 32%, 38% and 35% of total purchases
for the years ended September 29, 2007, September 30, 2006 and October 1, 2005,
respectively. Hutchinson Technology Inc. is the sole provider of suspension
components for our FSA product which we expect to reach its end of life by the
end of the fiscal 2008 second quarter.

Note K.Related Party Transactions

Prior to
March 7, 2006, the Company held 35% of the outstanding shares of Applied
Kinetics Inc. (AKI). AKI is a technology development company that focuses on
manufacturing processes related to disk drive components. AKI developed the
manufacturing process technology utilized by the Companys FSA products. AKI
granted the Company a license to use this technology in return for a royalty to
be paid on the revenue generated from the sale of these products. On March 7,
2006, the Company entered into a Settlement Agreement with AKI pursuant to
which, the parties dismissed with prejudice their lawsuits against one another
in exchange for redemption by AKI of the 3,500 shares of AKI common stock owned
by the Company and settlement of all royalty and rebate amounts under the
License Agreement for prior and future periods. The License Agreement remains in
place and the Company will continue to make royalty payments related to the
agreement.

The Company
had accounted for its investment in AKI on the equity method. Included in other
income is a gain of $806,000 recorded related to the Companys equity holding in
AKI in fiscal 2005. In addition, the Company received consulting fees from AKI
of $170,000 in fiscal 2005. The Company did not record any gains or losses on
its AKI equity investment from the filing of its lawsuit against AKI and the AKI
Inside Shareholders in July 2005 through the settlement of the lawsuit on March
7, 2006. The Company recorded a $6,000 loss related to the sale of its equity
holding in AKI as part of the March 7, 2006 settlement.

Note L.Restructuring Charges

Corporate office relocation:

On October
1, 2007, the Company announced a plan to relocate its corporate offices to
Thailand and discontinue manufacturing activity at its Korat, Thailand
facilities as the FSA product reaches its expected end of life by the end of the
fiscal 2008 second quarter. The restructuring was triggered by the previous move
of the companys manufacturing operations to Thailand and the presence of the
Companys banking sources and most of its customers and suppliers in Asia. In
addition, incremental cost reductions are required for the Company to returnto profitability.

49

---

Asset
impairment charges of $400,000 related to the plan were recorded in the fiscal
2007 fourth quarter. The impaired assets were primarily equipment used in the
FSA manufacturing process at the Korat facility. The assets were written down to
their estimated net realizable value which is negligible as a result of their
age and specialized nature. Total cash related restructuring charges excluding
asset impairments of approximately $3.6 million are expected related to the
plan. The $3.6 million is comprised of $2.9 million for one-time termination
benefits and $0.7 million related to moving and closing costs associated with
transferring the corporate offices to Thailand, terminating the Plymouth,
Minnesota office lease and transferring equipment from Korat Thailand to
Lamphun, Thailand. Restructuring charges of $43,000 for severance related to the
plan were recorded in fiscal 2007.

Litchfield and Eastlake restructuring:

On January
16, 2006, the Company announced a plan to move prototyping and high volume
manufacturing from its Litchfield, Minnesota facilities to its Lamphun, Thailand
facilities. On September 25, 2006, the Company expanded the previously announced
Litchfield restructuring to close the entire Litchfield facility and move the
remaining development efforts to its Thailand facilities. The plan announced in
September 2006 was to accelerate the end of life production for FSA flexible
circuits in Litchfield and discontinue use of that facility by the end of April
2007. The plan also included acceleration of production end-of-life at the
Eastlake, Ohio laminate material manufacturing facility. In June 2006, as part
of the plan, the Company divested its low-volume etched metal product line also
located at the Litchfield facilities. In addition to closing the Litchfield and
Eastlake facilities, the Company continues to selectively reduce its indirect
labor and general and administrative expenses at both its U.S. and Thailand
locations. The restructuring was triggered by the Companys need to reduce its
cost structure in order to compete effectively and as a result of its lower than
expected level of revenue.

Asset
impairment charges related to the expanded restructuring plan of $8.1 million
and $2.0 million were recorded in the first and fourth quarters, respectively,
of fiscal 2006 for a total of $10.1 million. The assets that were impaired
include the Litchfield facilities and related equipment. The fair value of these
assets was determined using appraised values. The fair value of the Litchfield
facility impairment was determined from an independent appraisal performed by
Ruhland Commercial Consultants, Ltd. The fair value of the equipment located at
the facilities was determined from appraisals performed by Asset Reliance
International, LLC. Assets that were not transferred to Lamphun, Thailand were
sold or disposed. A $900,000 loss on the sale of assets was recorded during the
fiscal 2007 third quarter as the remaining assets were sold.

Manufacturing operations were completed in the Eastlake facility in
February 2007 and decommission of the facility is expected to be complete by the
end of December 2007. Manufacturing operations in the Litchfield facilities were
completed during April 2007 and decommission of the facilities was completed by
the end of the fiscal 2007 third quarter. A purchase agreement has been signed
to sell the Litchfield facilities for $2.4 million. The sale is expected to
close after the buyer arranges financing. Efforts are being made to sublease the
Eastlake facility in fiscal 2008.

Total cash
related restructuring charges excluding asset impairments of approximately $8.3
million are expected. The $8.3 million is comprised of $3.3 million for one-time
termination benefits and $5.0 million related to moving and closing costs
associated with transferring portions of the Litchfield operation to Thailand
and the disposition of the Eastlake and Litchfield facilities not being
retained. Restructuring charges of $5.6 million related to the Litchfield and
Eastlake restructuring were recorded in fiscal 2007. These charges were
comprised of $2.4 million for one time termination benefits and $3.2 million for
moving and closing costs. Total restructuring charges through September 29, 2007
were $7.6 million. These charges were comprised of $3.3 million for one time
termination benefits, $3.5 million for moving and closing costs and $781,000
contract termination costs related to the Eastlake facility lease. Remaining
expenditures of approximately $700,000 are expected as part of the plan
primarily related to completing the transfer of equipment to Thailand.

Maple Plain
restructuring:

In order to
reduce its cost structure, the Company closed its Maple Plain facility and
consolidated its operations with the Lamphun, Thailand facility. In addition,
the Company planned to discontinue supporting the FSA attachment process in
order to utilize its resources in other growth areas.

During
fiscal 2004, the Company recorded asset impairment of $13.1 million related to
the planned closure of the Maple Plain facility and the plan to discontinue
support of the FSA attachment process. Additional assetimpairment charges of approximately $1.0 million were recorded in fiscal
2006 related to the disposition of the Maple Plain assets.

50

---

The Maple Plain facility was sold in the
fiscal 2007 third quarter for $4.25 million and an additional $0.8 million asset
impairment charge was recorded in the fiscal 2007 second quarter to reduce the
net book value of the facility to its net realizable value. Total asset
impairment charges related to the Maple Plain restructuring since its inception
were $14.9 million. The assets that were impaired included the Maple Plain
facility and related equipment and equipment used in the FSA attachment process.
The manufacturing operation has been transferred from the Maple Plain facility
to the Lamphun, Thailand facility.

During
fiscal 2004, the Company recorded restructuring charges of $1.7 million related
to the Maple Plain restructuring and additional restructuring charges of $2.8
million were recorded in fiscal 2005. During fiscal 2006, restructuring charges
of approximately $1.6 million were recorded under the restructuring plan.
Excluding asset impairment charges, total restructuring charges were
approximately $6.1 million. The $6.1 million was comprised of $1.9 million for
one-time termination benefits, $0.4 million for contract termination costs and
$3.8 million for other moving and closing costs associated with closing the
Maple Plain location.

Selected information regarding the
restructuring follows (in thousands):

|                    |  |                           |        |   | Manufacturing Operations     |   |     |                 | 
|------------------- |  | ------------------------- | ------ | - | ---------------------------- | - | --- | --------------- | 
|                    |  | Manufacturing Operations  |        |   | RestructuringLitchfield and |   |     |                 | 
|                    |  | RestructuringMaple Plain |        |   | Eastlake                     |   |     |                 | 
|                    |  | Facility                  |        |   | Employee                     |   |     | **Facility**    | 
|                    |  | Abandonment               |        |   | **Termination**              |   |     | **Abandonment** | 
|                    |  | Charges                   |        |   | **Benefits**                 |   |     | **Charges**     | 
|Accrual at          |  |                           |        |   |                              |   |     |                 | 
|October 1, 2005     |  | $                         |       |   |                              | $ | 10  |                 | 
|Restructuring       |  |                           |        |   |                              |   |     |                 | 
|charges             |  |                           | 1,582  |   |                              |   | 37  |                 | 
|Payments            |  |                           | (1,582 | ) |                              |   | (47 | )               | 
|Accrual
      at    |  |                           |        |   |                              |   |     |                 | 
|September
      30, |  |                           |        |   |                              |   |     |                 | 
|2006                |  |                           |       |   |                              |   |    |                 | 
|Restructuring       |  |                           |        |   |                              |   |     |                 | 
|charges             |  |                           |       |   |                              |   |    |                 | 
|Payments            |  |                           |       |   |                              |   |    |                 | 
|Accrual at          |  |                           |        |   |                              |   |     |                 | 
|September 29,       |  |                           |        |   |                              |   |     |                 | 
|2007                |  | $                         |       |   |                              | $ |    |                 | 

Note M. Goodwill Impairment

Goodwill
represents the excess of the purchase price over the fair value of the net
assets acquired. The Company determined goodwill relates to one reporting unit
for purposes of impairment testing. Goodwill and other intangible assets with
indefinite lives are tested for impairment annually or whenever an impairment
indicator arises. One of the impairment criteria used for evaluation of goodwill
is the stock price of the Company. The Company considers its stock price to be
the best independent valuation measure. While other criteria used to evaluate
goodwill did not indicate an impairment, the Companys stock traded below its
book value from November 7, 2007 through December 7, 2007. As a result, the
goodwill was considered impaired and written down from its recorded value of $3
million to a value of $-0- as of September 29, 2007.

Note N. Liquidity

The Company
has historically financed its operations primarily through cash from operating
activities, sales of equity securities, bank credit facilities and employee
stock option exercises. Cash and equivalents were$10.5
million at September 29, 2007 and $9.8 million at September 30, 2006. Long-term
debt was $15.5 million at September 29, 2007 and $19.8 million at September 30,
2006 less current maturities of $11.0 and $9.0, respectively.

51

---

During the years ended September 29, 2007
and September 30, 2006, the Company incurred losses from continuing operations
of $29.1 million and $17.0 million, respectively. Operating activities used
$17.6 million and provided $18.1 million during the years ended September 29,
2007 and September 30, 2006, respectively. As of September 29, 2007, the Company
had a working capital deficit of $12.2 million.

Total unused
debt availability as of September 29, 2007 was approximately $8.0 million under
the Companys long-term Thailand credit facilities and approximately $14.6
million under its short-term packing credit and working capital
facilities.

The Company
believes that with the existing Thailand credit facilities and cash generated
from operations, it will have adequate funds to support projected working
capital and capital expenditures for the next twelve months. The Company is
considering alternatives for generating additional working capital and long-term
financing and will continue to pursue financing opportunities to better leverage
its assets. The Company also filed a shelf registration statement with the
Securities and Exchange Commission on January 12, 2005 under which it may offer
up to an aggregate of 3,500,000 shares of its common stock in one or more
offerings from time to time. The Companys financing needs and the financing
alternatives available to it are subject to change depending on, among other
things, general economic and market conditions, changes in industry buying
patterns, customer demand for its AFC, stacked memory flex, FPD flex and other
new products, the Companys ability to meet its loan covenant requirements and
cash flow from operations.

QUARTERLY FINANCIAL
DATA

|                             |  | (Unaudited) |            |   |            |  
|---------------------------- |  | ----------- | ---------- | - | ---------- | -
|**Fiscal 2007
      ***      |  | 1stQuarter  |            |   | 2ndQuarter |  
|Net sales                    |  | $           | 26,016,841 |   |            | $
|Gross profit
      (deficit) |  |             | 519,350    |   |            |  
|Net income (loss)            |  |             | (6,325,956 | ) |            |  
|Net income
      (loss) per  |  |             |            |   |            |  
|share:                       |  |             |            |   |            |  
|Basic                        |  | $           | (0.33      | ) |            | $
|Diluted                      |  | $           | (0.33      | ) |            | $

* The first, second, third and fourth
quarters include restructuring charges of $1,841,000, $2,678,000, $1,369,000 and
$967,000, respectively, related to the restructuring of the Company's
manufacturing operations and closing its Litchfield and Eastlake facilities. The
fourth quarter includes an asset impairment charge of $3,001,000 related to the
write-off of goodwill.





|                            |  |            |            |   |            |  
|--------------------------- |  | ---------- | ---------- | - | ---------- | -
|**Fiscal 2006
      ***     |  | 1stQuarter |            |   | 2ndQuarter |  
|Net sales                   |  | $          | 50,507,842 |   |            | $
|Gross
      profit          |  |            | 6,159,510  |   |            |  
|Net income (loss)           |  |            | (9,769,033 | ) |            |  
|Net income
      (loss) per |  |            |            |   |            |  
|share:                      |  |            |            |   |            |  
|Basic                       |  | $          | (0.51      | ) |            | $
|Diluted                     |  | $          | (0.51      | ) |            | $

* The first, second, third and fourth quarters
include restructuring charges of $9,929,000, $1,378,000, $597,000 and
$2,865,000, respectively, related to the restructuring of the Company's
manufacturing operations and closing its Litchfield and Eastlake
facilities.

52

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ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE.

Not applicable.

ITEM 9A. CONTROLS AND
PROCEDURES

Evaluation of Disclosure Controls and
Procedures

The
Companys Chief Executive Officer, William P. Murnane, and Principal Financial
Officer, Douglas W. Keller, have evaluated the Companys disclosure controls and
procedures as of the end of the period covered by this report. Based upon that
evaluation, they have concluded that as of that date, the Companys disclosure
controls and procedures are effective.

Changes in Internal Control Over
Financial Reporting

There have
been no changes in internal control over financial reporting that occurred
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.

Managements Responsibility for
Financial Information

Company
management is responsible for the preparation and integrity of the consolidated
financial statements appearing in the Annual Report. The consolidated financial
statements were prepared in conformity with United States generally accepted
accounting principles and include amounts based on managements estimates and
judgments. All other financial information in this report has been presented on
a basis consistent with the information included in the financial
statements.

The
Companys control environment is the foundation for its system of internal
controls over financial reporting and is embodied in its Code of Business
Conduct and Ethics. It sets the tone of the organization and includes factors
such as integrity and ethical values. Internal controls over financial reporting
are supported by formal policies and procedures that are reviewed, modified and
improved as changes occur in business conditions and operations.

The Audit
Committee of the Board of Directors, which is composed solely of outside
directors, meets periodically with members of management and the independent
registered public accounting firm to review and discuss internal controls over
financial reporting and accounting and financial reporting matters. The
independent registered public accounting firm, Grant Thornton LLP, reports to
the Audit Committee and has full and free access to the Audit Committee at any
time.

Managements Report on Internal Control
over Financial Reporting

Management
is also responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). A system of internal controls that is designed to provide reasonable
assurance as to the fair and reliable preparation and presentation of the
consolidated financial statements, as well as to safeguard our assets from
unauthorized use or disposition is maintained.

Management
has conducted an evaluation of the effectiveness of our internal controls over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. This evaluation included review of the documentation of controls,
evaluation of the design effectiveness of controls, testing of the operating
effectiveness of the controls and a conclusion on this evaluation. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of the
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Based on its evaluation,
management has concluded that internal control over financial reporting was
effective as of September 29, 2007.

ITEM 9B. OTHER
INFORMATION

None.

53

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PART III

ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE

Reference is made to the sections entitled
Election of Directors, Governance Matters, Description ofCommittees of the Board of Directors, Section 16(a)
Beneficial Ownership Reporting Compliance and Code of Ethics in our
definitive proxy statement to be mailed to shareholders on or about December 12,
2007, and to be filed with the Securities and Exchange Commission within 120
days after September 29, 2007 (the 2007 Proxy Statement). Except as set forth
at Item 4A of this Annual Report, the information required by Item 10 is
incorporated herein by reference from the sections noted above of the 2007 Proxy
Statement.

ITEM 11. EXECUTIVE
COMPENSATION

Reference is made to the section entitled
Executive Compensation and Other Information and Executive Compensation and
Other Information  Director Compensation in the 2007 Proxy Statement. The
information required by Item 11 is incorporated herein by reference from the
sections noted above of the 2007 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS

Reference is made to the section entitled
Security Ownership of Certain Beneficial Owners and Management in the 2007
Proxy Statement. The information required by Item 12 is incorporated herein by
reference from the sections noted above of the 2007 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE

Reference is made to the section entitled
Certain Relationships and Related Transactions in the 2007 Proxy Statement.
The information required by Item 13 is incorporated herein by reference from the
sections noted above of the 2007 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES

Reference is made to the section entitled
Fees of Independent Public Accountants and Audit Committee Pre-Approval
Procedures in the 2007 Proxy Statement. The information required by Item 14 is
incorporated herein by reference from the sections noted above of the 2007 Proxy
Statement.

54

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|PART IV                                                  
|---------------------------------------------------------
|                                                         
|ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
      SCHEDULES
|                                                         
|(a) LIST OF DOCUMENTS FILED AS PART OF THIS
    REPORT   
|                                                         
|(1)                                                      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|(2)                                                      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|(3)                                                      
|                                                         
|3(a)                                                     
|                                                         
|3(b)                                                     
|                                                         
|10(a)                                                    
|                                                         
|10(b)                                                    
|                                                         
|10(c)                                                    
|                                                         
|10(d)                                                    
|                                                         
|10(e)                                                    
|                                                         
|10(f)                                                    
|                                                         
|10(g)                                                    
|                                                         
|10(h)                                                    

55



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|10(i) |  | Third Credit
      Facilities Agreement effective December 19, 2006 between Innovex
      (Thailand) Limited as the Borrower and Bank of Ayudhya Public Company
      Limited and TMB Bank Public Company Limited as the Creditor is
      incorporated by reference to Exhibit 10.1 of the Companys Form 8-K dated
      December 20, 2006. |   
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --
|     
|10(j) |  | **License
      and Development Agreement dated October 12, 1999 between Innovex Precision
      Components, Inc. and Applied Kinetics, Inc. is incorporated by reference
      to Exhibit 10.1 of the Companys Registration Statement on Form S-3 (File
      No. 333-1065734).                                                             |   
|     
|10(k) |  | **First
      Amendment to the License and Development Agreement dated July 1, 2001
      between Innovex Precision Components, Inc. and Applied Kinetics, Inc. is
      incorporated by reference to Exhibit 10.2 of the Companys Registration
      Statement on Form S-3 (File No. 333-1065734).                                          |   
|     
|10(l) |  | **Second
      Amendment to the License and Development Agreement dated October 4, 2002
      between Innovex Precision Components, Inc. and Applied Kinetics, Inc. is
      incorporated by reference to Exhibit 10.3 of the Companys Registration
      Statement on Form S-3 (File No. 333-1065734).                                      |   
|     
|10(m) |  | **Third
      Amendment to the License and Development Agreement dated March 7, 2006
      between Innovex Precision Components, Inc. and Applied Kinetics, Inc. is
      incorporated by reference to Exhibit 10.1 of the Companys Current Report
      on Form 8-K dated March 2, 2006.                                                    |   
|     
|10(n) |  | Business
      Note dated April 13, 2005 in the principal amount of $7,104,000 due
      February 1, 2010 with Innovex, Inc. as maker and US Federal Credit Union
      as lender is incorporated by reference to Exhibit 10.1 of the Companys
      Form 8-K dated April 18, 2005.                                                          |   
|     
|10(o) |  | Modification
      Agreement for Mortgage, Assignment of Rents, Security Agreement and
      Fixture Financing Statement dated as of April 13, 2005 made by Innovex,
      Inc. for the benefit of US Federal Credit Union is incorporated by
      reference to Exhibit 10.2 of the Companys Form 8-K dated April 18,
      2005.           |   
|     
|10(p) |  | Lease
      Agreement dated as of July 8, 2005 between Innovex, Inc. and Curtis
      Investors Ltd. is incorporated by reference to Exhibit 10.1 of the
      Companys Form 8-K dated July 8, 2005.                                                                                                                                         |   
|     
|10(q) |  | *Amendment
      No.1 to Employment Agreement by and between Innovex, Inc. and Keith
      Foerster dated November 16, 2007 is incorporated by reference to Exhibit
      10.1 of the Companys Form 8-K dated November 16, 2007.                                                                                                             |   
|     
|21    |  | Subsidiaries
      of Innovex, Inc.                                                                                                                                                                                                                                                                                                           | 59
|     
|23    |  | Consent of
      Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                | 60
|     
|31.1  |  | Certification of Chief Executive Officer pursuant to 13a-14 and
      15d-14 of the Exchange Act                                                                                                                                                                                                                                              | 61
|     
|31.2  |  | Certification of Vice President, Finance pursuant to 13a-14 and
      15d-14 of the Exchange Act                                                                                                                                                                                                                                              | 62
|     
|32    |  | Certificate
      pursuant to 18 U.S.C. § 1350                                                                                                                                                                                                                                                                                                | 63

*Indicates a management contract or
compensatory plan or arrangement.** Certain
portions of the Exhibit have been deleted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule
406.

(c) EXHIBITS

Reference is made
to Item 15(a)3.

(d) SCHEDULES

Reference is made
to Item 15(a)2.

56

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SIGNATURES

Pursuant to
the requirements of Section 13 or 15 (d) 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.

|                             | INNOVEX, INC.
|---------------------------- | -------------
|                            
|                            
|                             | By           
|                             |              
|                             |              
|                            
|Date December
      14, 2007 | By           
|                             |              
|                             |              

Pursuant to the requirements of the
Securities Exchange Act of 1934, the following persons on behalf of the
Registrant and in the capacities and on the dates indicated have signed this
report below.

Each of the
undersigned hereby constitutes and appoints William P. Murnane and Douglas W.
Keller as the undersigneds true and lawful attorneys-in-fact and agents, each
acting alone, with full power of substitution and resubstitution, for the
undersigned and in the undersigneds name, place and stead, in any and all
capacities, to sign any of all amendments to this Annual Report on Form 10-K and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or may lawfully do or cause to
be done by virtue thereof.

|\s\ William P
      Murnane    | President, Chief
      Executive Officer and Director   
|------------------------------ | --------------------------------------------------------
|William P.
      Murnane       | (principal
      executive officer)                     
|                              
|\s\ Douglas W.
      Keller    | Vice President,
      Finance                           
|Douglas W.
      Keller        | (principal
      financial officer)                     
|                              
|\s\ Terry M.
      Dauenhauer  | Senior Vice
      President, Chief Operating Officer and
|Terry M.
      Dauenhauer      | Director                                                
|                              
|\s\ D. Allen
      Andersen    | Director                                                
|D. Allen
      Andersen        |                                                         
|                              
|\s\ Philip D.
      Ankeny     | Director                                                
|Philip D.
      Ankeny         |                                                         
|                              
|\s\ Robert C.
      Buhrmaster | Director                                                
|Robert C.
      Buhrmaster     |                                                         
|                              
|\s\ Kenneth J.
      Roering   | Director                                                
|Kenneth J.
      Roering       |                                                         

57

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SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS

Balance at
    
    Charged to
    
    
    
    Balance atBeginning
    
    Cost
      and
    
    
    
    End
      ofDescription
    
    of Period
    
    Expenses
    
    Deductions
    
    PeriodAllowance for doubtfulaccountsSeptember 29, 2007
    
    $
    273,105
    
    $
    
    
    $
    55,875
    (1)
    
    $
    217,230September 30, 2006
    
    
    349,920
    
    
    
    
    
    76,815
    (1)
    
    
    273,105October 1, 2005
    
    
    374,644
    
    
    
    
    
    24,724
    (1)
    
    
    349,920


(1) Represents
writeoffs of bad debt and adjustments for disputed invoices.

58

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