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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended July 3, 2004



OR



| ̈ | 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 0-11559



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KEY TRONIC CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Washington                                                     |  | 91-0849125                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|N. 4424 Sullivan Road Spokane Valley, Washington               |  | 99216                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Registrants
telephone number, including area code: (509) 928-8000



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Securities Registered Pursuant to Section 12(b) of the Act: None



Securities Registered Pursuant to Section 12(g) of the Act: Common stock,
no par value



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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 during the past 90 days.    Yes  x    No ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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.  x



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



The aggregate market value of the voting stock held by non-affiliates of the Registrant was $21,281,076 as of December 27, 2003.



The number of shares of Common Stock of the Registrant outstanding as of September 3, 2004 was 9,675,913 shares.



The Exhibit Index is located at pages 40 - 41.



Documents Incorporated by Reference:



The following documents are incorporated by reference to the extent specified herein:



|                                         |  |                  
|---------------------------------------- |  | -----------------
|Document Description                     |  | Part of Form 10-K
|Proxy Statement dated September 24, 2004 |  | Part III         



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##### Table of Contents

KEY TRONIC CORPORATION

2004 FORM 10-K



TABLE OF CONTENTS



|         |  |                                                                                                                   |  |        
|-------- |  | ----------------------------------------------------------------------------------------------------------------- |  | -------
|         |  |                                                                                                                   |  | Page   
|Part I  
|         |  |                                                                                                                  
|Item 1.  |  | Business                                                                                                          |  | 3 - 5  
|Item 2.  |  | Properties                                                                                                        |  | 6      
|Item 3.  |  | Legal Proceedings                                                                                                 |  | 7      
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                               |  | 7      
|        
|Part II 
|         |  |                                                                                                                  
|Item 5.  |  | Market for the Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |  | 8      
|Item 6.  |  | Selected Financial Data                                                                                           |  | 8 - 9  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                             |  | 9 - 17 
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                        |  | 17     
|Item 8.  |  | Financial Statements and Supplementary Data                                                                       |  | 18 - 35
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                              |  | 36     
|Item 9A. |  | Controls and Procedures                                                                                           |  | 36     
|Item 9B. |  | Other Information                                                                                                 |  | 36     
|        
|Part III
|         |  |                                                                                                                  
|Item 10. |  | Directors and Executive Officers of the Registrant                                                                |  | 37 - 38
|Item 11. |  | Executive Compensation                                                                                            |  | 38     
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                                                    |  | 38 - 39
|Item 13. |  | Certain Relationships and Related Transactions                                                                    |  | 39     
|Item 14. |  | Principal Accounting Fees and Services                                                                            |  | 39     
|        
|Part IV 
|         |  |                                                                                                                  
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                        |  | 40 - 42
|         |  | Signatures                                                                                                        |  | 43 -44 



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FORWARD-LOOKING STATEMENTS



This Annual Report contains forward-looking statements in addition to historical information. Forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Risks and uncertainties that might cause such differences include, but are not limited to those outlined in
Managements Discussion and Analysis of Financial Condition and Results of OperationsRisks and Uncertainties that May Affect Future Results. Readers are cautioned not to place undue reliance on forward-looking statements,
which reflect managements opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to forward-looking statements. Readers should carefully review the risk factors
described in periodic reports the Company files from time to time with the Securities and Exchange Commission, including Quarterly Reports on Form 10-Q.



PART I



Item 1. BUSINESS



Overview



Key Tronic Corporation (dba KeyTronicEMS Co.), a Washington corporation organized in 1969,
and its subsidiaries (hereinafter collectively called the Company, Key Tronic, or we unless the context otherwise requires) are principally engaged in electronic manufacturing services (EMS) and consumer related
products manufacturing for original equipment manufacturers (OEMs). The Company also manufactures keyboards and other input devices for personal computers, terminals, and workstations primarily in standard layouts that can be sold directly from
inventory on hand.



Presently, Key Tronic is known as an independent provider
of product realization services for OEMs in a variety of industries. Historically, Key Tronic was principally a manufacturer of electronic keyboards, but after assessing its strengths and capabilities, the Company shifted its focus to electronic
manufacturing services (EMS).



Operations are currently conducted in facilities
in the United States, China, Mexico, and Ireland. The Companys global production capability provides customers with benefits of improved supply-chain management, reduced inventory, lower labor costs, lower transportation costs and reduced
product fulfillment time.



The EMS industry is comprised of companies that
provide a range of manufacturing services for OEMs. The EMS industry has experienced rapid growth over the past several years as more OEMs shift to outsourcing manufacturing, and this trend is expected to continue in the future.



Marketing



The Company provides manufacturing services for outsourced OEM products. Key Tronic provides a mix of EMS services including: product
design, surface mount technologies (SMT) for printed circuit assembly, tool making, precision molding, liquid plastic injection molding, prototype design, full box builds, and printing screened silver flexible circuit membranes.



The percentage of revenues from EMS services for the fiscal years ended July 3, 2004, June
28, 2003, and June 29, 2002 were 91.1%, 88.6%, and 89.4%, respectively. Sales of such products have historically not been seasonal in nature, but may be seasonal in the future, due to changes in the types of products manufactured.



The following customers accounted for 10% or more of consolidated revenues in the three
fiscal years presented below:



|                                |  |             |   |  |      |   |  |      |  
|------------------------------- |  | ----------- | - |  | ---- | - |  | ---- | -
|                                |  | Fiscal Year |  
|                                |  | 2004        |   |  | 2003 |   |  | 2002 |  
|The Clorox Company              |  | 16          | % |  | 31   | % |  | 39   | %
|Lexmark International, Inc.     |  | 14          | % |  | 8    | % |  | 18   | %
|Zebra Technologies Corporation  |  | 12          | % |  | 8    | % |  | 0    | %
|Transaction Printer Group, Inc. |  | 10          | % |  | 9    | % |  | 10   | %
|Hewlett-Packard Company         |  | 1           | % |  | 8    | % |  | 13   | %



For the fiscal years ended July 3,
2004, June 28, 2003, and June 29, 2002, the five largest customers in each year accounted for 58%, 64%, and 85% of total sales, respectively.



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Although keyboard manufacturing is still included in the Companys product offerings, annual keyboard sales continue
to decline. During the fiscal years ended July 3, 2004, June 28, 2003, and June 29, 2002, the Company realized revenues of approximately $12.9 million, $14.6 million, and $18.3 million, respectively, from the sale of keyboards representing
approximately 8.7%, 11.1%, and 10.4% of consolidated revenues. The keyboard market has continued to trend toward standard keyboard layouts. In order to accommodate the demand for standard products, the Company maintains a purchase-from-stock
program. The most popular standard layouts are built and stocked for immediate availability. These products serve as enhancements to or replacements for the original system-supplied keyboards.



The Company markets its products and services primarily through its direct sales department
aided by strategically located field sales people and distributors. Although the Company established relationships with several independent sales organizations to assist in marketing the Companys EMS product lines in the U.S., commissions
earned and paid are insignificant.



Manufacturing



Since inception, the Company has made substantial investments in developing and expanding an
extensive capital equipment base to achieve selective vertical integration in its manufacturing processes. The Company has invested significant capital into surface mount technologies (SMT) for high volume manufacturing of complex printed circuit
board assemblies. The Company designs and develops tooling for injection molding machines and manufactures the majority of plastic parts used in the products it manufactures. Additionally, the Company has invested in equipment to produce printed
flexible circuit membranes.



Key Tronic uses a variety of manual and highly
automated assembly processes in its facilities, depending upon product complexity and degree of customization. Automated processes include component insertion, SMT, flexible robotic assembly, computerized vision system quality inspection, automated
switch and keytop installation, and automated functional testing.



The
Companys automated manufacturing processes enable it to work closely with its customers during the design and prototype stages of production and to jointly increase productivity and reduce response time to the marketplace. Key Tronic uses
computer-aided design techniques and unique software to assist in preparation of the tool design layout and tool fabrications, to reduce tooling costs, improve component and product quality, and enhance turnaround time during product development.



The Company purchases materials and components for its products from many
different suppliers both domestic and international. Key Tronic develops close working relationships with its suppliers, many of whom have been supplying products to the Company for several years.



Foreign Markets



Information concerning net sales and long-lived assets (property, plant, and equipment) by geographic areas as of and for the years ended
July 3, 2004, June 28, 2003, and June 29, 2002 is summarized in the following table. Net sales provided below are based on the shipping destination.



|                  |  |                 |         |         |   |        |  |   |        
|----------------- |  | --------------- | ------- | ------- | - | ------ |  | - | -------
|                  |  | Domestic (U.S.) |         | Foreign |   | Total 
|                  |  | (in thousands) 
|2004              |  |                 |         |         |   |        |  |   |        
|Net sales         |  | $               | 134,413 |         | $ | 14,488 |  | $ | 148,901
|Long-lived assets |  | $               | 10,153  |         | $ | 978    |  | $ | 11,131 
|2003              |  |                 |         |         |   |        |  |   |        
|Net sales         |  | $               | 114,674 |         | $ | 16,220 |  | $ | 130,894
|Long-lived assets |  | $               | 10,974  |         | $ | 1,008  |  | $ | 11,982 
|2002              |  |                 |         |         |   |        |  |   |        
|Net sales         |  | $               | 143,324 |         | $ | 32,267 |  | $ | 175,591
|Long-lived assets |  | $               | 11,429  |         | $ | 803    |  | $ | 12,232 



For the year ended July 3, 2004, 44.5%
of the Companys foreign net sales were to customers in Mexico, 29.7% were to customers in Europe, 20.1% were to customers in Canada, and the remaining 5.7% were spread among customers in Asia and South America.



For the year ended June 28, 2003, 71.7% of the Companys foreign net sales were to
customers in the Far East, 14.6% were to customers in Mexico, 10.0% were to customers in Europe, and the remaining 3.7% were spread among customers in Canada and South America.



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For the year ended June 29, 2002, 45.4% of the Companys foreign net sales were sold to customers in Mexico, 44.3%
were to customers in the Far East, 6.6% were to customers in Europe, and the remaining 3.7% were spread among customers in Canada and South America.



Backlog



At August 1, 2004, the Company had an order backlog of approximately $68.1 million. This compares with a backlog of approximately $34.9 million at August 2, 2003. Order backlog is not necessarily indicative of future
sales but can be indicative of trends in expected future sales revenue. Order backlog consists of purchase orders received for products expected to be shipped approximately within the next fiscal year, although shipment dates are subject to change
due to design modifications, customer forecast changes, or other customer requirements.



Research, Development, and Engineering



Research and
development and engineering (RD&E) expenses consist principally of employee related costs, third party development costs, program materials, depreciation and allocated information technology and facilities costs. The Companys RD&E
expenses were $2.6 million, $2.9 million, and $2.6 million in fiscal years 2004, 2003, and 2002, respectively. In fiscal years 2004, 2003, and 2002, the Company focused most of its RD&E efforts on current customer EMS programs. The higher cost
in fiscal year 2003 compared to fiscal years 2004 and 2002 is due primarily to a 10% pay reduction during most of fiscal years 2004 and 2002. Part of the increase in 2003 was due to a decrease in the amounts charged to the Companys customers.



Competition



The market for the products and services the Company provides is highly competitive. There
are numerous competitors in the EMS industry, many of which have substantially more resources and are more geographically diverse. Key Tronic competes primarily on the basis of responsiveness, creativity, vertical production capability, quality, and
price.



Trademarks and Patents



The Company owns several keyboard patents; however, since the Companys current focus
is electronic manufacturing services, management believes that these patents will not have a significant impact on future revenues. The Key Tronic name and logo are federally registered trademarks, and the Company believes they are valuable assets
of its business. During 2001, Key Tronic began operating under the trade name KeyTronicEMS Co. to better identify its primary business concentration.



Employees



As of July 3, 2004, the Company had approximately 2,847 employees compared to 2,687 on June 28, 2003 and 1,995 on June 29, 2002. The increase in employees is due
primarily to additional production workers hired in the Companys Juarez facility to ramp-up for more labor intensive customer programs. The Company can have significant fluctuations in product demand. The Company seeks to maintain flexibility
in its workforce by utilizing skilled temporary and short-term contract labor in its manufacturing facilities in addition to full-time employees. The Companys employees in Reynosa, Mexico, are represented by local unions. The Company has no
history of any material interruption of production due to labor disputes.



The
Company considers its employees its primary strength and makes considerable efforts to maintain a well-qualified staff. The Companys employee benefits include bonus programs involving periodic payments to all employees based on meeting
quarterly or fiscal year before-tax income targets. The Company maintains a 401(k) plan for U.S. employees, which provides a matching company contribution of up to 4% on a portion of the employees contribution, and also provides group health,
life, and disability insurance plans. The Company also maintains stock option plans for certain employees and outside directors.



5



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##### Table of Contents

Item 2. PROPERTIES



The Company has manufacturing
and sales operations located in the United States, Mexico, China, and Ireland. The table below lists the locations and square footage of the Companys facilities as of July 3, 2004:



|                       |  |                |  |                                |  |                            
|---------------------- |  | -------------- |  | ------------------------------ |  | ---------------------------
|Location               |  | Approx.Sq. Ft. |  | Type of Interest(Leased/Owned) |  | Description of Use         
|Spokane, Washington(1) |  | 49,000         |  | Leased                         |  | Research and administration
|Spokane, Washington    |  | 96,000         |  | Leased                         |  | Manufacturing              
|Las Cruces, New Mexico |  | 45,000         |  | Owned                          |  | Manufacturing              
|El Paso, Texas         |  | 80,000         |  | Leased                         |  | Shipping and warehouse     
|                       |  |                |  |                                |  |                            
|Total USA              |  | 270,000        |  |                                |  |                            
|                       |  |                |  |                                |  |                            
|Juarez, Mexico(2)      |  | 174,000        |  | Owned                          |  | Manufacturing              
|Juarez, Mexico         |  | 49,000         |  | Leased                         |  | Manufacturing and warehouse
|Juarez, Mexico(3)      |  | 38,000         |  | Leased                         |  | Manufacturing and warehouse
|Reynosa, Mexico        |  | 140,000        |  | Leased                         |  | Manufacturing              
|Reynosa, Mexico(4)     |  | 48,000         |  | Leased                         |  | Warehouse                  
|                       |  |                |  |                                |  |                            
|Total Mexico           |  | 449,000        |  |                                |  |                            
|                       |  |                |  |                                |  |                            
|Shanghai, China(5)     |  | 63,000         |  | Leased                         |  | Manufacturing              
|                       |  |                |  |                                |  |                            
|Total China            |  | 63,000         |  |                                |  |                            
|                       |  |                |  |                                |  |                            
|Dundalk, Ireland       |  | 4,000          |  | Leased                         |  | Sales                      
|                       |  |                |  |                                |  |                            
|Total Ireland          |  | 4,000          |  |                                |  |                            
|                       |  |                |  |                                |  |                            
|Grand Total            |  | 786,000        |  |                                |  |                            
|                       |  |                |  |                                |  |                            

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|(1) | On December 27, 2000, the Company sold two contiguous parcels of land and its corporate headquarters building in Spokane to Royal Hills Associates L.L.C. (RHA) for
approximately $6 million in cash. In connection with the sale, the Company entered into a 10-year lease agreement with RHA for one floor of the two-story building, which the Company continues to occupy as its headquarters (see Note 3 to Consolidated
Financial Statements). The Companys monthly rent payment is $30,875 plus allocated expenses.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The Company added 9,000 square feet to its main manufacturing facility in Juarez, Mexico during fiscal year 2004 to accommodate a new 3,000 ton press molding machine
and improve product flow of outbound shipping.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In May 2004, the Company leased an additional 38,000 square foot manufacturing facility in Juarez, Mexico for new product assembly space and warehouse storage.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In July 2003, the Company leased an additional 48,000 square foot warehouse in Reynosa, Mexico for storage capacity.
|--- | --------------------------------------------------------------------------------------------------------------------

|(5) | The Company began an assembly operation in Shanghai, China in fiscal year 1999. During fiscal year 2003, the leased space was increased from 36,000 sq. ft. to 63,000
sq. ft. to accommodate a new surface mount technology (SMT) line for automated circuit board production.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The geographic diversity of these locations allows the Company to offer services near its customers and its major electronics markets, while reducing labor costs. The
Company considers the productive capacity of its current facilities sufficient to carry on the Companys current business.



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Item 3. LEGAL PROCEEDINGS



On December 20, 2001, a
jury in Seattle federal court rendered a verdict in the case of F&G Scrolling Mouse, LLC, Fernando Falcon and Federico Gilligan v. Microsoft Corporation, Honeywell, Inc., and Key Tronic Corporation, United States District Court for the Western
District of Washington, Case No. C99-995C (the litigation) finding that Key Tronic misappropriated trade secrets and breached a confidentiality agreement with Plaintiffs. The jury awarded damages to the Plaintiffs in the amount of $16.5
million. The judgment against the Company was subsequently increased to approximately $19.2 million through an award of pre-judgment interest. On October 24, 2002, the Company reached a settlement of the litigation with the Plaintiffs (hereafter
called F&G). Under the terms of the settlement, the Company has agreed to pay F&G a total of $7.0 million. The Company was required to make an initial payment to F&G of $2.5 million, as well as make quarterly payments to
F&G of $200,000 or 50% of Key Tronics operating income, whichever is greater, until the total payment of $7.0 million has been made, provided the total payment is completed by December 15, 2005. The remaining amount to be paid of the $7.0
million settlement was approximately $2.5 million at July 3, 2004.



If the
total of $7.0 million is not paid by 12/15/2005, the total settlement amount increases on 12/15/2005 to $7.6 million. If payment of $7.6 million is not completed by 12/15/2006 the total settlement amount increases to $8.2 million. If payment of $8.2
million is not completed by 12/15/2007 the total settlement amount increases to $8.8 million. If payment of $8.8 million is not completed by 12/15/2008 the total settlement amount increases to $9.7 million. If payment of $9.7 million is not
completed by 12/15/2009 the total settlement amount increases to $10.6 million. If payment of $10.6 million is not made by 12/15/2010 the total settlement amount increases to $11.5 million. Any unpaid balance remaining at 12/15/2011 will accrue
interest thereafter at prime plus 11/2% per annum until paid. If the Company fails to make any minimum quarterly
payment when due, Plaintiffs have the right to accelerate all remaining payments in the amount of $11.5 million less any amounts previously paid.



Reported earnings for the year ended June 28, 2003, include a one-time benefit of $12.2 million ($1.26 per share) for reversal of a previously recorded litigation
accrual.



On March 31, 2004 a former employee of the Company filed a complaint
against the Company in the Superior Court of the State of Washington, Spokane County. Anthony DeStefano, Jr. v Key Tronic Corporation, Case No. 04201480-2. The complaint asserted claims for breach of contract, wrongful withholding of wages
and wrongful discharge and sought an unspecified amount of damages. The complaint was dismissed with prejudice on September 8, 2004 with each party bearing its own costs.



The Company is party to certain other lawsuits or claims 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 financial position, results of operations or cash flow. Also see Note 8 to the Consolidated Financial Statements.



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



None



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##### Table of Contents

PART II



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



Market Information



Key Tronic Corporations common stock is traded on the NASDAQ National Market System under the symbol KTCC. Quarterly high and low closing sales prices for Key Tronic common stock for fiscal years
2004 and 2003 were as follows:



|               |  |      |      |      |   |      |  |     |      |  |   |     
|-------------- |  | ---- | ---- | ---- | - | ---- |  | --- | ---- |  | - | ----
|               |  | 2004 |      | 2003
|               |  | High |      | Low  |   | High |  | Low
|First Quarter  |  | $    | 2.65 |      | $ | 2.30 |  | $   | 1.20 |  | $ | 0.28
|Second Quarter |  |      | 2.49 |      |   | 1.96 |  |     | 1.45 |  |   | 0.30
|Third Quarter  |  |      | 3.00 |      |   | 2.20 |  |     | 1.40 |  |   | 1.05
|Fourth Quarter |  |      | 4.06 |      |   | 2.66 |  |     | 2.85 |  |   | 1.05



High and low stock prices are based on
the daily closing price reported by the NASDAQ National Market System. These quotations represent prices between dealers without adjustment for markups, markdowns, and commissions, and may not represent actual transactions.



Holders And Dividends



As of July 3, 2004, the Company had 1,380 shareholders of record. The Companys current financing agreement contains a covenant that
prohibits the declaration or payment of dividends (see Note 4 to Consolidated Financial Statements). The Company has not paid a cash dividend and does not anticipate payment of dividends in the foreseeable future.



Item 6: SELECTED FINANCIAL DATA



The following
selected consolidated financial data of the Company should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations, the consolidated financial statements and related notes,
and other information included in this report.



Financial Highlights



(Dollars in thousands, except per share amounts)



|                                                       |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |    |  |   |         |   
|------------------------------------------------------ |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | -- |  | - | ------- | --
|                                                       |  | Fiscal Years |        
|                                                       |  | 2004         |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|Consolidated Statements of Operations Data:            |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |    |  |   |         |   
|Net sales                                              |  | $            | 148,901 |   |      | $ | 130,894 |      |  | $ | 175,591 |   |  | $    | 165,865 |    |  | $ | 164,353 |   
|Gross profit                                           |  |              | 13,237  |   |      |   | 14,958  |      |  |   | 14,985  |   |  |      | 7,556   |    |  |   | 14,458  |   
|Gross margin percentage                                |  |              | 8.9     | % |      |   | 11.4    | %    |  |   | 8.5     | % |  |      | 4.6     | %  |  |   | 8.8     | % 
|Operating income (loss)                                |  |              | 1,789   |   |      |   | 2,612   |      |  |   | 1,224   |   |  |      | (9,484  | )  |  |   | (3,460  | ) 
|Operating margin percentage                            |  |              | 1.2     | % |      |   | 2.0     | %    |  |   | 0.7     | % |  |      | (5.7    | )% |  |   | (2.1    | )%
|Litigation/settlement recovery (expense)               |  |              |        |   |      |   | 12,186  |      |  |   | (20,214 | ) |  |      |        |    |  |   |        |   
|Net income (loss)                                      |  |              | 110     |   |      |   | 13,409  |      |  |   | (25,362 | ) |  |      | (11,373 | )  |  |   | (5,333  | ) 
|Earnings per share  diluted                           |  |              | 0.01    |   |      |   | 1.39    |      |  |   | 2.62    |   |  |      | (1.18   | )  |  |   | (0.55   | ) 
|                                                       |  |              |         |   |     
|Consolidated Cash Flow Data:                           |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |    |  |   |         |   
|Cash flows provided by (used in) operations            |  |              | (17     | ) |      |   | (544    | )    |  |   | 919     |   |  |      | 7,481   |    |  |   | 3,256   |   
|Capital expenditures                                   |  |              | 1,633   |   |      |   | 2,128   |      |  |   | 1,142   |   |  |      | 720     |    |  |   | 1,439   |   
|                                                       |  |              |         |   |     
|Consolidated Balance Sheet Data:                       |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |    |  |   |         |   
|Net working capital(1)                                 |  |              | 23,468  |   |      |   | 21,783  |      |  |   | 22,261  |   |  |      | 22,886  |    |  |   | 37,128  |   
|Total assets                                           |  |              | 67,938  |   |      |   | 59,125  |      |  |   | 57,439  |   |  |      | 74,371  |    |  |   | 95,815  |   
|Long-term liabilities                                  |  |              | 13,452  |   |      |   | 13,553  |      |  |   | 26,823  |   |  |      | 9,389   |    |  |   | 17,555  |   
|Shareholders equity                                   |  |              | 23,234  |   |      |   | 23,120  |      |  |   | 9,711   |   |  |      | 35,318  |    |  |   | 46,602  |   
|Book value per share(2)                                |  |              | 2.40    |   |      |   | 2.39    |      |  |   | 1.00    |   |  |      | 3.65    |    |  |   | 4.83    |   
|                                                       |  |              |         |   |     
|Supplemental Data:                                     |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |    |  |   |         |   
|Number of shares outstanding at year-end (thousands)   |  |              | 9,676   |   |      |   | 9,673   |      |  |   | 9,673   |   |  |      | 9,673   |    |  |   | 9,641   |   
|Number of employees at year-end                        |  |              | 2,847   |   |      |   | 2,687   |      |  |   | 1,995   |   |  |      | 2,151   |    |  |   | 1,926   |   
|Approximate square footage of leased/ owned facilities |  |              | 786,000 |   |      |   | 691,000 |      |  |   | 664,000 |   |  |      | 615,000 |    |  |   | 665,000 |   

---

|(1) | Net working capital is defined as total current assets less total current liabilities. Net working capital measures the portion of current assets that are financed
by long term funds and is an indicator of short term financial management.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(2) | Book value per share is defined as total shareholders equity divided by the number of shares outstanding at the end of the fiscal year. Book value per share
measures shareholders value as defined by generally accepted accounting principles.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Results of Operations



Overview



Key Tronic Corporation is an independent provider of electronic manufacturing services (EMS) for original equipment manufacturers (OEMs). The Companys core
strengths include innovative design and engineering expertise in SMT, electronics, mechanical engineering, precision molding and tooling, combined with high-quality, low-cost production and assembly on a global basis. Our global production
capability provides customers with benefits of improved supply-chain management, reduced inventories, lower transportation costs, and reduced product fulfillment time. The following information should be read in conjunction with the consolidated
financial statements included herein and the Risk and Uncertainties section beginning on page 16.



The EMS industry has historically experienced growth as more OEMs shift to outsourced manufacturing. Key Tronic sales in fiscal year 2004 increased by 14% over 2003 results. With the current turnaround of end-market
demand and recent new product programs awarded, the Company expects to increase revenues once again in fiscal year 2005  however, actual results will depend on actual levels of customer orders. We believe that we are well positioned in the EMS
industry to expand our customer base and continue business growth within our current capacity.



The total number of Key Tronic EMS customers continued to increase during fiscal 2004. Some of these customers have programs that represent small annual sales while others have multi-million-dollar potential. The
concentration of the Companys largest customers has also declined as the top five customers sales decreased to 58% of total sales in 2004 from 64% in 2003 and 85% in 2002. The Companys current customer relationships involve a variety of
products, including consumer electronics and plastics, household products, gaming devices, specialty printers, educational toys, exercise equipment, and computer accessories.



The EMS industry is intensely competitive, and Key Tronic, at this time, estimates it has less than 1% of the potential market. The Company
believes that it can acquire new business in the future, particularly those programs that require innovative design and engineering, short lead times, or small initial volumes. The Company is planning for growth in coming quarters by utilizing
current capacity, improving manufacturing processes, and investing in additional manufacturing equipment.



The Company maintains a strong balance sheet with a current ratio of 1.75 and a long-term debt to equity ratio of 0.58. The Company had approximately $9.1 million available from a revolving line of credit at July 3,
2004. The Company maintains a good working relationship with CIT Group/Business Credit, Inc., its asset-based lender, and it believes that internally generated funds and its revolving line of credit should provide adequate capital for planned
growth.



Net Sales



Net sales in fiscal 2004 were $148.9 compared to $130.9 million and $175.6 million in fiscal
years 2003 and 2002, respectively. The increase during 2004 compared to 2003 is related to the Companys successful expansion of the number of manufacturing



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##### Table of Contents

programs with existing customers and acquiring new significant customers during the year, offset in part, by a large
decrease in demand from a single customer. Sales revenue resulting from new customers attained in 2004 was approximately $8.2 million, while the net increase of sales to existing customers was approximately $9.8 million. Sales of keyboards accounted
for only 8.7% of total sales in fiscal 2004 compared to 11.1% in fiscal 2003.



The decrease in sales revenue during 2003 compared to 2002 is due to decreased shipments to some of the Companys primary customers as a result of a slowdown in end-market demand and the effects of a legal judgment on our ability to
acquire new customers. This legal judgment was settled in the second quarter of fiscal 2003, and further information is set forth in Note 8 of the Consolidated Financial Statements contained herein. Sales revenue resulting from new customers
acquired in 2003 was approximately $5.4 million, while the net decrease of sales to existing customers was approximately $50.1 million. Keyboard sales were 11.1% of sales in fiscal 2003 compared to 10.4% in fiscal 2002.



Gross Profit



In fiscal year 2004, gross profit on sales was 8.9% of revenues compared to 11.4% in fiscal
year 2003 and 8.5% in fiscal year 2002. The decrease in 2004 was due primarily to the product mix and costs associated with the start-up of new manufacturing programs, offset in part by an insurance settlement in 2004 of $475,000. The increase in
the gross profit percentage in fiscal year 2003 compared to fiscal year 2002 was due primarily to the product mix, improvements in operating efficiencies, and lower material costs.



Gross profit margins reflect a number of factors that can vary from period to period, including product mix, start-up costs and efficiencies
associated with new programs, product life cycles, sales volumes, capacity utilization of the Companys resources, management of inventories, component pricing and shortages, end market demand of our customers products, fluctuations and
timing of customer orders, and competition within the EMS industry. These and other factors can cause variations in our operating results. There can be no assurance that gross margins will not decrease in future periods.



Cost of Sales



Total costs of material as a percentage of sales were approximately 58.1%, 57.0%, and 64.8%
in fiscal years 2004, 2003, and 2002, respectively. The change from year-to-year is directly related to sales product mix. Products sold in 2004 and 2003 were more labor intensive, thereby decreasing costs of material as a percentage of sales.



Direct production costs (direct labor and manufacturing overhead) have
increased to 18.3% of total sales in fiscal 2004 from 16.0% in 2003 and 15.6% in 2002. Approximately half of the increase in 2004 is the result of start-up costs associated with new manufacturing programs. These start-up costs included increasing
the Companys manufacturing and storage space in Juarez, Mexico. The remaining increase in 2004 is due primarily to additional employees required for more labor-intensive products.



The Company provides for obsolete and non-saleable inventories based on specific identification of inventory against current demand and
recent usage. The amounts charged to expense were $162,000, $203,000, and $2,225,000 in fiscal years 2004, 2003, and 2002, respectively.



The Company provides for warranty costs based on historical experience and anticipated product returns. The amounts charged to expense were fairly consistent at
approximately $193,000, $150,000, and $215,000 in fiscal years 2004, 2003, and 2002, respectively. The Company does not warrant design defects for EMS customers.



Cost of sales also includes freight costs of $2.5 million in fiscal year 2004 compared to $2.0 million in fiscal year 2002, and $2.4 million
in fiscal year 2001. Freight costs have increased to 1.8% of total sales in 2004 from 1.5% in 2003 and 1.4% in 2002. The Companys freight costs have increased as the Company continues to expand global procurement and as a result of increased
shipping rates and fuel surcharges.



Research, Development and Engineering



Research and
development and engineering (RD&E) expenses consist principally of employee related costs, third party development costs, program materials, depreciation and allocated information technology and facilities costs. The Companys RD&E
expenses were $2.6 million, $2.9 million, and $2.6 million in fiscal years 2004, 2003, and 2002, respectively. In fiscal years 2004, 2003, and 2002, the Company focused most of its RD&E efforts on current customer EMS programs. The higher cost
in fiscal year 2003 compared to fiscal years 2004 and 2002 is due primarily to a 10% pay reduction during most of fiscal years 2004 and 2002. Part of the increase in 2003 was due to a decrease in the amounts charged to the Companys customers.



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##### Table of Contents

Selling



Sales and marketing expenses consist principally of advertising and marketing programs, salaries and benefits for sales and marketing
personnel, sales commissions, and travel expenses. Selling expenses were $1.9 million, $2.3 million, and $2.8 million in fiscal years 2004, 2003, and 2002, respectively. The decrease in 2004 was related to a reduction in promotional programs,
commissions, and bonuses paid. The decreases in fiscal year 2003 compared to fiscal year 2002 were due primarily to a reduction in promotional programs and marketing expenses related to keyboard sales. Sales of keyboards through distribution require
greater promotional and marketing programs than sales of EMS products.



General and Administrative



General and
administrative expenses consist of employee related costs, travel expenses and allocated information technology and facilities costs for finance, legal, human resources and executive functions, outside legal and accounting fees, provision for
doubtful accounts and business insurance costs. General and administrative expenses were $7.0 million, $7.2 million and $8.4 million in fiscal years 2004, 2003, and 2002, respectively. The decrease in fiscal year 2004 compared to fiscal year 2003
was due primarily to a 10% reduction in salaries that was in effect for most of the fiscal year offset in part by increasing business insurance premiums. The decrease in fiscal year 2003 compared to 2002 was primarily due to a year over year decline
in legal expenses as a result of the settlement of the F&G litigation. Other contributing factors were a decreased provision for doubtful accounts, lower telephone expenses, decreased staffing in Ireland, and the adoption of SFAS 142, which
ceased the amortization of goodwill.



Interest Expense



The Company had net interest expenses of
$1.1 million, $1.0 million, and $1.3 million in fiscal years 2004, 2003, and 2002, respectively. Net interest expense has remained fairly consistent, as the Company has increased its borrowings while interest rates have decreased. The Company does
not currently use derivatives in hedging interest rate risk. During 2004, the Company began to utilize short-term fixed LIBOR rates on portions of its revolver for short-term interest savings in anticipation of rate increases.



Other Income, Net



The Company had net other income of $23,000, $237,000, and $358,000 in fiscal years 2004,
2003, and 2002, respectively. Other income in fiscal year 2003 is primarily proceeds from the sale of an equity security. The other income for fiscal year 2002 is primarily the result of recognizing gains on the sale of two of the Companys
buildings and related equipment.



Income
Tax Provision



The Company had income tax expense of $611,000 in fiscal
year 2004 compared to $600,000 in fiscal year 2003 and $5,416,000 in fiscal year 2002. The tax provisions for fiscal years 2004 and 2003 are primarily the result of foreign taxes on the earnings of foreign subsidiaries. Income tax expense in fiscal
year 2002 was due primarily to establishing a 100% valuation allowance against the Companys net deferred tax assets after a litigation judgment was awarded to F&G Scrolling Mouse. These assets totaled $4.5 million. Prior to the award of
this judgment, Key Tronic had almost $45.9 million in tax loss carry-forwards. Financial Accounting Standard No. 109 requires that management assess the sources of future taxable income, which may be available to recognize the deductible differences
that comprise deferred tax assets. A valuation allowance against deferred tax assets is required if it is more likely than not that some or all of the deferred tax assets will not be realized. Because the litigation judgment was considered evidence
of the Companys possible inability to utilize the balance of the deferred tax assets, the valuation allowance was increased to the full value. The Companys tax loss carry-forwards begin expiring in 2006. The remaining $900,000 of the
Companys income tax provision in 2002 was due to foreign income taxes on the earnings of foreign subsidiaries.



International Subsidiaries



The Company offers customers a complete global manufacturing solution. The Companys facilities provide its customers the opportunity to have their products
manufactured in the facility that best serves specific product manufacturing and distribution needs. Foreign subsidiaries are located in the following locations:



| |  | Key Tronic Juarez SA de CV, owns an SMT, assembly, and molding facility in Juarez, Mexico and currently leases two other facilities for assembly and storage. This subsidiary is
primarily used to support the Companys U.S. operations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Key Tronic Reynosa SA de CV, leases manufacturing and warehouse facilities in Reynosa, Mexico. This subsidiary is used exclusively to manufacture products for one EMS customer.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  | Key Tronic Computer Peripheral Co., Ltd., leases a facility with SMT and assembly capabilities in Shanghai, China, which began operations in 1999. Its primary function is to provide
EMS services for export; however, it is also currently utilized to manufacture electronic keyboards.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Key Tronic Europe, Ltd., the Companys operation in Dundalk, Ireland, is primarily used to solicit sales and support customers within Europe.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



Foreign sales from worldwide operations, including domestic exports, were $14.5 million in
fiscal year 2004 compared to $16.2 million and $32.3 million in fiscal years 2003 and 2002, respectively. Foreign sales were 9.7% of net sales in fiscal 2004 compared to 12.4% and 18.4% in fiscal years 2003 and 2002, respectively. Sales from Key
Tronic Europe, Ltd. represented approximately 2.0% of consolidated sales in fiscal year 2003 compared to 3.3% and 3.0% in fiscal years 2003 and 2002, respectively. The decrease in foreign sales for fiscal year 2004 when compared to fiscal year 2003
is a result of declining keyboard sales from the Companys subsidiary in Ireland. The decrease in foreign sales for fiscal year 2003 is primarily the result of declining sales to the foreign subsidiaries of one EMS customer and the continuing
decline of keyboard sales. Although the Company hopes to expand its EMS business to include the European market, sales within Europe currently are primarily of electronic keyboards. Key Tronic Computer Peripheral Co., Ltd., the Companys
subsidiary in Shanghai, China, has had only minimal sales to customers in China over the past three fiscal years.



Capital Resources and Liquidity



Cash flows used in operating activities were $(17,000) in fiscal year 2004 compared to $(544,000) used in fiscal year 2003 and $919,000 of cash provided by operating
activities in fiscal year 2002.



The cash used in operations during fiscal year
2004 was due primarily to an increase of $7.4 million in accounts receivables and $3.9 million in inventory but these were offset by an increase in operating liabilities of $9.0 million. The increase in accounts receivable is due to an increase of
sales during the last two months of the fiscal year. The increase in inventory is due to a build up of raw materials for existing and new customers to support demand in the first quarter of 2005. Also contributing to the use of cash was $1.3 million
paid to F&G under the settlement agreement.



Capital expenditures were $1.6
million, $2.1 million, and $1.1 million in fiscal years 2004, 2003, and 2002, respectively. The Company also uses a variety of operating leases to fund the purchase of operating equipment.



The Companys primary financing activity in fiscal years 2004, 2003, and 2002 was
borrowing and repayment under the Companys debt agreements.



The Company
has entered into a financing agreement with CIT Group/Business Credit, Inc. (CIT) which provides a revolving credit facility up to $20 million. The revolving loan is secured by the assets of the Company. The interest rate provisions allow for a
variable rate based on either the prime rate or LIBOR rate. The agreement specifies four alternative levels of margin to be added to these base rates depending on compliance with certain financial covenants. The range of interest being paid to CIT
on outstanding balances was 4.34  4.75% as of July 3, 2004. The agreement and subsequent amendments contain financial covenants that relate to total equity, earnings before interest, taxes, depreciation and amortization, and a minimum fixed
charge ratio. The revolving loan matures August 23, 2006. As of July 3, 2004, the Company was in compliance with all loan covenants. At July 3, 2004, the outstanding revolving loan balance was $10.9 million compared to $9.9 million at fiscal year
end June 28, 2003. The increase in the loan balance was due primarily to required payments to F&G in compliance with the settlement of the legal judgment and capital expenditures. Based on eligible collateral, approximately $9.1 million was
available from the revolving line of credit as of July 3, 2004.



In addition to
the Companys revolving credit facility payment obligations and normal operating expenses, the Company has a $2.5 million litigation settlement payment obligation, various lease commitments, and other long term obligations of $1.1 million.



The Company believes that funds available under the revolving credit facility,
projected cash from operations, and leasing capabilities will be sufficient to meet our working and fixed capital requirements through fiscal year 2005 and the foreseeable future.



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##### Table of Contents

Contractual Obligations and Commitments



In the normal course of business, the Company enters into contracts, which obligate the Company to make payments in the future.



The table below sets forth the Companys significant future obligations by fiscal
year:



Payments Due by Fiscal Year (in thousands)



|                                |  |       |        |      |   |       |  |      |       |      |        |      |     |            |     |  |    
|------------------------------- |  | ----- | ------ | ---- | - | ----- |  | ---- | ----- | ---- | ------ | ---- | --- | ---------- | --- |  | ---
|                                |  | Total |        | 2005 |   | 2006  |  | 2007 |       | 2008 |        | 2009 |     | Thereafter
|Litigation Settlement(1)        |  | $     | 2,461  |      | $ | 925   |  | $    | 1,536 |      |        |      |     |            |     |  |    
|CIT Revolving Loan(2)           |  |       | 10,851 |      |   |       |  |      |       |      | 10,851 |      |     |            |     |  |    
|Capital and Operating Leases(3) |  |       | 7,536  |      |   | 3,173 |  |      | 1,896 |      | 868    |      | 454 |            | 445 |  | 700
|Purchase Orders(4)              |  |       |        |      |   |       |  |      |       |      |        |      |     |            |     |  |    

---

|(1) | For an in-depth discussion of the litigation settlement, please see the Consolidated
Financial Statements at Note 8, Commitments and Contingencies. In accordance with the terms of the litigation settlement, the Company must pay a minimum of $200,000 or fifty percent of its operating earnings each quarter whichever is
greater. If the entire remainder of the settlement is not paid by December 15, 2005 additional amounts must be paid. Because payments exceeding $200,000 depend entirely on the Companys operating earnings, which are not readily determinable,
the above table indicates the minimum payments for fiscal year 2005, and the remaining amount owing after those payments is shown in fiscal year 2006. At this time, the Company expects to pay the entire settlement amount by December 15, 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The terms of the CIT revolving loan are discussed in the consolidated financial statements at
Note 4, Long-Term Obligations. The Companys current financing agreement with CIT terminates on August 23, 2006, at which time the unpaid balance of the revolving loan will become immediately payable. However, the Company will more
likely than not extend or replace its revolving loan agreement prior to that date. The amount payable on the Companys revolving loan changes daily depending upon the amount of cash borrowed to support its operations and the amount of customer
payments received. Under the terms of the Companys agreement with CIT, all customers payments are applied against the outstanding revolving loan balance as soon as the amounts clear through the banking system.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under the terms of the revolving credit agreement, the Company must meet a number of financial covenants. As of July 3, 2004 the Company was in
compliance with all of its loan covenants. Breaching one or more of these covenants could have a material impact on the Companys operations or financial condition.

|(3) | The Company maintains vertically integrated manufacturing operations in Mexico and Shanghai,
China. Such operations are heavily dependent upon technically superior manufacturing equipment including molding machines in various tonnages, SMT lines, and automated insertion and test equipment for the various products the Company is capable of
producing.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, the Company leases most of its administrative and manufacturing facilities. A complete discussion of
properties can be found in Part 1, Item 2 at Properties. Leases have proven to be an acceptable method for the Company to acquire new or replacement equipment and to maintain many facilities with a minimum impact on its operating cash
flows.

|(4) | As of July 3, 2004, the Company had open purchase order commitments for materials and other
supplies of approximately $32 million. Of the $32 million in open purchase orders, there are various blanket orders for annual requirements. Actual needs under these blanket purchase orders fluctuate with the Companys manufacturing levels. In
addition, the Company has contracts with its customers that minimize its exposure to losses for material purchased within lead-times necessary to meet customer forecasts. Purchase orders generally can be cancelled without penalty within specified
ranges that are determined in negotiations with the Companys suppliers. These agreements depend in part on the type of product purchased as well as the circumstances surrounding any requested cancellations.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition to the cash requirements presented in tabular format, the Company also owes its
suppliers approximately $24.4 million for accounts payable and shipments in transit at the end of the fiscal year. The Company generally pays its suppliers in a range from 30 to 120 days depending on terms offered. Quarterly payments to suppliers
normally average between $20 and $25 million. These payments are financed by the Companys revolving line of credit.



The Company believes that funds available under the revolving credit facility and internally generated funds can satisfy cash requirements for a period in excess of 12
months.



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Critical Accounting Policies



Revenue Recognition: The Company recognizes revenue primarily when products are shipped. Staff Accounting Bulletin 101 states that
revenue generally is realized or realizable and earned when all of the following criteria are met:



| | Persuasive evidence of an arrangement exists
|- | --------------------------------------------



| | Delivery has occurred or services have been rendered
|- | ----------------------------------------------------



| | The sellers price to the buyer is fixed or determinable
|- | --------------------------------------------------------



| | Collectibility is reasonably assured
|- | ------------------------------------



The Company believes that it meets the above criteria for the following reasons:



| | Customer purchase orders confirming the price and shipping terms are required prior to shipment.
|- | ------------------------------------------------------------------------------------------------



| | The terms of the Companys sales are generally FOB shipping point, meaning that the customer takes ownership of the goods and assumes the risk of loss when the goods leave the
Companys premises.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The sellers price to the buyer is fixed or determinable  as noted, we require a customer purchase order, which confirms the price and shipping terms.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | Collectibility is reasonably assured  the credit terms for customers are pre-established so that collection of the account can be reasonably assured.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------



Inactive, Obsolete and Surplus Inventory Reserve: The Company reserves for
inventories that it deems inactive, obsolete or surplus. This reserve is calculated based upon the demand for the products that the Company produces. Demand is determined by expected sales or customer forecasts. If expected sales do not materialize,
then the Company would have inventory in excess of its reserves and would have to charge the excess against future earnings. In the case where the Company has purchased material based upon a customers forecast, the Company is usually covered
by lead-time assurance agreements with each customer. These contracts state that the financial liability for material purchased within lead-time and based upon the customers forecasts, lies with the customer. If the Company purchases material
outside the lead-time assurance agreement and the customers forecasts do not materialize, the Company would have the financial liability and would have to charge the excess against future earnings.



Allowance for Doubtful Accounts: The Company values its accounts receivable net of an
allowance for doubtful accounts. This allowance is based on estimates of the portion of accounts receivable that may not be collected in the future, and the amount of this allowance is disclosed in the Companys Consolidated Balance Sheets. The
estimates used are based primarily on specific identification of potentially uncollectible accounts. Such accounts are identified using publicly available information in conjunction with evaluations of current payment activity. However, if any of
the Companys customers were to develop unexpected and immediate financial problems that would prevent payment of open invoices, the Company could incur additional and possibly material expenses that would negatively impact earnings.



Accrued Warranty: An accrual is made for expected warranty costs, with
the related expense recognized in cost of goods sold. Management reviews the adequacy of this accrual quarterly based on historical analysis and anticipated product returns. Over the course of the past three years, the Companys warranty
expense has decreased. The declines in warranty expense and the related accrual account are directly related to the change in the composition of the Companys revenue from keyboards to EMS products. As the Company has made the transition from
manufacturing primarily keyboards to primarily EMS products, its exposure to warranty claims has declined significantly. The Companys warranty period for keyboards is generally longer than that for EMS products. Also the Company does not
warrant design defects for EMS customers.



Goodwill



In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Under the
statement, the Company records intangible assets that are acquired individually or with a group of other assets in the financial statements at acquisition. Goodwill will be tested for impairment annually. The Company adopted SFAS No. 142 on June 30,
2002, and completed its impairment test during the second quarters of fiscal years 2004 and 2003. The tests did not indicate an impairment of the Companys stated goodwill of $765,000.



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##### Table of Contents

The net effect of adopting this accounting standard was to eliminate annual amortization expense of $128,000. In
accordance with SFAS No. 142, the effect of this accounting change is reflected prospectively. Comparative disclosure as if the change had been retroactively applied to fiscal year 2002 is as follows (no tax effect has been included because of
offsetting tax valuations):



|                                                     |  |                                       |      |      |   |        |  |   |         |  
|---------------------------------------------------- |  | ------------------------------------- | ---- | ---- | - | ------ |  | - | ------- | -
|                                                     |  | Fiscal Years Ended June               |     
|                                                     |  | 2004                                  |      | 2003 |   | 2002   | 
|                                                     |  | (in thousands, except per share data) |     
|Reported net income (loss)                           |  | $                                     | 110  |      | $ | 13,409 |  | $ | (25,362 | )
|Add back: goodwill amortization                      |  |                                       |     |      |   |       |  |   | 128     |  
|                                                     |  |                                       |      |      |   |        |  |   |         |  
|Total                                                |  | $                                     | 110  |      | $ | 13,409 |  | $ | (25,234 | )
|                                                     |  |                                       |      |      |   |        |  |   |         |  
|Basic and diluted earnings (loss) per share:         |  |                                       |      |      |   |        |  |   |         |  
|Reported net income (loss)                           |  | $                                     | 0.01 |      | $ | 1.39   |  | $ | (2.62   | )
|                                                     |  |                                       |     
|Goodwill amortization                                |  |                                       |     |      |   |       |  |   | .01     |  
|                                                     |  |                                       |      |      |   |        |  |   |         |  
|Adjusted basic and diluted earnings (loss) per share |  | $                                     | 0.01 |      | $ | 1.39   |  | $ | (2.61   | )
|                                                     |  |                                       |      |      |   |        |  |   |         |  



New Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). In December 2003, the FASB issued a revision to FIN 46 to make certain technical corrections and address certain implementation issues that had
arisen. FIN 46, as revised, clarifies existing accounting literature regarding the consolidation of entities in which a company holds a controlling financial interest. A majority voting interest in an entity has generally been considered
indicative of a controlling financial interest. FIN 46 specifies other factors (variable interests) which must be considered when determining whether a company holds a controlling financial interest in, and therefore must consolidate, an entity
(variable interest entities). The adoption of FIN 46 had no impact on the Companys overall financial position and results of operations as the Company has no variable interest entities.



In April 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on Derivative
Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133.
This statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the
Companys financial statements.



In May 2003, the FASB issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. Financial instruments that are within the scope of the statement, which previously were often classified as equity, must now be classified as liabilities. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Companys financial statements.



In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (SAB 104),
Revenue Recognition. SAB 104 supercedes SAB 101, Revenue Recognition in Financial Statements. The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue
arrangements, superceded as a result of the issuance of EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. Additionally, SAB 104 rescinds the SECs Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed
to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on the Companys financial statements.



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RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE RESULTS



The following risks and uncertainties could affect the Companys actual results and
could cause results to differ materially from past results or those contemplated by the Companys forward-looking statements. When used herein, the words expects, believes, anticipates and similar expressions
are intended to identify forward-looking statements.



Potential Fluctuations
in Quarterly Results The Companys quarterly operating results have varied in the past and may vary in the future due to a variety of factors, including changes in overall demand for customers products, success of customers
programs, timing of new programs, new product introductions or technological advances by the Company, its customers and its competitors and changes in pricing policies by the Company, its customers, its suppliers and its competitors. For example,
the Company relies on customers forecasts to plan its business. If those forecasts are overly optimistic, the Companys revenues and profits may fall short of expectations. Conversely, if those forecasts are too conservative, the Company
could have an unexpected increase in revenues and profits. The products which the Company manufactures for its customers have relatively short product lifecycles, therefore the Companys business, operating results and financial condition are
dependent in significant part on the Companys ability to obtain orders from new customers and new product programs from existing customers.



Competition The EMS industry is intensely competitive. Competitors may offer customers lower prices on certain high volume programs. This could result in price
reductions, reduced margins and loss of market share, all of which would materially and adversely affect the Companys business, operating results and financial condition. The Companys inability to provide comparable or better
manufacturing services at a lower cost than its competitors could cause sales to decline. In addition, competitors can copy the Companys non-proprietary designs after the Company has invested in development of products for customers, thereby
enabling such competitors to offer lower prices on such products due to savings in development costs.



Concentration of Major Customers At present, the Companys customer base is highly concentrated and could become even more concentrated. The Companys largest EMS customer accounted for 16% of net
sales in fiscal year 2004. This same customer accounted for 31% of sales in 2003 and 39% in 2002. For the fiscal years ended 2004, 2003, and 2002, the five largest customers accounted for 58%, 64% and 85% of total sales, respectively. There can be
no assurance that the Companys principal customers will continue to purchase products from the Company at current levels. Moreover, the Company typically does not enter into long-term volume purchase contracts with its customers, and the
Companys customers have certain rights to extend or delay the shipment of their orders. The loss of one or more of the Companys major customers, or the reduction, delay or cancellation of orders from such customers, could materially and
adversely affect the Companys business, operating results and financial condition.



Dependence on Suppliers The Company is dependent on many suppliers, including sole source suppliers, to provide key components and raw materials used in manufacturing customers products. Delays in
deliveries from suppliers or the inability to obtain sufficient quantities of components and raw materials could cause delays or reductions in shipment of products to our customers which could adversely affect the Companys operating results
and damage customer relationships.



Dependence on Key Personnel The
Companys future success depends in large part on the continued service of its key technical, marketing and management personnel and on its ability to continue to attract and retain qualified employees. The competition for such personnel is
intense and there can be no assurance that the Company will be successful in attracting and retaining such personnel. The loss of key employees could have a material adverse effect on the Companys business, operating results and financial
condition.



Foreign Manufacturing Operations Virtually all
products manufactured by the Company are produced at the Companys facilities located in Mexico and China. Accordingly, the Companys operations are subject to a variety of risks unique to international operations including import and
export duties and value added taxes, import and export regulation changes, the burden and cost of compliance with foreign laws and foreign economic and political risk.



Technological Change and New Product Risk The markets for the Companys customers products is characterized by rapidly
changing technology, evolving industry standards, frequent new product introductions and relatively short product life cycles. The introduction of products embodying new technologies or the emergence of new industry standards can render existing
products obsolete or unmarketable. The Companys success will depend upon its customers ability to enhance existing products and to develop and introduce, on a timely and cost-effective basis, new products that keep pace with
technological developments and emerging industry standards and address evolving and increasingly sophisticated customer requirements. Failure of the Companys



16



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##### Table of Contents

customers to do so could substantially harm the Companys customers competitive positions. There can be no
assurance that the Companys customers will be successful in identifying, developing and marketing products that respond to technological change, emerging industry standards or evolving customer requirements.



Dilution and Stock Price Volatility As of July 3, 2004, there were outstanding options
for the purchase of approximately 2,072,000 shares of common stock of the Company (Common Stock), of which options for approximately 1,914,000 shares were vested and exercisable. Holders of the Common Stock will suffer immediate and substantial
dilution to the extent outstanding options to purchase the Common Stock are exercised. The stock price of the Company may be subject to wide fluctuations and possible rapid increases or declines over a short time period. These fluctuations may be
due to factors specific to the Company such as variations in quarterly operating results or changes in analysts earnings estimates, or to factors relating to the EMS and computer industries or to the securities markets in general, which, in
recent years, have experienced significant price fluctuations. These fluctuations often have been unrelated to the operating performance of the specific companies whose stocks are traded.



Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Company is subject to the risk of fluctuating interest rates in the normal course of business. The Companys major market risk relates to its secured debt. The Companys debt is secured by substantially
all of the Companys assets. The interest rates applicable to the Companys revolving loan fluctuate with the JP Morgan Chase Bank prime rate and LIBOR rates.



The Company does not enter into derivative transactions or leveraged swap agreements.



Although the Company has international operations, the functional currency for all active
subsidiaries is the U.S. dollar. The Company imports for its own use raw materials that are used in its manufacturing operations. Substantially all of the Companys purchases are denominated in U.S. dollars and are paid under normal trade
terms.



The table below presents principal (or notional) amounts and related
weighted average variable rates by fiscal year of maturity. The weighted average variable interest rates for fiscal years 2004 through 2006 are estimated based on current rates as of August 23, 2004. These forward rates have been increased by
current levels of margins based on the financing agreement with CIT. The Companys revolving debt could increase or decrease depending upon cash needs over the period of time that the financing agreement remains in place with CIT. The JP Morgan
Chase Bank prime rate and LIBOR will fluctuate with the market and could go up or down depending on market conditions.



|                       |  |              |  |      |       |      |                         |   |  |   |        |  |   |       
|---------------------- |  | ------------ |  | ---- | ----- | ---- | ----------------------- | - |  | - | ------ |  | - | ------
|                       |  | Fiscal Years |  |      | Total |      | Fair Value July 3, 2004
|(In thousands)         |  | 2005         |  | 2006 |       | 2007 |                         |   | 
|Interest rate risk:    |  |              |  |      |       |      |                         |   |  |   |        |  |   |       
|Secured revolving debt |  |              |  |      |       | $    | 10,851                  |   |  | $ | 10,851 |  | $ | 10,851
|Average interest rate  |  |              |  |      |       |      | 4.56                    | % |  |   |        |  |   |       



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Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



Reports of Independent Registered Public Accounting Firms



The
Board of Directors and Shareholders

Key Tronic Corporation

Spokane, Washington



We have audited the accompanying consolidated
balance sheets of Key Tronic Corporation and subsidiaries (the Company) as of July 3, 2004 and June 28, 2003, and the related consolidated statements of operations, shareholders equity and cash flows for the years then ended. We have also
audited the schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule 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 and schedule are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedule. 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 Key Tronic Corporation and
subsidiaries at July 3, 2004 and June 28, 2003, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.



Also, in our opinion, the schedule presents fairly, in all material respects, the information
set forth therein.



As discussed in Note 1 to the consolidated financial
statements, the Company changed its method for accounting for goodwill in fiscal 2003.



/s/ BDO Seidman, LLP



Spokane, Washington

August 19, 2004



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To the Shareholders and Board of Directors of Key Tronic Corporation:



We have audited the accompanying consolidated statements of operations, shareholders
equity, and cash flows of Key Tronic Corporation and subsidiaries (the Company) for the year ended June 29, 2002. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audit.



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 audit provides a reasonable basis for our opinion.



In our opinion, such consolidated financial statements present fairly, in all material respects the results of operations and cash flows of Key Tronic Corporation and
subsidiaries for the year ended June 29, 2002, in conformity with accounting principles generally accepted in the United States of America.



|                         
|-------------------------
|/s/ Deloitte & Touche LLP
|Deloitte & Touche LLP    
|Seattle, Washington      
|August 16, 2002          



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KEY TRONIC CORPORATION

CONSOLIDATED BALANCE SHEETS



|                                                                                                                  |  |              |         |   |               |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ------------- | - | ------- | -
|(In thousands)                                                                                                    |  | July 3, 2004 |         |   | June 28, 2003 |  
|ASSETS                                                                                                            |  |              |         |   |               |   |         |  
|                                                                                                                  |  |             
|Current assets:                                                                                                   |  |              |         |   |               |   |         |  
|Cash and cash equivalents                                                                                         |  | $            | 600     |   |               | $ | 956     |  
|Trade receivables, less allowance for doubtful accounts of $60 and $105                                           |  |              | 24,439  |   |               |   | 17,078  |  
|Inventories                                                                                                       |  |              | 27,848  |   |               |   | 24,151  |  
|Other                                                                                                             |  |              | 1,833   |   |               |   | 2,050   |  
|                                                                                                                  |  |              |         |   |               |   |         |  
|Total current assets                                                                                              |  |              | 54,720  |   |               |   | 44,235  |  
|                                                                                                                  |  |              |         |   |               |   |         |  
|Property, plant and equipment, net                                                                                |  |              | 11,131  |   |               |   | 11,982  |  
|                                                                                                                  |  |             
|Other assets:                                                                                                     |  |              |         |   |               |   |         |  
|Restricted cash                                                                                                   |  |              | 705     |   |               |   | 1,142   |  
|Other, net of accumulated amortization of $696 and $565                                                           |  |              | 617     |   |               |   | 1,001   |  
|Goodwill                                                                                                          |  |              | 765     |   |               |   | 765     |  
|                                                                                                                  |  |              |         |   |               |   |         |  
|Total assets                                                                                                      |  | $            | 67,938  |   |               | $ | 59,125  |  
|                                                                                                                  |  |              |         |   |               |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                              |  |              |         |   |               |   |         |  
|                                                                                                                  |  |             
|Current liabilities:                                                                                              |  |              |         |   |               |   |         |  
|Accounts payable                                                                                                  |  | $            | 24,354  |   |               | $ | 13,145  |  
|Accrued compensation and vacation                                                                                 |  |              | 4,015   |   |               |   | 4,213   |  
|Current portion of litigation settlement                                                                          |  |              | 925     |   |               |   | 1,124   |  
|Current portion of other long-term obligations                                                                    |  |              | 606     |   |               |   | 730     |  
|Other                                                                                                             |  |              | 1,352   |   |               |   | 3,240   |  
|                                                                                                                  |  |              |         |   |               |   |         |  
|Total current liabilities                                                                                         |  |              | 31,252  |   |               |   | 22,452  |  
|                                                                                                                  |  |              |         |   |               |   |         |  
|Long-term liabilities:                                                                                            |  |              |         |   |               |   |         |  
|Revolving loan                                                                                                    |  |              | 10,851  |   |               |   | 9,864   |  
|Litigation settlement                                                                                             |  |              | 1,536   |   |               |   | 2,593   |  
|Other long-term obligations                                                                                       |  |              | 1,065   |   |               |   | 1,096   |  
|                                                                                                                  |  |              |         |   |               |   |         |  
|Total long-term liabilities                                                                                       |  |              | 13,452  |   |               |   | 13,553  |  
|                                                                                                                  |  |              |         |   |               |   |         |  
|Commitments and contingencies (Notes 4 and 8)                                                                     |  |              |         |   |               |   |         |  
|                                                                                                                  |  |             
|Shareholders equity                                                                                              |  |              |         |   |               |   |         |  
|Common stock, no par value, authorized 25,000 shares; issued and outstanding 9,676 and 9,673 shares, respectively |  |              | 38,397  |   |               |   | 38,393  |  
|Accumulated deficit                                                                                               |  |              | (15,163 | ) |               |   | (15,273 | )
|                                                                                                                  |  |              |         |   |               |   |         |  
|Total shareholders equity                                                                                        |  |              | 23,234  |   |               |   | 23,120  |  
|                                                                                                                  |  |              |         |   |               |   |         |  
|Total liabilities and shareholders equity                                                                        |  | $            | 67,938  |   |               | $ | 59,125  |  
|                                                                                                                  |  |              |         |   |               |   |         |  



See accompanying notes to consolidated
financial statements.



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KEY TRONIC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                   |  |              |         |   |               |   |         |               |  |   |         |  
|-------------------------------------------------- |  | ------------ | ------- | - | ------------- | - | ------- | ------------- |  | - | ------- | -
|                                                   |  | Years Ended  |        
|(In thousands, except per share amounts)           |  | July 3, 2004 |         |   | June 28, 2003 |   |         | June 29, 2002 | 
|Net sales                                          |  | $            | 148,901 |   |               | $ | 130,894 |               |  | $ | 175,591 |  
|Cost of sales                                      |  |              | 135,664 |   |               |   | 115,936 |               |  |   | 160,606 |  
|                                                   |  |              |         |   |               |   |         |               |  |   |         |  
|Gross profit on sales                              |  |              | 13,237  |   |               |   | 14,958  |               |  |   | 14,985  |  
|                                                   |  |              |        
|Operating expenses:                                |  |              |         |   |               |   |         |               |  |   |         |  
|Research, development and engineering              |  |              | 2,583   |   |               |   | 2,913   |               |  |   | 2,554   |  
|Selling                                            |  |              | 1,900   |   |               |   | 2,250   |               |  |   | 2,793   |  
|General and administrative                         |  |              | 6,965   |   |               |   | 7,183   |               |  |   | 8,414   |  
|                                                   |  |              |         |   |               |   |         |               |  |   |         |  
|Operating income                                   |  |              | 1,789   |   |               |   | 2,612   |               |  |   | 1,224   |  
|                                                   |  |              |        
|Interest expense, net                              |  |              | 1,091   |   |               |   | 1,026   |               |  |   | 1,314   |  
|Litigation (settlement) judgment expense           |  |              |        |   |               |   | (12,186 | )             |  |   | 20,214  |  
|Other income, net                                  |  |              | (23     | ) |               |   | (237    | )             |  |   | (358    | )
|                                                   |  |              |         |   |               |   |         |               |  |   |         |  
|Income (loss) before income taxes                  |  |              | 721     |   |               |   | 14,009  |               |  |   | (19,946 | )
|                                                   |  |              |         |   |               |   |         |               |  |   |         |  
|Income tax provision                               |  |              | 611     |   |               |   | 600     |               |  |   | 5,416   |  
|                                                   |  |              |         |   |               |   |         |               |  |   |         |  
|Net income (loss)                                  |  | $            | 110     |   |               | $ | 13,409  |               |  | $ | (25,362 | )
|                                                   |  |              |         |   |               |   |         |               |  |   |         |  
|Income (loss) per share:                           |  |              |         |   |               |   |         |               |  |   |         |  
|                                                   |  |              |        
|Income (loss) per common share  basic and diluted |  | $            | 0.01    |   |               | $ | 1.39    |               |  | $ | (2.62   | )
|                                                   |  |              |        
|Weighted average shares outstanding  basic        |  |              | 9,673   |   |               |   | 9,673   |               |  |   | 9,673   |  
|Weighted average shares outstanding  diluted      |  |              | 9,793   |   |               |   | 9,673   |               |  |   | 9,673   |  



See accompanying notes to consolidated
financial statements.



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KEY TRONIC CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY



|                             |  |              |  |                            |        |  |                                     |         |   |       |   |      |   |  |   |         |  
|---------------------------- |  | ------------ |  | -------------------------- | ------ |  | ----------------------------------- | ------- | - | ----- | - | ---- | - |  | - | ------- | -
|                             |  | Common Stock |  | RetainedEarnings/(Deficit) |        |  | AccumulatedOtherComprehensiveIncome |         |   | Total |  
|(In thousands)               |  | Shares       |  | Amount                     |        |  |                                    
|Balances, June 30, 2001      |  | 9,673        |  | $                          | 38,393 |  | $                                   | (3,320  | ) |       | $ | 245  |   |  | $ | 35,318  |  
|Comprehensive income:        |  |              |  |                            |        |  |                                     |         |   |       |   |      |   |  |   |         |  
|Net loss  2002              |  |              |  |                            |        |  |                                     | (25,362 | ) |       |   |      |   |  |   | (25,362 | )
|Other comprehensive income:  |  |              |  |                            |        |  |                                     |         |   |       |   |      |   |  |   |         |  
|Foreign currency translation |  |              |  |                            |        |  |                                     |         |   |       |   | (245 | ) |  |   | (245    | )
|                             |  |              |  |                            |        |  |                                     |         |   |       |   |      |   |  |   |         |  
|Total comprehensive income   |  |              |  |                            |        |  |                                     |         |   |       |   |      |   |  |   | (25,607 | )
|                             |  |              |  |                            |        |  |                                     |         |   |       |   |      |   |  |   |         |  
|Balances, June 29, 2002      |  | 9,673        |  |                            | 38,393 |  |                                     | (28,682 | ) |       |   |     |   |  |   | 9,711   |  
|                             |  |              |  |                            |        |  |                                     |         |   |       |   |      |   |  |   |         |  
|Comprehensive income:        |  |              |  |                            |        |  |                                     |         |   |       |   |      |   |  |   |         |  
|Net income  2003            |  |              |  |                            |        |  |                                     | 13,409  |   |       |   |      |   |  |   | 13,409  |  
|                             |  |              |  |                            |        |  |                                     |         |   |       |   |      |   |  |   |         |  
|Balances, June 28, 2003      |  | 9,673        |  |                            | 38,393 |  |                                     | (15,273 | ) |       |   |     |   |  |   | 23,120  |  
|                             |  |              |  |                            |        |  |                                     |         |   |       |   |      |   |  |   |         |  
|Comprehensive income:        |  |              |  |                            |        |  |                                     |         |   |       |   |      |   |  |   |         |  
|Net income  2004            |  |              |  |                            |        |  |                                     | 110     |   |       |   |      |   |  |   | 110     |  
|Exercise of stock options    |  | 3            |  |                            | 4      |  |                                     |         |   |       |   |      |   |  |   | 4       |  
|                             |  |              |  |                            |        |  |                                     |         |   |       |   |      |   |  |   |         |  
|Balances, July 3, 2004       |  | 9,676        |  | $                          | 38,397 |  | $                                   | (15,163 | ) |       | $ |     |   |  | $ | 23,234  |  
|                             |  |              |  |                            |        |  |                                     |         |   |       |   |      |   |  |   |         |  



See accompanying notes to consolidated
financial statements.



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KEY TRONIC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                            |  |              |          |   |               |   |          |               |  |   |          |  
|------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ------------- | - | -------- | ------------- |  | - | -------- | -
|                                                                                            |  | Years Ended  |         
|(In thousands)                                                                              |  | July 3, 2004 |          |   | June 28, 2003 |   |          | June 29, 2002 | 
|Increase (decrease) in cash and cash equivalents:                                           |  |              |          |   |               |   |          |               |  |   |          |  
|Cash flows from operating activities:                                                       |  |              |          |   |               |   |          |               |  |   |          |  
|Net income (loss)                                                                           |  | $            | 110      |   |               | $ | 13,409   |               |  | $ | (25,362  | )
|Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: |  |              |          |   |               |   |          |               |  |   |          |  
|Depreciation and amortization                                                               |  |              | 2,957    |   |               |   | 3,016    |               |  |   | 4,475    |  
|Accretion of deferred gain on sale of building                                              |  |              | (78      | ) |               |   | (78      | )             |  |   | (78      | )
|Provision for obsolete inventory                                                            |  |              | 162      |   |               |   | 203      |               |  |   | 2,225    |  
|Provision for (recovery of) doubtful receivables                                            |  |              |         |   |               |   | (56      | )             |  |   | 175      |  
|Provision for warranty                                                                      |  |              | 193      |   |               |   | 150      |               |  |   | 215      |  
|Litigation judgment (settlement)                                                            |  |              |         |   |               |   | (12,186  | )             |  |   | 19,479   |  
|(Gain) loss on sale of assets                                                               |  |              | 14       |   |               |   | 20       |               |  |   | (559     | )
|Deferred income tax provision                                                               |  |              |         |   |               |   |         |               |  |   | 12,866   |  
|Foreign currency translation                                                                |  |              |         |   |               |   |         |               |  |   | (245     | )
|Changes in operating assets and liabilities:                                                |  |              |          |   |               |   |          |               |  |   |          |  
|Trade receivables                                                                           |  |              | (7,361   | ) |               |   | 3,956    |               |  |   | 521      |  
|Inventories                                                                                 |  |              | (3,859   | ) |               |   | (5,959   | )             |  |   | (19      | )
|Other assets                                                                                |  |              | 145      |   |               |   | (22      | )             |  |   | 2,376    |  
|Accounts payable                                                                            |  |              | 11,209   |   |               |   | (1,264   | )             |  |   | (6,976   | )
|Accrued compensation and vacation                                                           |  |              | (198     | ) |               |   | 1,410    |               |  |   | 188      |  
|Changes in deferred tax assets                                                              |  |              |         |   |               |   |         |               |  |   | (8,350   | )
|Deferred sales proceeds                                                                     |  |              |         |   |               |   |         |               |  |   | (349     | )
|Litigation settlement                                                                       |  |              | (1,256   | ) |               |   | (3,576   | )             |  |   |         |  
|Other liabilities                                                                           |  |              | (2,055   | ) |               |   | 433      |               |  |   | 337      |  
|                                                                                            |  |              |          |   |               |   |          |               |  |   |          |  
|Cash provided (used) by operating activities                                                |  |              | (17      | ) |               |   | (544     | )             |  |   | 919      |  
|                                                                                            |  |              |          |   |               |   |          |               |  |   |          |  
|Cash flows from investing activities:                                                       |  |              |          |   |               |   |          |               |  |   |          |  
|Purchase of property and equipment                                                          |  |              | (1,633   | ) |               |   | (2,128   | )             |  |   | (1,142   | )
|Decrease (increase) in restricted cash                                                      |  |              | 437      |   |               |   | (862     | )             |  |   | (280     | )
|Proceeds from sale of property and equipment and assets held for sale                       |  |              | 4        |   |               |   | 46       |               |  |   | 1,711    |  
|                                                                                            |  |              |          |   |               |   |          |               |  |   |          |  
|Cash provided (used) by investing activities                                                |  |              | (1,192   | ) |               |   | (2,944   | )             |  |   | 289      |  
|                                                                                            |  |              |          |   |               |   |          |               |  |   |          |  
|Cash flows from financing activities:                                                       |  |              |          |   |               |   |          |               |  |   |          |  
|Payment of financing costs                                                                  |  |              | (35      | ) |               |   | (150     | )             |  |   | (504     | )
|Proceeds from exercise of stock options                                                     |  |              | 4        |   |               |   |         |               |  |   |         |  
|Proceeds from long-term debt                                                                |  |              | 538      |   |               |   |         |               |  |   |         |  
|Repayment of long-term debt                                                                 |  |              | (641     | ) |               |   |         |               |  |   |         |  
|Borrowing under revolving credit agreement                                                  |  |              | 146,805  |   |               |   | 139,000  |               |  |   | 177,432  |  
|Repayment of revolving credit agreement                                                     |  |              | (145,818 | ) |               |   | (135,611 | )             |  |   | (179,068 | )
|                                                                                            |  |              |          |   |               |   |          |               |  |   |          |  
|Cash provided (used) by financing activities                                                |  |              | 853      |   |               |   | 3,239    |               |  |   | (2,140   | )
|                                                                                            |  |              |          |   |               |   |          |               |  |   |          |  
|Increase (decrease) in cash and cash equivalents                                            |  |              | (356     | ) |               |   | (249     | )             |  |   | (932     | )
|                                                                                            |  |              |         
|Cash and cash equivalents, beginning of year                                                |  |              | 956      |   |               |   | 1,205    |               |  |   | 2,137    |  
|                                                                                            |  |              |          |   |               |   |          |               |  |   |          |  
|Cash and cash equivalents, end of year                                                      |  | $            | 600      |   |               | $ | 956      |               |  | $ | 1,205    |  
|                                                                                            |  |              |          |   |               |   |          |               |  |   |          |  
|Supplemental cash flow information:                                                         |  |              |          |   |               |   |          |               |  |   |          |  
|Interest payments                                                                           |  | $            | 865      |   |               | $ | 763      |               |  | $ | 1,340    |  
|Income tax payments, net of refunds                                                         |  | $            | 1,015    |   |               | $ | 348      |               |  | $ | 1,208    |  



See accompanying notes to consolidated
financial statements.



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. SIGNIFICANT ACCOUNTING POLICIES



Business



Key Tronic Corporation and subsidiaries (the Company) is engaged in electronic manufacturing services (EMS) for original equipment manufacturers (OEMs), and also
manufactures keyboards and other input devices.



Principles of Consolidation



The consolidated financial statements include the Company and its wholly
owned subsidiaries in Ireland, Mexico, and China. Intercompany balances and transactions have been eliminated in consolidation. The Companys former subsidiaries, KT FSC and Key Tronic Far East Pte Ltd, were legally dissolved on September 5,
2001, and February 22, 2003, respectively. The dissolution of these subsidiaries did not have a material impact on the Companys financial statements, since the subsidiaries had been inactive for several years.



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Significant estimates include the allowance for doubtful receivables, the provision for obsolete and non-saleable inventories, the valuation allowances on deferred tax assets, valuation of goodwill, and the provision for
warranty costs. Actual results could differ from those estimates.



Cash
Equivalents



The Company considers investments with an original maturity
of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.



The restricted cash balance includes an approximately $500,000 deposit required by the state of Washington for the Companys estimated maximum workers
compensation liability for the period in which the Company was self-insured. The Company no longer self-insures workers compensation liabilities but the deposit will be required to be maintained for a number of years into the future. The
remaining amounts of $205,000 and $642,000 in restricted cash at July 3, 2004 and June 28, 2003, respectively, are amounts in the Companys bank account that cannot be used for any other purpose than to pay down the Companys long term
revolving line of credit.



Allowance for Doubtful Accounts



The Company evaluates the collectibility of accounts receivable and records an allowance
for doubtful accounts, which reduces the receivables to an amount that management reasonably estimates will be collected. A specific allowance is recorded against receivables that are considered to be impaired based on the Companys knowledge
of the financial condition of the customer. In determining the amount of the allowance, the Company considers several factors including the aging of the receivables, the current business environment, and historical experience.



Inventories



Inventories are stated at the lower of cost or market. Cost is determined principally using the first-in, first-out (FIFO) method. The
Company provides for obsolete and non-saleable inventories based on specific identification of inventory against current demand and recent usage.



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##### Table of Contents

Property, Plant and Equipment



Property, plant and equipment are carried at cost and depreciated using straight-line methods over the expected lives of the assets.
Constructed molds and dies are expensed as incurred if there is no future utility beyond one year. Capitalized molds and dies are depreciated over the expected useful lives of one to three years.



Impairment of Long-lived Assets



The Company, using its best estimates based on reasonable and supportable assumptions and
projections, reviews assets for impairment whenever events or changes in circumstances have indicated that the carrying amount of its assets might not be recoverable. Impaired assets are reported at the lower of cost or fair value. No assets were
written down during the fiscal years ended July 3, 2004, June 28, 2003, and June 29, 2002.



Deferred Loan Fees



Deferred loan fees
are amortized using the interest method over the term of the related loan agreement.



Accrued Warranty



An accrual is made for expected warranty
costs, with the related expense recognized in cost of goods sold. Management reviews the adequacy of this accrual quarterly based on historical analyses and anticipated product returns.



Self-funded Insurance



The Company began to self-fund its domestic employee health plan on June 30, 2004. The Company contracted a separate administrative service company to supervise and
administer the program and act as representative. The Company also insures for claims exceeding $50,000 and if the aggregate annual claims amount to more than 125% of expected claims for the plan year ending June 30, 2005. We estimate our exposure
for claims incurred but not paid at the end of each reporting period and use historical information supplied by our insurance carrier and broker to estimate our liability for these claims. This liability is subject to a total limitation that varies
based on employee enrollment and factors that are established at each annual contract renewal. Our actual claims experience may differ from our estimates.



Revenue Recognition



Sales revenue from manufacturing is generally recognized upon shipment of the manufactured product under contractual terms, which are generally FOB shipping point. Upon shipment, title transfers and the customer
assumes risks and rewards of ownership of the product. Generally, there are no formal customer acceptance requirements or further obligations related to the manufacturing services; if any such requirements exist, then sales revenue is recognized at
the time when such requirements are completed and such obligations are fulfilled.



Revenue from engineering design and development services, which are generally performed under contract of short term durations, is recognized as costs are incurred utilizing the percentage-of-completion method. Revenue from engineering
design and development services is less than one percent of total revenue in fiscal years 2004, 2003, and 2002.



Revenue is recorded net of estimated returns of manufactured product based on managements analysis of historical returns. Revenue also includes amounts billed to
customers for shipping and handling.



Cost of Sales



Cost of sales includes related shipping and handling costs. Cost of sales for the fiscal
year ending July 3, 2004 includes an insurance settlement recovery of approximately $475,000.



25



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##### Table of Contents

Research, Development and Engineering



Research, development and engineering expenses include unreimbursed costs of electronic manufacturing services (EMS) as well as design and
engineering costs associated with the production of EMS programs. Such costs are charged to expense as incurred.



Income Taxes



The Company accounts for income taxes in accordance with provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under the asset and liability method
prescribed by SFAS No. 109, deferred income taxes are provided for temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred taxes are measured using provisions of currently enacted tax laws. Tax credits
are accounted for as a reduction of income taxes in the year the credit originates.Determination of the unrecognized deferred tax liability on foreign subsidiary undistributed earnings is not practicable.



Earnings Per Share



Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common and common equivalent shares outstanding during the period using the treasury stock method. The computation assumes the
proceeds from the exercise of stock options were used to repurchase common shares at the average market price during the period. The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of common
stock equivalent shares that would have an antidilutive effect on earnings per share.



Foreign Currency Transactions



The functional currency of the
Companys subsidiaries in Ireland, Mexico and China is the U.S. dollar. Realized foreign currency transaction gains and losses are included in general and administrative expenses. Prior to 2001, assets and liabilities of the Companys
subsidiary in Ireland had been translated to U.S. dollars at year-end exchange rates. Revenues and expenses had been translated at average exchange rates. Translation gains and losses had been included in a separate component of shareholders
equity. The foreign currency translation adjustment of $245,000 as of June 30, 2001, which was included in other comprehensive income, was written off in fiscal year 2002 as a result of the disposal of the majority of the assets of the subsidiary in
Ireland.



Fair Value of Financial Instruments



The carrying values of financial instruments reflected on the balance sheets at July 3, 2004
and June 28, 2003, reasonably approximate their fair value. Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of long-term debt is estimated to be $10.9 million and
$9.9 million, respectively, as of July 3, 2004 and June 28, 2003, which approximates the carrying values.



Stock-based Compensation



The Company
accounts for its stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board No. 25 Accounting for Stock Issued to Employees (APB 25). Under APB 25, compensation expense is recognized
only if the option price is less than the quoted market price of the Companys stock at the date of the option grant. Under SFAS No. 123 Accounting for Stock Based Compensation, the fair value of stock-based awards to employees is
calculated through the use of option pricing models. These models require subjective assumptions, including future stock price volatility and expected time to exercise. The Companys calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions: expected life, 60 months in 2004 and 2003, and 77 months in 2002; stock volatility, 111.74% in 2004, 107.96% in 2003, and 83.69% in 2002; risk free interest rates, 3.11% in 2004 and 2003, and
3.89% in 2002, and no dividends during the expected term. The weighted average fair values of options granted during fiscal years 2004, 2003, and 2002 were $2.20, $1.16, and $2.07 per share, respectively.



26



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##### Table of Contents

For purposes of disclosure under SFAS Nos. 123 and 148, the following is the pro forma effect of the options had they
been recorded under the fair value method (no tax effect has been included because of offsetting tax valuations):



|                                                                                                                |  |                                              |       |   |               |   |        |               |  |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | ----- | - | ------------- | - | ------ | ------------- |  | - | ------- | -
|                                                                                                                |  | Years Ended                                  |      
|                                                                                                                |  | July 3, 2004                                 |       |   | June 28, 2003 |   |        | June 29, 2002 | 
|                                                                                                                |  | (in thousands, except per share information) |      
|Net income (loss), as reported                                                                                  |  | $                                            | 110   |   |               | $ | 13,409 |               |  | $ | (25,362 | )
|                                                                                                                |  |                                              |      
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |  |                                              | (130  | ) |               |   | (387   | )             |  |   | (412    | )
|                                                                                                                |  |                                              |       |   |               |   |        |               |  |   |         |  
|Pro forma net income (loss)                                                                                     |  | $                                            | (20   | ) |               | $ | 13,022 |               |  | $ | (25,774 | )
|                                                                                                                |  |                                              |       |   |               |   |        |               |  |   |         |  
|Earnings (loss) per share:                                                                                      |  |                                              |       |   |               |   |        |               |  |   |         |  
|Basic and diluted  as reported                                                                                 |  | $                                            | 0.01  |   |               | $ | 1.39   |               |  | $ | (2.62   | )
|                                                                                                                |  |                                              |      
|Basic and diluted  pro forma                                                                                   |  | $                                            | (0.00 | ) |               | $ | 1.35   |               |  | $ | (2.66   | )



Goodwill



In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Under the statement, the Company records intangible assets that are acquired individually
or with a group of other assets in the financial statements at acquisition. Goodwill is tested for impairment annually. The Company adopted SFAS No. 142 on June 30, 2002, and completed its impairment test during the second quarter of fiscal 2004 and
2003. The tests did not indicate an impairment of the Companys stated goodwill of $765,000.



The net effect of adopting this accounting standard was to eliminate annual amortization expense of $128,000. In accordance with SFAS No. 142, the effect of this accounting change is reflected prospectively.
Comparative disclosure as if the change had been retroactively applied to fiscal year 2002 is as follows (no tax effect has been included because of offsetting tax valuations):



|                                                     |  |                                       |      |      |   |        |  |   |         |  
|---------------------------------------------------- |  | ------------------------------------- | ---- | ---- | - | ------ |  | - | ------- | -
|                                                     |  | Fiscal Years Ended June               |     
|                                                     |  | 2004                                  |      | 2003 |   | 2002   | 
|                                                     |  | (in thousands, except per share data) |     
|Reported net income (loss)                           |  | $                                     | 110  |      | $ | 13,409 |  | $ | (25,362 | )
|Add back: goodwill amortization                      |  |                                       |     |      |   |       |  |   | 128     |  
|                                                     |  |                                       |      |      |   |        |  |   |         |  
|Total                                                |  | $                                     | 110  |      | $ | 13,409 |  | $ | (25,234 | )
|                                                     |  |                                       |      |      |   |        |  |   |         |  
|Basic and diluted earnings (loss) per share:         |  |                                       |      |      |   |        |  |   |         |  
|Reported net income (loss)                           |  | $                                     | 0.01 |      | $ | 1.39   |  | $ | (2.62   | )
|                                                     |  |                                       |     
|Goodwill amortization                                |  |                                       |     |      |   |       |  |   | .01     |  
|                                                     |  |                                       |      |      |   |        |  |   |         |  
|Adjusted basic and diluted earnings (loss) per share |  | $                                     | 0.01 |      | $ | 1.39   |  | $ | (2.61   | )
|                                                     |  |                                       |      |      |   |        |  |   |         |  



New Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46, as revised, clarifies existing accounting literature regarding the consolidation of entities in which a company holds a controlling
financial interest. A majority voting interest in an entity has generally been considered indicative of a controlling financial interest. FIN 46 specifies other factors (variable interests) which must be considered when determining whether a
company holds a controlling financial interest in, and therefore must consolidate, an entity (variable interest entities). The adoption of FIN 46 had no impact on the Companys overall financial position and results of operations as the Company
has no variable interest entities.



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##### Table of Contents

In April 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on Derivative Instruments and Hedging
Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. This statement is
effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Companys financial
statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.
Financial instruments that are within the scope of the statement, which previously were often classified as equity, must now be classified as liabilities. This statement is effective for financial instruments entered into or modified after May 31,
2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Companys financial statements.



In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue
Recognition. SAB 104 supercedes SAB 101, Revenue Recognition in Financial Statements. The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements,
superceded as a result of the issuance of EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. Additionally, SAB 104 rescinds the SECs Revenue Recognition in Financial Statements Frequently Asked Questions and Answers
(the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21,
the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on the Companys financial statements.



Reclassifications



Certain reclassifications of prior balances have been made for consistent presentation with the current year.



Fiscal Year



The Company operates on a 52/53 week fiscal year. Fiscal years end on the Saturday nearest June 30. As such, fiscal years 2004, 2003, and
2002 ended on July 3, 2004, June 28, 2003, and June 29, 2002, respectively. Fiscal year 2005 will end on July 2, 2005. Fiscal 2004 was a 53 week year and fiscal 2003 and 2002 were 52 week years.



2. INVENTORIES



Components of inventories were as follows:



|                         |  |                |        |   |               |   |        |  
|------------------------ |  | -------------- | ------ | - | ------------- | - | ------ | -
|                         |  | July 3, 2004   |        |   | June 28, 2003 |  
|                         |  | (in thousands) |       
|Finished goods           |  | $              | 10,984 |   |               | $ | 9,439  |  
|Work-in-process          |  |                | 2,926  |   |               |   | 3,117  |  
|Raw materials            |  |                | 17,119 |   |               |   | 15,108 |  
|Reserve for obsolescence |  |                | (3,181 | ) |               |   | (3,513 | )
|                         |  |                |        |   |               |   |        |  
|                         |  | $              | 27,848 |   |               | $ | 24,151 |  
|                         |  |                |        |   |               |   |        |  



3. PROPERTY, PLANT AND EQUIPMENT



|                           |  |            |  |                |         |   |               |   |         |  
|-------------------------- |  | ---------- |  | -------------- | ------- | - | ------------- | - | ------- | -
|                           |  | Life       |  | July 3, 2004   |         |   | June 28, 2003 |  
|                           |  | (in years) |  | (in thousands) |        
|Land                       |  |           |  | $              | 1,730   |   |               | $ | 1,730   |  
|Buildings and improvements |  | 3 to 30    |  |                | 11,724  |   |               |   | 11,165  |  
|Equipment                  |  | 1 to 10    |  |                | 50,187  |   |               |   | 67,315  |  
|Furniture and fixtures     |  | 3 to 5     |  |                | 6,412   |   |               |   | 6,259   |  
|                           |  |            |  |                |         |   |               |   |         |  
|                           |  |            |  |                | 70,053  |   |               |   | 86,469  |  
|                           |  |            |  |                |         |   |               |   |         |  
|Accumulated depreciation   |  |            |  |                | (58,922 | ) |               |   | (74,487 | )
|                           |  |            |  |                |         |   |               |   |         |  
|                           |  |            |  | $              | 11,131  |   |               | $ | 11,982  |  
|                           |  |            |  |                |         |   |               |   |         |  



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##### Table of Contents

In December of 2000, the Company sold its headquarters building, located in Spokane, Washington. In conjunction with the
sale, the Company entered into a ten year lease agreement for a portion of the building. The gain on the sale of the building was deferred under other long-term obligations and will be amortized to other income over the remaining lease term.



In February of 2002, the Company sold its Cheney, Washington, facility, which
had previously been recorded as real estate held for sale, for $1.7 million, resulting in a gain of $84,000, recorded within other income.



4. LONG-TERM DEBT



The Company has entered into a financing agreement with CIT Group/Business Credit, Inc. (CIT) which provides a revolving credit facility up to $20 million. The revolving loan is secured by the assets of the Company.
The interest rate provisions allow for a variable rate based on either the prime rate or LIBOR rate. The agreement specifies four alternative levels of margin to be added to these base rates depending on compliance with certain financial covenants.
The range of interest being paid to CIT on outstanding balances was 4.34  4.75% as of July 3, 2004. The agreement and subsequent amendments contain financial covenants that relate to total equity, earnings before interest, taxes, depreciation
and amortization, and a minimum fixed charge ratio. The revolving loan matures August 23, 2006. As of July 3, 2004, the Company was in compliance with all loan covenants. At July 3, 2004, the outstanding revolving loan balance was $10.9 million
compared to $9.9 million at fiscal year end June 28, 2003. Based on eligible collateral, approximately $9.1 million was available from the revolving line of credit as of July 3, 2004.



5. INCOME TAXES



Income tax expense consists of the following:



|                              |  |                |      |   |               |   |        |               |  |   |        |  
|----------------------------- |  | -------------- | ---- | - | ------------- | - | ------ | ------------- |  | - | ------ | -
|                              |  | Year Ended     |     
|                              |  | July 3, 2004   |      |   | June 28, 2003 |   |        | June 29, 2002 | 
|                              |  | (in thousands) |     
|Current income taxes:         |  |                |      |   |               |   |        |               |  |   |        |  
|Federal                       |  | $              |     |   |               | $ | (37    | )             |  | $ |       |  
|Foreign                       |  |                | 611  |   |               |   | 637    |               |  |   | 900    |  
|State                         |  |                |     |   |               |   |       |               |  |   |       |  
|                              |  |                |      |   |               |   |        |               |  |   |        |  
|                              |  |                | 611  |   |               |   | 600    |               |  |   | 900    |  
|                              |  |                |      |   |               |   |        |               |  |   |        |  
|Deferred income taxes:        |  |                |      |   |               |   |        |               |  |   |        |  
|Federal                       |  |                | (464 | ) |               |   | 4,264  |               |  |   | (7,627 | )
|Foreign                       |  |                |     |   |               |   |       |               |  |   |       |  
|State                         |  |                | (16  | ) |               |   | 272    |               |  |   | (723   | )
|                              |  |                |      |   |               |   |        |               |  |   |        |  
|                              |  |                | (480 | ) |               |   | 4,536  |               |  |   | (8,350 | )
|Change in valuation allowance |  |                | 480  |   |               |   | (4,536 | )             |  |   | 12,866 |  
|                              |  |                |      |   |               |   |        |               |  |   |        |  
|                              |  |                |     |   |               |   |       |               |  |   | 4,516  |  
|                              |  |                |      |   |               |   |        |               |  |   |        |  
|Total income tax expense      |  | $              | 611  |   |               | $ | 600    |               |  | $ | 5,416  |  
|                              |  |                |      |   |               |   |        |               |  |   |        |  



The Companys effective tax rate
differs from the federal tax rate as follows:



|                                                        |  |                |      |   |               |   |        |               |  |   |        |  
|------------------------------------------------------- |  | -------------- | ---- | - | ------------- | - | ------ | ------------- |  | - | ------ | -
|                                                        |  | Year Ended     |     
|                                                        |  | July 3, 2004   |      |   | June 28, 2003 |   |        | June 29, 2002 | 
|                                                        |  | (in thousands) |     
|Federal income tax expense (benefit) at statutory rates |  | $              | 245  |   |               | $ | 4,763  |               |  | $ | (6,782 | )
|Effect of foreign taxes                                 |  |                | 110  |   |               |   | (101   | )             |  |   | 807    |  
|State tax (net of federal effect)                       |  |                | 7    |   |               |   | 140    |               |  |   | (723   | )
|Permanent differences                                   |  |                |      |   |               |   |        |               |  |   |        |  
|Life insurance premiums                                 |  |                | 65   |   |               |   | 65     |               |  |   | 50     |  
|Other                                                   |  |                | (296 | ) |               |   | 269    |               |  |   | (802   | )
|Change in valuation allowance                           |  |                | 480  |   |               |   | (4,536 | )             |  |   | 12,866 |  
|                                                        |  |                |      |   |               |   |        |               |  |   |        |  
|Income tax provision                                    |  | $              | 611  |   |               | $ | 600    |               |  | $ | 5,416  |  
|                                                        |  |                |      |   |               |   |        |               |  |   |        |  



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The domestic and foreign components of income (loss) before income taxes were:



|                                  |  |                |       |   |               |   |               |  |   |         |  
|--------------------------------- |  | -------------- | ----- | - | ------------- | - | ------------- |  | - | ------- | -
|                                  |  | Year Ended     |      
|                                  |  | July 3, 2004   |       |   | June 28, 2003 |   | June 29, 2002 | 
|                                  |  | (in thousands) |      
|Domestic                          |  | $              | (709  | ) |               | $ | 11,900        |  | $ | (20,219 | )
|Foreign                           |  |                | 1,430 |   |               |   | 2,109         |  |   | 273     |  
|                                  |  |                |       |   |               |   |               |  |   |         |  
|Income (loss) before income taxes |  | $              | 721   |   |               | $ | 14,009        |  | $ | (19,946 | )
|                                  |  |                |       |   |               |   |               |  |   |         |  



Deferred income taxes result from
temporary differences in the timing of recognition of revenue and expenses. Deferred income tax assets and liabilities consist of the following at:



|                                                                  |  |                |         |   |               |   |         |  
|----------------------------------------------------------------- |  | -------------- | ------- | - | ------------- | - | ------- | -
|                                                                  |  | July 3, 2004   |         |   | June 28, 2003 |  
|                                                                  |  | (in thousands) |        
|Allowance for doubtful accounts                                   |  | $              | 18      |   |               | $ | 32      |  
|Inventory                                                         |  |                | 1,675   |   |               |   | 1,462   |  
|Vacation accrual                                                  |  |                | 342     |   |               |   | 346     |  
|Warranty accrual                                                  |  |                | 59      |   |               |   | 55      |  
|State deferred asset                                              |  |                | 72      |   |               |   | 71      |  
|Litigation judgment (current portion)                             |  |                | 315     |   |               |   | 382     |  
|Other                                                             |  |                | 19      |   |               |   | 132     |  
|                                                                  |  |                |         |   |               |   |         |  
|Current deferred income tax assets                                |  |                | 2,500   |   |               |   | 2,480   |  
|Current portion of valuation allowance                            |  |                | (2,500  | ) |               |   | (2,480  | )
|                                                                  |  |                |         |   |               |   |         |  
|Current deferred income tax assets, net of valuation allowance    |  | $              |        |   |               | $ |        |  
|                                                                  |  |                |         |   |               |   |         |  
|Depreciation and amortization                                     |  | $              | 22      |   |               | $ | 686     |  
|State deferred taxes                                              |  |                | 615     |   |               |   | 600     |  
|Litigation judgment (non-current portion)                         |  |                | 522     |   |               |   | 882     |  
|Net operating loss carryforwards                                  |  |                | 19,971  |   |               |   | 18,396  |  
|Tax credit carryforwards                                          |  |                | 536     |   |               |   | 607     |  
|Other                                                             |  |                | 434     |   |               |   | 469     |  
|                                                                  |  |                |         |   |               |   |         |  
|Noncurrent deferred income tax assets                             |  |                | 22,100  |   |               |   | 21,640  |  
|Valuation allowance, net of current portion                       |  |                | (22,100 | ) |               |   | (21,640 | )
|                                                                  |  |                |         |   |               |   |         |  
|Noncurrent deferred income tax assets, net of valuation allowance |  | $              |        |   |               | $ |        |  
|                                                                  |  |                |         |   |               |   |         |  
|Total deferred income tax assets                                  |  | $              |        |   |               | $ |        |  
|                                                                  |  |                |         |   |               |   |         |  



SFAS No. 109 requires that management
assess the sources of future taxable income, which may be available to recognize the deductible differences that comprise deferred tax assets. A valuation allowance against deferred tax assets is required if it is more likely than not that some or
all of the deferred tax assets will not be realized. Management has determined that a valuation allowance equal to the net deferred tax assets is appropriate.



At July 3, 2004, the Company had net operating loss carryforwards approximating $59 million. The net operating loss carryforwards expire in varying amounts from fiscal
years ending in 2006 through 2024. The Company also has general business credits and alternative minimum tax credits approximating $316,000 and $220,000, respectively. The general business credits expire in varying amounts from fiscal years ending
in years 2005 through 2009 and the alternative minimum tax credits do not expire. Utilization of net operating loss carryforwards would be limited in the event the Companys ownership changes more than 50% in a three-year period.



6. EARNINGS PER SHARE



Basic earnings per share (EPS) is calculated by dividing net income (loss) (the numerator) by the weighted-average number of common shares
outstanding (the denominator) during the period. Diluted EPS is computed by including both the weighted-average number of shares outstanding and any dilutive common share equivalents. The following table presents a reconciliation of the denominator
and the number of antidilutive common share options that were not included. These antidilutive securities occur when options outstanding have an option price greater than the average market price for the period.



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|                                                                |  |                     |  |           |  |          
|--------------------------------------------------------------- |  | ------------------- |  | --------- |  | ---------
|                                                                |  | Fiscal Years Ending
|                                                                |  | 2004                |  | 2003      |  | 2002     
|Total weighted average shares  basic                           |  | 9,673,128           |  | 9,672,580 |  | 9,672,580
|Effect of dilutive common stock options                         |  | 119,707             |  |          |  |         
|                                                                |  |                     |  |           |  |          
|Total weighted average shares  diluted                         |  | 9,792,835           |  | 9,672,580 |  | 9,672,580
|                                                                |  |                     |  |           |  |          
|Antidilutive options not included in diluted earnings per share |  | 1,952,184           |  | 2,086,086 |  | 2,081,304



7. STOCK OPTION AND BENEFIT PLANS



The Company has executive stock option plans for certain key employees.
Options under these plans vest over one to five years and become exercisable as they vest. Options under the plans become exercisable in full immediately prior to the occurrence of a Change in Control as defined in the plan documents.
The Company has reserved 2,795,000 shares for issuance under these plans. As of July 3, 2004, 1,826,891 options were outstanding of which 1,728,554 shares were exercisable. There are 112,467 shares available for future grant under these option
plans. These options expire ten years from the date of grant.



The Company also
has a stock option plan for Nonemployee Directors. Options under this plan vest over a three-year period and are exercisable as they vest. The Company has reserved 300,000 shares for issuance under this plan. As of July 3, 2004, 245,000
options were outstanding of which 185,416 shares were exercisable. There are 24,650 shares available for future grant under this plan. These options expire ten years from the date of grant.



Compensation expense for options will be recorded if the exercise price of the option is less
than the closing market price of the stock on the date of grant. There was no compensation expense incurred in conjunction with options issued in fiscal years 2004, 2003, or 2002, as all options were granted at fair market value. See Note 1 for the
pro forma effect if the Company had accounted for the stock options using fair value methods.



Following is a summary of plan activity:



|                           |  |             |                |                   |           |   |                                |   |     
|-------------------------- |  | ----------- | -------------- | ----------------- | --------- | - | ------------------------------ | - | ----
|                           |  | Price Range |                | Number Of Options |           |   | Weighted AverageExercise Price
|Outstanding, June 30, 2001 |  | $           | 1.54 to $16.25 |                   | 1,966,200 |   |                                | $ | 4.99
|                           |  |             |                |                   |           |   |                                |   |     
|Granted during 2002        |  | $           | 2.00 to $ 2.11 |                   | 130,000   |   |                                | $ | 2.07
|Expired or canceled        |  | $           | 2.75 to $7.25  |                   | (14,896   | ) |                                | $ | 4.12
|                           |  |             |                |                   |           |   |                                |   |     
|Outstanding, June 29, 2002 |  | $           | 1.54 to $16.25 |                   | 2,081,304 |   |                                | $ | 4.81
|                           |  |             |                |                   |           |   |                                |   |     
|Granted during 2003        |  | $           | 1.15 to $ 1.20 |                   | 160,000   |   |                                | $ | 1.16
|Expired or canceled        |  | $           | 1.15 to $16.25 |                   | (155,218  | ) |                                | $ | 6.04
|                           |  |             |                |                   |           |   |                                |   |     
|Outstanding, June 28, 2003 |  | $           | 2.75 to $16.25 |                   | 2,086,086 |   |                                | $ | 4.44
|                           |  |             |                |                   |           |   |                                |   |     
|Granted during 2004        |  | $           | 2.20           |                   | 37,500    |   |                                | $ | 2.20
|Exercised                  |  | $           | 1.15           |                   | (3,333    | ) |                                | $ | 1.15
|Expired or canceled        |  | $           | 1.15 to $ 9.50 |                   | (48,362   | ) |                                | $ | 7.62
|                           |  |             |                |                   |           |   |                                |   |     
|Outstanding, July 3, 2004  |  | $           | 1.15 to $16.25 |                   | 2,071,891 |   |                                | $ | 4.33
|                           |  |             |                |                   |           |   |                                |   |     



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Additional information regarding options outstanding as of June 28, 2003, is as follows:



|                         |  |                     |  |                                              |  |                            |       |                   |           |                             |   |      
|------------------------ |  | ------------------- |  | -------------------------------------------- |  | -------------------------- | ----- | ----------------- | --------- | --------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                         
|Range of Exercise Prices |  | NumberOutstanding   |  | Weighted Avg.RemainingContractualLife (yrs.) |  | WeightedAvg. ExercisePrice |       | NumberExercisable |           | Weighted Avg. ExercisePrice
|$ 1.15 - $ 1.73          |  | 145,000             |  | 6.0                                          |  | $                          | 1.18  |                   | 57,914    |                             | $ | 1.20 
|$ 1.74 - $ 2.60          |  | 167,500             |  | 6.1                                          |  | $                          | 2.10  |                   | 96,665    |                             | $ | 2.06 
|$ 2.61 - $ 3.92          |  | 789,000             |  | 6.4                                          |  | $                          | 2.79  |                   | 789,000   |                             | $ | 2.79 
|$ 3.93 - $ 5.89          |  | 685,200             |  | 4.9                                          |  | $                          | 5.07  |                   | 685,200   |                             | $ | 5.07 
|$ 5.90 - $ 8.85          |  | 198,191             |  | 4.0                                          |  | $                          | 7.43  |                   | 198,191   |                             | $ | 7.43 
|$ 8.86 - $13.30          |  | 20,000              |  | 0.3                                          |  | $                          | 10.75 |                   | 20,000    |                             | $ | 10.75
|$13.31 - $16.25          |  | 67,000              |  | 2.6                                          |  | $                          | 16.25 |                   | 67,000    |                             | $ | 16.25
|                         |  |                     |  |                                              |  |                            |       |                   |           |                             |   |      
|$ 1.15 - $16.25          |  | 2,071,891           |  | 5.5                                          |  | $                          | 4.33  |                   | 1,913,970 |                             | $ | 4.56 
|                         |  |                     |  |                                              |  |                            |       |                   |           |                             |   |      



The Companys defined
contribution plan is available to U.S. employees who have attained age 21. The Company contributes an amount equal to 100% of the employees contribution on the first 3% of the employees compensation and an additional 50% of the
employees contribution on the following 2% of the employees compensation. Company contributions to the plan were $370,336, $366,190, and $362,458 in fiscal years 2004, 2003 and 2002, respectively.



8. COMMITMENTS AND CONTINGENCIES



Leases: The Company has operating leases for certain equipment and production
facilities, which expire at various dates during the next seven years. Future minimum payments under non-cancelable operating and capital leases with initial or remaining terms of one year or more at July 3, 2004, are summarized as follows (in
thousands):



|                                                  |  |                 |       |               |   |      |  
|------------------------------------------------- |  | --------------- | ----- | ------------- | - | ---- | -
|Fiscal Years Ending                               |  | OperatingLeases |       | CapitalLeases |  
|2005                                              |  | $               | 2,802 |               | $ | 371  |  
|2006                                              |  |                 | 1,833 |               |   | 63   |  
|2007                                              |  |                 | 862   |               |   | 6    |  
|2008                                              |  |                 | 448   |               |   | 6    |  
|2009                                              |  |                 | 440   |               |   | 5    |  
|Thereafter                                        |  |                 | 700   |               |   |     |  
|                                                  |  |                 |       |               |   |      |  
|Total minimum lease payments                      |  | $               | 7,085 |               |   | 451  |  
|                                                  |  |                 |       |               |   |      |  
|Amount representing interest                      |  |                 |       |               |   | (59  | )
|                                                  |  |                 |       |               |   |      |  
|Present value of lease payments                   |  |                 |       |               |   | 392  |  
|Current portion                                   |  |                 |       |               |   | (324 | )
|                                                  |  |                 |       |               |   |      |  
|Capital lease obligations, net of current portion |  |                 |       |               | $ | 68   |  
|                                                  |  |                 |       |               |   |      |  



As of July 3, 2004, the gross carrying
amount of the Companys equipment financed under capital leases amounted to approximately $538,000. Accumulated depreciation for property and equipment under capital leases totaled approximately $78,000. The weighted average interest rate on
these capital leases is approximately 8.50% and expire at various dates through fiscal year 2009.



Rental expenses under operating leases were approximately $4.4 million, $4.6 million, and $4.5 million in 2004, 2003, and 2002, respectively.



Warranty Costs: The Company provides warranties on certain product sales and allowances for estimated warranty costs are recorded
during the period of sale. The determination of such allowances requires us to make estimates of product return rates and expected costs to repair or to replace the products under warranty. The Company currently establishes warranty reserves based
on historical warranty costs for each product line combined with liability estimates based on the prior twelve months sales activities.



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If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to
recognize additional cost of sales may be required in future periods.



Components of the reserve for warranty costs during 2004, 2003, and 2002 were as follows:





|                                              |  |   |          |  
|--------------------------------------------- |  | - | -------- | -
|Balance at June 30, 2001                      |  | $ | 326,545  |  
|Additions related to current period sales     |  |   | 215,101  |  
|Warranty costs incurred in the current period |  |   | (247,376 | )
|                                              |  |   |          |  
|Balance at June 29, 2002                      |  |   | 294,270  |  
|Additions related to current period sales     |  |   | 150,000  |  
|Warranty costs incurred in the current period |  |   | (283,126 | )
|                                              |  |   |          |  
|Balance at June 28, 2003                      |  |   | 161,144  |  
|Additions related to current period sales     |  |   | 192,715  |  
|Warranty costs incurred in the current period |  |   | (180,127 | )
|                                              |  |   |          |  
|Balance at July 3, 2004                       |  | $ | 173,732  |  
|                                              |  |   |          |  



Litigation: On December 20,
2001, a jury in Seattle federal court rendered a verdict in the case of F&G Scrolling Mouse, LLC, Fernando Falcon and Federico Gilligan v. Microsoft Corporation, Honeywell, Inc., and Key Tronic Corporation, United States District Court for the
Western District of Washington, Case No. C99-995C (the litigation) finding that Key Tronic misappropriated trade secrets and breached a confidentiality agreement with Plaintiffs. The jury awarded damages to the Plaintiffs in the amount
of $16.5 million. The judgment against the Company was subsequently increased to approximately $19.2 million through an award of pre-judgment interest. On October 24, 2002, the Company reached a settlement of the litigation with the Plaintiffs
(hereafter called F&G). Under the terms of the settlement, the Company has agreed to pay F&G a total of $7.0 million. The Company was required to make an initial payment to F&G of $2.5 million, as well as make quarterly
payments to F&G of $200,000 or 50% of Key Tronics operating income, whichever is greater, until the total payment of $7.0 million has been made, provided the total payment is completed by December 15, 2005. The remaining amount to be paid
of the $7.0 million settlement was approximately $2.5 million at July 3, 2004.



If the total of $7.0 million is not paid by 12/15/2005, the total settlement amount increases on 12/15/2005 to $7.6 million. If payment of $7.6 million is not completed by 12/15/2006 the total settlement amount increases to $8.2 million. If
payment of $8.2 million is not completed by 12/15/2007 the total settlement amount increases to $8.8 million. If payment of $8.8 million is not completed by 12/15/2008 the total settlement amount increases to $9.7 million. If payment of $9.7 million
is not completed by 12/15/2009 the total settlement amount increases to $10.6 million. If payment of $10.6 million is not made by 12/15/2010 the total settlement amount increases to $11.5 million. Any unpaid balance remaining at 12/15/2011 will
accrue interest thereafter at prime plus 11⁄2% per annum until paid. If the Company fails to make any minimum quarterly payment when due, Plaintiffs have the right to accelerate all remaining payments in the amount of $11.5 million less any
amounts previously paid.



Reported earnings for the fiscal year ended June 28,
2003, include a one-time benefit of $12.2 million ($1.26 per share) for a revision of the litigation accrual.



On March 31, 2004 a former employee of the Company filed a complaint against the Company in the Superior Court of the State of Washington, Spokane County. Anthony DeStefano, Jr. v Key Tronic Corporation, Case
No. 04201480-2. The complaint asserted claims for breach of contract, wrongful withholding of wages and wrongful discharge and sought an unspecified amount of damages. The complaint was dismissed with prejudice in September 2004 with each party
bearing its own costs.



The Company is party to certain other lawsuits or
claims 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 financial position, results of operations or cash flow. Also see Note 8 to the
Consolidated Financial Statements.



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9. ENTERPRISE-WIDE DISCLOSURES



Management organizes its business around EMS and keyboards based on geographic area. These businesses have been aggregated into one segment
as each has similar economic characteristics, and the nature of the business, its production processes, customers and distribution methods are similar.



Of the revenues for the years ended July 3, 2004, June 28, 2003, and June 29, 2002, EMS sales were $135.5 million, $116.0 million, and $157.0 million, respectively.
Keyboard sales for the years ended July 3, 2004, June 28, 2003, and June 29, 2002 were $12.9 million, $14.6 million, and $18.3 million, respectively. The remainder of revenues for all years presented were from sales of miscellaneous other products
and services.



Net sales and long-lived assets (property, plant, and equipment)
by geographic area for the years ended July 3, 2004, June 28, 2003, and June 29, 2002 are summarized in the following table. Net sales set forth below are based on the shipping destination.



|                  |  |                 |         |         |   |        |  |   |        
|----------------- |  | --------------- | ------- | ------- | - | ------ |  | - | -------
|                  |  | Domestic (U.S.) |         | Foreign |   | Total 
|                  |  | (in thousands) 
|2004              |  |                 |         |         |   |        |  |   |        
|Net sales         |  | $               | 134,413 |         | $ | 14,488 |  | $ | 148,901
|Long-lived assets |  | $               | 10,153  |         | $ | 978    |  | $ | 11,131 
|2003              |  |                 |         |         |   |        |  |   |        
|Net sales         |  | $               | 114,674 |         | $ | 16,220 |  | $ | 130,894
|Long-lived assets |  | $               | 10,974  |         | $ | 1,008  |  | $ | 11,982 
|2002              |  |                 |         |         |   |        |  |   |        
|Net sales         |  | $               | 143,324 |         | $ | 32,267 |  | $ | 175,591
|Long-lived assets |  | $               | 11,429  |         | $ | 803    |  | $ | 12,232 



For the year ended July 3, 2004, 44.5%
of the Companys foreign net sales were to customers in Mexico, 29.7% were to customers in Europe, 20.1% were to customers in Canada, and the remaining 5.7% were spread among customers in Asia and South America.



For the year ended June 28, 2003, 71.7% of the Companys foreign net sales were to
customers in the Far East, 14.6% were to customers in Mexico, 10.0% were to customers in Europe, and the remaining 3.7% were spread among customers in Canada and South America.



For the year ended June 29, 2002, 45.4% of the Companys foreign net sales were to customers in Mexico, 44.3% were to customers in the
Far East, 6.6% were to customers in Europe, and the remaining 3.7% were spread among customers in Canada and South America.



Significant Customers



The following customers accounted for 10% or more of consolidated revenues in the three fiscal years presented below:



|                                |  |             |   |  |      |   |  |      |  
|------------------------------- |  | ----------- | - |  | ---- | - |  | ---- | -
|                                |  | Fiscal Year |  
|                                |  | 2004        |   |  | 2003 |   |  | 2002 |  
|The Clorox Company              |  | 16          | % |  | 31   | % |  | 39   | %
|Lexmark International, Inc.     |  | 14          | % |  | 8    | % |  | 18   | %
|Zebra Technologies Corporation  |  | 12          | % |  | 8    | % |  | 0    | %
|Transaction Printer Group, Inc. |  | 10          | % |  | 9    | % |  | 10   | %
|Hewlett-Packard Company         |  | 1           | % |  | 8    | % |  | 13   | %



Accounts receivable related to The
Little Tikes Company, Lexmark International, Inc., and Transaction Printer Group, Inc. represented approximately 19%, 13%, and 12%, respectively of the Companys total accounts receivable balance as of July 3, 2004. Sales to The Little Tikes
Company did not account for more than 10% of consolidated revenues in fiscal year 2004 as sales did not commence until the latter part of the year.



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There can be no assurance that the Companys principal customers will continue to purchase products from the Company
at current levels. Moreover, the Company typically does not enter into long-term volume purchase contracts with its customers, and the Companys customers have certain rights to extend or delay the shipment of their orders. The loss of one or
more of the Companys major customers, or the reduction, delay or cancellation of orders from such customers, could materially and adversely affect the Companys business, operating results and financial condition.



10. QUARTERLY FINANCIAL DATA

(Unaudited)



|                                                   |  |                                          |        |                |   |        |               |  |                |        |  |   |       
|-------------------------------------------------- |  | ---------------------------------------- | ------ | -------------- | - | ------ | ------------- |  | -------------- | ------ |  | - | ------
|                                                   |  | Year Ended July 3, 2004                 
|                                                   |  | First Quarter                            |        | Second Quarter |   |        | Third Quarter |  | Fourth Quarter
|                                                   |  |                                          |        |               
|                                                   |  | (in thousands, except per share amounts)
|Net sales                                          |  | $                                        | 34,652 |                | $ | 32,567 |               |  | $              | 37,316 |  | $ | 44,366
|Gross profit                                       |  | $                                        | 3,355  |                | $ | 2,672  |               |  | $              | 3,652  |  | $ | 3,558 
|Income (loss) before income taxes                  |  | $                                        | 193    |                | $ | (177   | )             |  | $              | 350    |  | $ | 355   
|Net income (loss)                                  |  | $                                        | 20     |                | $ | (287   | )             |  | $              | 112    |  | $ | 265   
|Earnings (loss) per common share basic and diluted |  | $                                        | 0.00   |                | $ | (0.03  | )             |  | $              | 0.01   |  | $ | 0.03  
|Weighted average shares                            |  |                                          |        |                |   |        |               |  |                |        |  |   |       
|Basic                                              |  |                                          | 9,673  |                |   | 9,673  |               |  |                | 9,673  |  |   | 9,675 
|Diluted                                            |  |                                          | 9,775  |                |   | 9,673  |               |  |                | 9,793  |  |   | 10,007
|                                                   | 
|                                                   |  | Year Ended June 28, 2003                
|                                                   |  | FirstQuarter                             |        | SecondQuarter  |   |        | ThirdQuarter  |  | FourthQuarter 
|                                                   |  | (in thousands, except per share amounts)
|Net sales                                          |  | $                                        | 34,034 |                | $ | 30,552 |               |  | $              | 30,645 |  | $ | 35,663
|Gross profit                                       |  | $                                        | 3,506  |                | $ | 3,484  |               |  | $              | 3,778  |  | $ | 4,190 
|Income before income taxes                         |  | $                                        | 12,718 |                | $ | 190    |               |  | $              | 320    |  | $ | 781   
|Net income                                         |  | $                                        | 12,479 |                | $ | 74     |               |  | $              | 306    |  | $ | 550   
|Earnings per common share basic and diluted        |  | $                                        | 1.29   |                | $ | .01    |               |  | $              | .03    |  | $ | .06   
|Weighted average shares                            |  |                                          |        |                |   |        |               |  |                |        |  |   |       
|Basic                                              |  |                                          | 9,673  |                |   | 9,673  |               |  |                | 9,673  |  |   | 9,673 
|Diluted                                            |  |                                          | 9,673  |                |   | 9,673  |               |  |                | 9,675  |  |   | 9,714 



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Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL



DISCLOSURES



On December 3, 2002 Deloitte & Touche, LLP (D&T) was dismissed as the Companys independent public accountants and BDO Seidman, LLP (BDO) was appointed as the Companys new
independent accountants to replace D&T for the fiscal year ending June 28, 2003. The decision to dismiss D&T and to appoint BDO was made and approved by the Audit Committee. D&Ts reports on the Companys financial statements
for the past two fiscal years did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the prior two fiscal years and through December 3, 2002,
there were no disagreements with D&T on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of D&T would have caused that
firm to make reference to the subject matter of the disagreements in connection with its reports; and there were no reportable events as defined in certain SEC regulations. Prior to the engagement of BDO the Company had not consulted with BDO during
the prior two fiscal years and through December 3, 2002 in any matter regarding the application of accounting principles on a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the
Companys financial statements, or any other matters or reportable events as defined in certain SEC regulations. See Form 8-K dated December 3, 2002.



Item 9A: CONTROLS AND PROCEDURES



| | a) | As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Companys chief executive
officer and chief financial officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the chief executive officer and chief
financial officer concluded that the Companys disclosure controls and procedures are effective.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | There have been no changes in the Companys internal controls over financial reporting during the quarter ended July 3, 2004 that have materially affected, or are reasonable
likely to materially affect, the Companys internal control over financial reporting.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 9B: OTHER INFORMATION



None



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PART III



Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



DALE F. PILZ Director, Chairman of the Board



Dale F. Pilz, age 78, has served as Chairman of the Board since January 2000 and has been a director of the Company since April 1992. Mr. Pilz was Chief Executive Officer of Flowind Corporation from 1986 to 1990. He
served as President of Omninet Corporation from 1985 to 1986. Prior to that, Mr. Pilz was Chief Executive Officer and President of GTE Sprint Communications from 1983 to 1985 and also served as Chief Executive Officer and President of GTE Spacenet
Corporation from 1983 to 1985.



WENDELL J. SATRE - Director



Wendell J. Satre, age 86, has been a director of the Company since 1988 and
served as Chairman of the Board of Directors from July 1991 through August 1995. Mr. Satre also served as a director from 1983 through 1986 and served as President and CEO of the Company from August 1991 through February 1992. Mr. Satre is the
retired Chairman of the Board and Chief Executive Officer of the Washington Water Power Company (now Avista Corp.), a public utility headquartered in Spokane Valley, Washington. Mr. Satre also serves on the Board of Directors of Output Technology
Corporation and The Coeur dAlenes Company.



YACOV A. SHAMASH
- Director



Yacov A. Shamash, age 54, has been a director of the
Company since 1989. He has been the Dean of Engineering and Applied Sciences at the State University of New York campus at Stony Brook since 1992. Professor Shamash developed and directed the NSF Industry/University Cooperative Research Center for
the Design of Analog/Digital Integrated Circuits from 1989 to 1992 and also served as Chairman of the Electrical and Computer Engineering Department at Washington State University from 1985 until 1992. Dr. Shamash also serves on the Board of
Directors of American Medical Alert Corp, Manchester Technologies Inc. and Netsmart Technologies, Inc.



WILLIAM E. TERRY - Director



William E. Terry, age 71, has been a director of the Company since August 1992. Mr. Terry retired from Hewlett-Packard in November 1993 where he served in a number of executive positions during the prior 36 years. He is a Trustee of Santa
Clara University and also serves on the Board of Directors of Altera Corporation.



PATRICK SWEENEY- Director



Patrick Sweeney, age 69, has been a director of the Company since July 2000. Mr. Sweeney was President and CEO of Hadco Corporation from 1991 through 1995 and formerly served as Hadcos Vice President/Chief Financial Officer and Vice
President of Operations. Prior to that Mr. Sweeney was the Vice President of International Manufacturing at Wang - USA from 1981 through 1986 and also served as Managing Director of Ireland for Wang and as Plant Manager of its Galway and Clonmel
divisions. Mr. Sweeney also serves on the Board of Directors of Aimware, Info. Mosaic, Photo Machining Inc. and Farran Technologies.



JACK W. OEHLKE - Director, President and Chief Executive Officer



Jack W. Oehlke, age 58, has been President and Chief Executive Officer of the Company since June 1997. From October 1995, he served as Chief
Operating Officer. Previously, he served as Senior Vice President of Operations from January 1995 to October 1995 and Vice President of Manufacturing Operations of the Company from December 1993 to January 1995. Mr. Oehlke served as Director of
Operations, Director of Quality and in various management positions within manufacturing, engineering and quality functions of the Microswitch Division of Honeywell, Inc. from 1968 to 1993. Mr. Oehlke has a Bachelor of Science Degree in Industrial
Technology from the University of Wisconsin at Menomonie.



RONALD F.
KLAWITTER - Executive Vice President of Administration and Chief Financial Officer



Mr. Klawitter, age 52, has been Executive Vice President of Administration, CFO, and Treasurer since July 1997. Previously he was Vice President of Finance, Secretary and Treasurer of the Company since October 1995.
He was Acting Secretary from



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November 1994 to October 1995 and Vice President of Finance and Treasurer from 1992 to October 1995. From 1987 to 1992,
Mr. Klawitter was Vice President, Finance at Baker Hughes Tubular Service, a subsidiary of Baker Hughes, Inc. He has a BA degree from Wittenberg University and is a Certified Public Accountant.



CRAIG D. GATES - Executive Vice President and General Manager



Mr. Gates, age 45, has been Executive Vice President and General Manager
since August 2002. Previously he was Executive Vice President of Marketing, Engineering and Sales since July 1997. He served as Vice President and General Manager of New Business Development from October 1995 to July 1997. He joined the Company as
Vice President of Engineering in October of 1994. Mr. Gates has a Bachelor of Science Degree in Mechanical Engineering and a Masters in Business Administration from the University of Illinois, Urbana. From 1982 he held various engineering and
management positions within the Microswitch Division of Honeywell, Inc., in Freeport, Illinois, and from 1991 to October 1994 he served as Director of Operations, Electronics for Microswitch.



EFREN R. PEREZ Vice President of S.W. Operations



Mr. Perez, age 64, has served as Vice President of S.W. Operations since July 1997.
Previously he was the Managing Director of S.W. Operations from July 1996 to July 1997 and Director of S.W. Operations from July 1995 to June 1996. Following the Companys acquisition of the Honeywell, Inc. Keyboard Division, Mr. Perez served
as Plant Manager in Juarez from July 1993 to July 1995. He served as Plant Manager in Juarez for the Keyboard Division of Honeywell, Inc. from February 1989 to July 1993. Mr. Perez is a graduate of the University of Mexico with a B.S. in
Physics.



MICHAEL D. CHARD  Vice President of Materials



Mr. Chard, age 46, has been Vice President of Materials of the Company
since July 28, 2000. From February 1999 to July 28, 2000, he held various management positions with the Company in planning, quality assurance, and materials. From January 1997 to January 1999, he was Vice President of Product Delivery at Wang
Global and its predecessor Olivetti North America. From 1983 to 1996, he held various management positions in finance, marketing, and operations at ISC Systems, the predecessor to Olivetti North America. He holds a BA Degree in Business and
Accounting from Washington State University and is a Certified Public Accountant.



Compliance with Section 16(a) of the Exchange Act:



Incorporated by reference to Key Tronic Corporations 2003 Proxy Statement to Shareholders.



Code of Conduct



The Board of Directors
has adopted a written Code of Conduct which applies to its directors and employees, including its executive officers. The Code of Conduct is available on the Companys website at www.keytronic.com. The Company intends to disclose on its
website any amendments to or waivers of the Code of Conduct.



Item 11: EXECUTIVE COMPENSATION



Information
appearing under the caption Executive Compensation in the Companys 2004 Proxy Statement is incorporated herein by this reference.



Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The following table sets forth the aggregate information for the Companys equity compensation plans in effect as of July 3, 2004.



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EQUITY COMPENSATION PLAN INFORMATION



|                                                              |  |                                                                                               |  |                                                                              |      |                                                                                                                                           |        
|------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------- | ---- | ----------------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan category                                                 |  | Number of securities to be issued upon exerciseof outstanding options,warrants and rights (a) |  | Weighted-averageexercise price ofoutstanding options,warrants and
rights (b) |      | Number of securitiesremaining available forfuture issuance underequity
compensationplans (excludingsecurities reflected incolumn (a)) (c)
|Equity compensation plans approved by security holders        |  | 1,692,391                                                                                     |  | $                                                                            | 4.78 |                                                                                                                                           | 91,617 
|Equity compensation plans not approved by security holders(1) |  | 379,500                                                                                       |  | $                                                                            | 2.33 |                                                                                                                                           | 45,500 
|                                                              |  |                                                                                               |  |                                                                              |      |                                                                                                                                           |        
|Total                                                         |  | 2,071,891                                                                                     |  | $                                                                            | 4.33 |                                                                                                                                           | 137,117
|                                                              |  |                                                                                               |  |                                                                              |      |                                                                                                                                           |        

---

|(1) | Consists of the Key Tronic Corporation 2000 Employee Stock Option Plan
|--- | ----------------------------------------------------------------------



Information under the caption Beneficial Ownership of Securities in the Companys 2004 Proxy Statement is incorporated
herein by this reference.



Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Information appearing under the caption Certain Relationships and Transaction and Compensation Committee Interlocks and Insider Participation in the Companys 2004 Proxy Statement is incorporated herein by this
reference.



Item 14: PRINCIPAL ACCOUNTING FEES AND SERVICES



Information appearing under the caption Principal Accountant Fees and Services in the Companys 2004 Proxy Statement is incorporated herein by this reference.



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PART IV



Item 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



(a) 1. FINANCIAL STATEMENTS



|                                                                                                                   |  |                  
|------------------------------------------------------------------------------------------------------------------ |  | -----------------
|                                                                                                                   |  | Page in Form 10-K
|                                                                                                                  
|FINANCIAL STATEMENTS                                                                                               |  |                  
|Reports of Independent Registered Public Accounting Firms                                                          |  | 18-19            
|Consolidated Balance Sheets, as of July 3, 2004, and June 28, 2003                                                 |  | 20               
|Consolidated Statements of Operations for the years ended July 3, 2004, June 28, 2003, and June 29, 2002           |  | 21               
|Consolidated Statements of Shareholders Equity for the years ended July 3, 2004, June 28, 2003, and June 29, 2002 |  | 22               
|Consolidated Statements of Cash Flows for the years ended July 3, 2004, June 28, 2003, and June 29, 2002           |  | 23               
|Notes to Consolidated Financial Statements                                                                         |  | 24-35            



2. SCHEDULES



|                                                                 |  |                 
|---------------------------------------------------------------- |  | ----------------
|Independent Auditors Report on Financial Statement Schedule II. |  | 18, Exhibit 23.2
|Consolidated Valuation and Qualifying Accounts                   |  | 42              
|                                                                



Other schedules are omitted because of
the absence of conditions under which they are required, or because required information is given in the financial statements or notes thereto.



3. EXHIBITS



|            |  |                                                                                                                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                   
|3.1         |  | Articles of Incorporation, incorporated by reference to the Exhibits to the Companys form 10-K for the year ended June 30, 1986                                                              
|            | 
|3.2         |  | Bylaws, as amended, incorporated by reference to the Exhibits to the Companys Form 10-K for the year ended June 30, 1986                                                                     
|            | 
|10.1*       |  | Executive Stock Option Plan, incorporated by reference to Exhibits to the Companys Form 10-K for the year ended June 30, 1986                                                                
|            | 
|10.2*       |  | Amended and Restated 1990 Stock Option Plan for Non-Employee Directors, as amended, incorporated by reference to the Companys 1997 Proxy Statement (dated October 10, 1997), pages
14-17     
|            | 
|10.3*       |  | 1995 Executive Stock Option Plan, incorporated by reference to the Companys 1995 Proxy Statement, pages 19-22                                                                                
|            | 
|10.4*       |  | 2000 Employee Stock Option Plan, incorporated by reference to the Exhibits to the Companys Form 10-Q for the quarter ended January 1, 2000                                                   
|            | 
|10.5*       |  | Officers Employment Contracts, incorporated by reference to the Companys 1998 Proxy Statement, pages 10 and 11                                                                              
|            | 
|10.6*       |  | Employment Contract with Michael D. Chard, incorporated by reference to Exhibits to the Companys Form 10-K for the year ended July 1, 2000                                                   
|            | 
|10.7*       |  | Addenda to Officers Employment Contracts, incorporated by reference to Exhibits to the Companys Form 10-Q for the quarter ended January 1, 2000                                             
|            | 
|10.8*       |  | Description of Retention Bonus Plan, incorporated by reference to the Exhibits to the Companys 10-Q for the quarter ended December 28, 2002                                                  
|            | 
|10.9*       |  | Addenda to Officers Employment Contracts, incorporated by reference to Exhibits to the Companys Form 10-K for the year ended June 29, 2002                                                  
|            | 
|10.10       |  | Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Companys Form 10-Q for the quarter ended September 29, 2001                       
|            | 
|10.11       |  | First and Second Amendments to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Companys Form 10-K for the year ended June 29,
2002



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##### Table of Contents

|      |  |                                                                                                                                                                                          
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12 |  | Third Amendment to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Companys Form 10-Q for the quarter ended December 29,
2002
|      | 
|10.13 |  | Fourth Amendment to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Companys Form 10-K for the year ended June 28,
2003      
|      | 
|10.14 |  | Fifth Amendment to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Companys Form 10-Q for the quarter ended December 27,
2003
|      | 
|10.15 |  | Sixth Amendment to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Companys Form 10-Q for the quarter ended April 3,
2004    
|      | 
|10.16 |  | Seventh Amendment to Financing Agreement with CIT Group Business Credit, Inc., submitted herewith                                                                                        
|      | 
|10.17 |  | Eighth Amendment to Financing Agreement with CIT Group Business Credit, Inc., submitted herewith                                                                                         
|      | 
|14.   |  | Code of Conduct, submitted herewith                                                                                                                                                      
|      | 
|21.   |  | Subsidiaries of Registrant, submitted herewith                                                                                                                                           
|      | 
|23.1  |  | Consent of Independent Registered Public Accounting Firm, submitted herewith                                                                                                             
|      | 
|23.2  |  | Consent of Independent Registered Public Accounting Firm and Report on Schedule, submitted herewith                                                                                      
|      | 
|31.1  |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer, submitted herewith                                                                                                    
|      | 
|31.2  |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer, submitted herewith                                                                                                    
|      | 
|32.1  |  | Section 1350 Certification of Chief Executive Officer, submitted herewith                                                                                                                
|      | 
|32.2  |  | Section 1350 Certification of Chief Financial Officer, submitted herewith                                                                                                                

---

|* | Management contract or compensatory plan or arrangement
|- | -------------------------------------------------------



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##### Table of Contents

PART IV



SCHEDULE II



KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED VALUATION AND QUALIFYING
ACCOUNTS

FISCAL YEARS ENDED JULY 3, 2004, JUNE 28, 2003, AND

JUNE 29, 2002



|                                 |  |                |       |   |      |   |        |      |  |   |       |  
|-------------------------------- |  | -------------- | ----- | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                 |  | 2004           |       |   | 2003 |   |        | 2002 | 
|                                 |  | (in thousands) |      
|Allowance for Obsolete Inventory |  |                |       |   |      |   |        |      |  |   |       |  
|Balance at beginning of year     |  | $              | 3,513 |   |      | $ | 4,765  |      |  | $ | 2,712 |  
|Provisions                       |  |                | 162   |   |      |   | 203    |      |  |   | 2,225 |  
|Dispositions                     |  |                | (494  | ) |      |   | (1,455 | )    |  |   | (172  | )
|                                 |  |                |       |   |      |   |        |      |  |   |       |  
|Balance at end of year           |  | $              | 3,181 |   |      | $ | 3,513  |      |  | $ | 4,765 |  
|                                 |  |                |       |   |      |   |        |      |  |   |       |  
|Allowance for Doubtful Accounts  |  |                |       |   |      |   |        |      |  |   |       |  
|Balance at beginning of year     |  | $              | 105   |   |      | $ | 444    |      |  | $ | 633   |  
|(Recovery) provisions            |  |                |      |   |      |   | (56    | )    |  |   | 175   |  
|Write-offs                       |  |                | (45   | ) |      |   | (283   | )    |  |   | (364  | )
|                                 |  |                |       |   |      |   |        |      |  |   |       |  
|Balance at end of year           |  | $              | 60    |   |      | $ | 105    |      |  | $ | 444   |  
|                                 |  |                |       |   |      |   |        |      |  |   |       |  



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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.



Dated: September 17, 2004



KEY TRONIC CORPORATIONBy:

/s/ Jack W. OehlkeJack W. Oehlke, Director, President,and Chief Executive Officer




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##### Table of Contents

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated:



|                                  |  |                   
|--------------------------------- |  | ------------------
|/s/ Jack W. Oehlke                |  | September 17, 2004
|Jack W. Oehlke                    |  | Date              
|(Director, President and          |  |                   
|Chief Executive Officer)          |  |                   
|                                  | 
|/s/ Ronald F. Klawitter           |  | September 17, 2004
|Ronald F. Klawitter               |  | Date              
|(Principal Financial Officer)     |  |                   
|                                  | 
|/s/ Dale F. Pilz                  |  | September 17, 2004
|Dale F. Pilz                      |  | Date              
|(Director, Chairman of the Board) |  |                   
|                                  | 
|/s/ Wendell J. Satre              |  | September 17, 2004
|Wendell J. Satre                  |  | Date              
|(Director)                        |  |                   
|                                  | 
|/s/ Yacov A. Shamash              |  | September 17, 2004
|Yacov A. Shamash                  |  | Date              
|(Director)                        |  |                   
|                                  | 
|/s/ Patrick Sweeney               |  | September 17, 2004
|Patrick Sweeney                   |  | Date              
|(Director)                        |  |                   
|                                  | 
|/s/ William E. Terry              |  | September 17, 2004
|William E. Terry                  |  | Date              
|(Director)                        |  |                   



44