10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

for the quarterly period ended December 31, 2003

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 0-13143

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

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

5540 Pioneer Creek Drive, Maple Plain, MN 55359
(Address of principal executive offices)

(763) 479-5300
(Registrant’s telephone number, including area code)

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

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

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

          Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date: As of January 21, 2004, 19,008,740 shares of the registrant’s common stock, $.04 par value per share, were outstanding.

Index

		Page
PART I	FINANCIAL INFORMATION
Item 1	Financial Statements.	3-7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of
	Operations.	7-12
Item 3	Quantitative and Qualitative Disclosures about Market Risk.	13
Item 4	Controls and Procedures.	13
PART II	OTHER INFORMATION
Item 6	Exhibits and Reports on Form 8-K.	14
SIGNATURES		15

Page 2

PART 1:   ITEM 1: FINANCIAL STATEMENTS

INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)

	December 31, 2003		September 30, 2003
ASSETS
Current assets:
Cash and equivalents	$	19,665,679	$	21,606,761
Accounts receivable, net		27,950,835		24,449,708
Inventories		11,413,246		8,634,976
Deferred income taxes – current		3,883,473		3,883,473
Other current assets		2,181,973		1,956,442
Total current assets		65,095,206		60,531,360
Property, plant and equipment, net of accumulated depreciation
of $52,995,000 and $50,163,000		66,087,381		66,880,644
Goodwill		3,000,971		3,000,971
Deferred income taxes – long-term		4,544,152		4,829,068
Other assets		2,321,282		2,341,108
	$	141,048,992	$	137,583,151
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	5,867,219	$	5,190,580
Accounts payable		19,294,852		15,805,111
Accrued compensation		2,231,891		2,261,101
Other accrued liabilities		1,648,947		1,692,625
Total current liabilities		29,042,909		24,949,417
Long-term debt, less current maturities		6,432,501		9,086,977
Stockholders’ equity:
Common stock, $.04 par value; 30,000,000 shares authorized,
18,970,420 and 18,906,739 shares issued and outstanding		758,817		756,270
Capital in excess of par value		60,178,947		59,748,421
Retained earnings		44,635,818		43,042,066
Total stockholders’ equity		105,573,582		103,546,757
	$	141,048,992	$	137,583,151

See accompanying notes to condensed consolidated financial statements.

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INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)

	Three Months Ended December 31,
	2003			2002
Net sales	$	44,343,523		$	34,525,238
Costs and expenses:
Cost of sales		35,618,774			31,030,160
Selling, general and administrative		4,957,045			4,622,749
Engineering		1,750,980			1,535,791
Restructuring charges		—			750,000
Net interest (income) expense		159,086			567,835
Net other (income) expense		(46,376	)		91,702
Income (loss) before taxes		1,904,014			(4,072,999	)
Income taxes		310,262			(1,776,554	)
Net income (loss)	$	1,593,752		$	(2,296,445	)
Net income (loss) per share:
Basic	$	0.08			($ 0.15	)
Diluted	$	0.08			($ 0.15	)
Weighted average shares outstanding:
Basic		18,937,336			15,158,740
Diluted		19,762,048			15,158,740

See accompanying notes to condensed consolidated financial statements.

Page 4

INNOVEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

	Three Months Ended December 31,
	2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	1,593,752		$	(2,296,445	)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization		2,871,151			3,076,354
Restructuring charges		—			750,000
Other non-cash items		(9,624	)		8,415
Changes in operating assets and liabilities:
Accounts receivable		(3,501,127	)		(1,127,330	)
Inventories		(2,778,270	)		695,858
Deferred income taxes		284,916			(1,781,316	)
Other current assets		(225,531	)		(215,984	)
Accounts payable		3,489,741			2,457,543
Other liabilities		(72,888	)		556,465
Net cash provided by (used in) operating activities		1,652,120			2,123,560
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(2,086,438	)		(1,551,559	)
Other		38,000			4,000
Net cash provided by (used in) investing activities		(2,048,438	)		(1,547,559	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt		(1,977,837	)		(3,097,267	)
Net activity on line of credit		—			3,201,618
Proceeds from exercise of stock options		433,073			89,069
Net cash provided by (used in) financing activities		(1,544,764	)		193,420
Increase (decrease) in cash and equivalents		(1,941,082	)		769,421
Cash and equivalents at beginning of period		21,606,761			2,364,136
Cash and equivalents at end of period	$	19,665,679		$	3,133,557

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid for interest was $278,000 and $661,000 in the three months ended December 31, 2003 and 2002.

Income tax payments were $5,900 and $6,000 in the three months ended December 31, 2003 and 2002.

See accompanying notes to condensed consolidated financial statements.

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INNOVEX INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

NOTE 1 – FINANCIAL INFORMATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions on Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of Innovex, Inc. and its subsidiaries (the “Company”) after elimination of all significant intercompany transactions and accounts. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of operating results have been made. Operating results for interim periods are not necessarily indicative of results that may be expected for the year as a whole. The Company utilizes a fiscal year that ends on the Saturday nearest to September 30. For clarity of presentation, the Company has described all periods as if they end at the end of the calendar quarter. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2003.

Preparation of the Company’s condensed consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from these estimates.

NOTE 2 – RESTRUCTURING CHARGES

During fiscal 2001, the Company recorded asset impairment and restructuring charges of $9,754,000 and $10,124,000 related to the restructuring of the Company’s manufacturing operations. The restructuring is primarily related to moving manufacturing operations from the Company’s Chandler, Arizona facility to the Company’s Minnesota locations. During fiscal 2002 and the fiscal 2003 first quarter, additional restructuring charges of $876,000 and $750,000, respectively, were recorded due to an increase in the estimate of the leased Chandler facility disposition costs. As of March 31, 2003, the restructuring was substantially complete.

The remaining restructuring accrual as of December 31, 2003 totaled $77,000. Selected information regarding the restructuring follows (in thousands):

	Manufacturing Operations Restructuring – Arizona
	Facility Abandonment Charges			Employee Termination Benefits		Total
Accrual at October 1, 2003	$	59		$	25	$	84
Payments		(7	)		—		(7	)
Accrual at December 31, 2003	$	52		$	25	$	77

NOTE 3 – INCOME (LOSS) PER SHARE

The Company’s basic net loss per share is computed by dividing net income (loss) by the weighted average number of outstanding common shares. The Company’s diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of outstanding common shares and common share equivalents relating to stock options when dilutive. Options to purchase 576,700 shares of common stock with a weighted average exercise price of $14.21 were outstanding during the three month period ending December 31, 2003, but were excluded from the computation of common share equivalents because they were not dilutive. Options to purchase 1,357,850 shares of common stock with a weighted average exercise price of $10.42 were outstanding during the three month period ending December 31, 2002, but were excluded from the computation of common share equivalents because they were not dilutive.

Page 6

The Company’s fiscal 2004 first quarter pro forma net income would have been $1,490,000 or $0.08 diluted net income per share had the fair value method been used for valuing options granted. The Company’s fiscal 2003 first quarter pro forma net loss would have been ($2,474,000) or ($0.16) diluted net loss per share had the fair value method been used for valuing options granted. The weighted average fair value of options granted in the fiscal 2004 and 2003 first quarters was $4.80 and $1.14, respectively. The value was computed by applying the following weighted average assumptions to the Black Scholes options pricing model: volatility of 64% and 88%; dividends yields of 0.0%; risk-free rate of return of 3.2% and 2.6%; and an average term of 4.5 years for 2004 and 2003. No adjustment was made to the Black Scholes calculation to reflect that the options are not freely traded.

NOTE 4 – INVENTORIES

Inventories are comprised of the following (in thousands):

	December 31, 2003		September 30, 2003
Raw materials and purchased parts	$	6,017	$	4,361
Work-in-process and finished goods		5,396		4,274
	$	11,413	$	8,635

NOTE 5 – DERIVATIVE INSTRUMENTS

The Company enters into forward exchange contracts that are recorded at fair value with related fair value gains or losses recorded in income within the caption net other (income) expense. Generally, these contracts have maturities of six months or less. These contracts are entered into to offset the gains or losses on foreign currency denominated assets and liabilities. The Company does not enter into forward exchange contracts for trading purposes and the contracts are not designated as hedges. At December 31, 2003, the Company had open forward exchange contracts to buy Thailand baht maturing January 9, 2004 with notional amounts of 150,000,000. The total open contracts for 150,000,000 baht equates to approximately $3.8 million.

NOTE 6 – REVENUE RECOGNITION

Innovex makes electronic components (flexible circuits) based on customer specifications. The Company’s revenue recognition policy is consistently applied regardless of sales channels utilized and product destination. The Company has an implied warranty that the products meet the customer’s specification. Credits are only issued for customer returns. In recognizing revenue in any period, the company applies the provisions of SEC Staff Accounting Bulletin 101, “Revenue Recognition.” Revenue from product sales is recognized when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured.

For all sales, a binding purchase order is used as evidence of an arrangement. The Company also stores inventory in warehouses (JIT hubs – third party owned warehouses) that are located close to the customer’s manufacturing facilities. Revenue is recognized on sales from JIT hubs upon the transfer of title and risk of loss, following the customer’s acknowledgement of the receipt of the goods.

NOTE 7 – RECLASSIFICATIONS

Certain 2003 amounts have been reclassified to conform to the 2004 presentation. These reclassifications had no effect on net income (loss) or stockholders’ equity as previously reported.

PART I:   ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and notes to those statements included in this report. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those described under the heading “Risks Related to Our Business” in our Annual Report on Form 10-K for the year ended September 30, 2003, as well as others not now anticipated.

Page 7

          We utilize a fiscal year that ends on the Saturday nearest to September 30. For clarity of presentation, we have described all periods as if they end at the end of the calendar quarter. The first quarter of fiscal 2004 included 14 weeks while all remaining quarters of fiscal 2004 and all fiscal 2003 quarters include 13 weeks.

Overview

          We are a leading worldwide provider of flexible circuit interconnect solutions to OEMs in the electronics industry. We offer a full range of customized flexible circuit applications and services from initial design, development and prototype to fabrication, assembly and test on a global basis. We target high-volume markets where miniaturization, form and weight are driving factors and flexible circuits are an enabling technology. Applications for flexible circuits currently addressed by us include data storage devices such as hard disk drives, liquid crystal displays (“LCDs”) for mobile communication devices, tape drives and arrays, flat panel displays and printers. Our customers include 3M, Dell, Hitachi, HP, Maxtor, Medtronic, Philips, Quantum, SAE Magnetics (a subsidiary of TDK), Samsung, Seagate, Staktek, StorageTek, Xerox and other leading electronic OEMs.

Net Sales and Revenue Recognition

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

Costs and Expenses

          Cost of sales consists primarily of:

• material costs for raw materials and semi-finished components used for assembly of our products;

• labor costs directly related to manufacture, assembly and inspection of our products;

• costs of general utilities, production supplies and chemicals consumed in the manufacturing processes;

• costs related to the maintenance of our manufacturing equipment and facilities;

• costs related to material and product handling and shipment;

• depreciation costs related to facilities, machinery and equipment used to manufacture, assemble and inspect our products; and

• salaries and overhead attributed to our supply chain, process engineering and manufacturing personnel.

          Selling, general and administrative expenses primarily consist of:

• salaries and related selling (commissions, travel, business development and program management), administrative, finance, human resources, regulatory, information services and executive personnel expenses;

• other significant expenses related to external accounting, software maintenance and legal and regulatory fees; and

• overhead attributed to our selling, general and administrative personnel.

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

• salaries and related development personnel expenses;

• overhead attributed to our development and test engineering personnel; and

• prototyping costs related to the development of new products.

Page 8

          Restructuring charges are those costs primarily related to manufacturing facility closures, severance and product discontinuations. In fiscal 2001, we recorded restructuring charges related to closing our Chandler, Arizona facility and transferring manufacturing operations to our Minnesota and Thailand locations. Because we initially underestimated the costs relating to this restructuring, we recorded additional restructuring charges in fiscal 2002 and 2003. We believe that the restructuring related to the closing of the Chandler facility has been substantially completed.

Results of Operations

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

	For the Three months Ended December 31,
	2003			2002
Net Sales		100	%		100	%
Cost of goods sold		80.3			89.9
Gross profit		19.7			10.1
Operating expenses:
Selling, general and administrative		11.2			13.4
Engineering		3.9			4.4
Restructuring		—			2.2
Total operating expenses		15.1			20.0
Income (loss) from operations		4.6			(9.9	)
Interest and other expense, net		(0.3	)		(1.9	)
Income (loss) before income taxes		4.3			(11.8	)
Income taxes		0.7			(5.1	)
Net income (loss)		3.6	%		(6.7	)%

Comparison of Three Months Ended December 31, 2003 and 2002

Net Sales

          Our net sales were $44.3 million for the three months ended December 31, 2003, compared to $34.5 million for the three months ended December 31, 2002, an increase of 28%. This increase was due to higher sales generated by flex suspension assembly (FSA), disk drive actuator flex circuit (AFC), liquid crystal display (LCD) and stacked memory product lines. The increased FSA sales were related to improved market share as our largest customer in the disk drive industry transitioned to the 80 gigabyte (“GB”) per platter technology platform. The increased AFC sales were related to market share increases with one of our larger customers. The LCD sales improvement was due to continued strong demand for the mobile phone product using our initial LCD flexible circuit. Revenue from our stacked memory applications also increased as our stacked memory customers experienced higher demand.

          Sales from the disk drive industry generated 75% of our net sales for the three months ended December 31, 2003, compared to 73% for the three months ended December 31, 2002. Sales from integrated circuit packaging applications were 10%, compared to 8%, display application net sales were 8% versus 3%, network system application sales were 4% compared to 7% and sales from other industry applications were 3% for the three months ended December 31, 2003 compared to 9% for the three months ended December 31, 2002.

Page 9

Gross Profit

          Our gross profit was $8.7 million for the three months ended December 31, 2003, compared to $3.5 million for the three months ended December 31, 2002, an increase of 149%. Our gross margin for the three months ended December 31, 2003 increased to 20%, compared to 10% for the three months ended December 31, 2002. The increase in gross margin was primarily due to higher net sales increasing fixed cost leverage and efficiency improvements primarily related to our Six Sigma initiative.  We anticipate that gross margins for the remainder of fiscal 2004 will continue to improve as new programs begin to increase revenue levels and additional Six Sigma savings are realized.

Selling, General and Administrative

          Selling, general and administrative expenses for the three months ended December 31, 2003 were $5.0 million, compared to $4.6 million in the three months ended December 31, 2002. As a percentage of net sales, selling, general and administrative expenses were 11% for the three months ended December 31, 2003, down from 13% for the same period in the prior year. The dollar increase in selling, general and administrative expenses over the prior year is primarily due to the accrual of incentive based compensation and the inclusion of 14 weeks of expenses in the fiscal 2004 first quarter as compared to 13 weeks in the fiscal 2003 first quarter. The decrease in fiscal 2004 as a percent of net sales was primarily due to an increase in fiscal 2004 net sales.  Selling, general and administrative expenses for the remainder of fiscal 2004 are expected to decrease as a percentage of net sales due to anticipated increased sales.

Engineering

          Engineering expenses for the three months ended December 31, 2003 were $1.8 million, compared to $1.5 million for the three months ended December 31, 2002, an increase of 20%. The increase in fiscal 2004 engineering expenses was primarily due to increased spending on new product development, qualifying products and processes for new applications including LCD displays, printers, integrated circuit packaging substrates and other high-end flexible circuit technology development related to new products. In addition, the fiscal 2004 first quarter included 14 weeks of expenses as compared to 13 weeks in the fiscal 2003 first quarter. As a percentage of net sales, engineering expenses were 4% of sales for the three months ended December 31, 2003, unchanged as compared to the same period in the prior year. Engineering expenses for the remainder of fiscal 2004 are expected to decrease as a percentage of net sales due to an expected increase in sales.

Net Interest and Other Expense

          Net interest expenses were $0.2 million for the three months ended December 31, 2003, compared to the $0.6 million reported for the three months ended December 31, 2002. The decrease is due to a portion of the proceeds from a secondary public offering of the Company’s common stock in the fourth quarter of fiscal 2003 being used to reduce the level of outstanding debt. Net other (income) expense was ($46,000) in the three months ended December 31, 2003 as compared to $92,000 in the three months ended December 31, 2002. The change was the result of foreign currency exchange gains being incurred in fiscal 2004 while foreign currency losses were incurred in fiscal 2003.

Income Taxes

          Income tax expense for the three months ended December 31, 2003 was $310,000, compared to an income tax benefit of $1.8 million for the three months ended December 31, 2002. The fiscal 2004 effective tax rate was lower than the statutory federal rate primarily due to the exclusion of income generated from our foreign operating corporation. We have determined that it is more likely than not that we will be able to utilize the tax benefit carried on our balance sheet in the future.

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Critical Accounting Policies

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

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

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

•Goodwill.  Goodwill and other intangible assets with indefinite lives are tested for impairment annually or whenever an impairment indicator arises. If events or circumstances change, including reductions in anticipated cash flows generated by operations, goodwill could become impaired and result in a charge to earnings.

•Deferred Taxes.  We account for income taxes using the liability method. Deferred income taxes are provided for temporary differences between the financial reporting and tax bases of assets and liabilities. A valuation allowance is set up where the realization of any deferred taxes becomes less likely than not to occur. We analyze the valuation allowance periodically which may result in income tax expense being different than statutory rates.

•Revenue Recognition. We make electronic components (flexible circuits) based on customer specifications. Our revenue recognition policy is consistently applied regardless of sales channels utilized and product destination. We have an implied warranty that the products meet our customer’s specification. Credits are only issued for customer returns. In recognizing revenue in any period, we apply the provisions of SEC Staff Accounting Bulletin 101, “Revenue Recognition.” Revenue from product sales is recognized when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. For all sales, a binding purchase order is used as evidence of an arrangement. We also store inventory in warehouses (JIT hubs – third party owned warehouses) that are located close to our customer’s manufacturing facilities. Revenue is recognized on sales from JIT hubs upon the transfer of title and risk of loss, following our customer’s acknowledgement of the receipt of the goods.

Liquidity and Capital Resources

          We have historically financed our operations primarily through cash from operating activities, bank credit facilities and employee stock option exercises. Cash and equivalents were $19.7 million at December 31, 2003 and $21.6 million at September 30, 2003.

          For the three months ended December 31, 2003, net cash provided by operating activities of $1.7 million benefited from net income and non-cash charges for depreciation and an increase in accounts payable more than offsetting increases in accounts receivable and inventories. Accounts payable and inventories increased as a result of the increased manufacturing activity levels and to prevent any material shortages during the calendar year-end holiday period. Accounts receivable increased as a result of the increased sales level during the quarter and as payment terms with one of our largest customers were extended.

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          Net cash used in investing activities was $2.0 million in the fiscal 2004 first quarter, compared to $1.5 million in the fiscal 2003 first quarter. In the fiscal 2004 first quarter, net cash used in investing activities was attributed to the purchase of selected equipment to expand capacity in our bottleneck processes. Fiscal 2003 first quarter net cash used in investing activities was due to capital expenditures primarily for test equipment and capacity increases in selected areas.

          Net cash used in financing activities was $1.5 million in the fiscal 2004 first quarter, compared to net cash provided by financing activities of $0.2 million in the fiscal 2003 first quarter. During the fiscal 2004 first quarter, net cash used in financing activities was due to scheduled debt payments on our Thailand debt facilities and US based capital leases. Fiscal 2003 first quarter net cash provided by financing activities was due to scheduled debt payments being offset by draw downs under our Thailand packing credit facilities

          In April 2001, we entered into a 1.2 billion Thailand baht (approximately $28.0 million) credit facility agreement with Bank of Ayudhya Public Company Limited and The Industrial Finance Corporation of Thailand. The facility is comprised of a 590 million baht long-term facility, a 530 million baht packing credit facility, a 70 million baht short-term working capital facility and a 10 million baht overdraft facility. The Thailand based facility is secured by certain receivables, inventory and assets held by us in Thailand. In June 2002, we completed a 300 million Thailand baht (approximately $6.8 million) expansion of our Thailand credit facilities also secured by certain receivables and inventory held by us in Thailand. In February 2003, we completed a 220 million baht (approximately $5.1 million) expansion of our Thailand credit facilities, increased our working capital facility by 150 million baht and reduced our packing credit facility by 150 million baht. The new long-term debt is secured by specified equipment held by Innovex Thailand, our wholly owned subsidiary. As of December 31, 2003 we had approximately $10.3 million outstanding under our Thailand credit facilities. We are currently in compliance with covenants under our Thailand based financing agreements.

          We believe that with the existing U.S. and Thailand credit facilities, cash generated from operations and the proceeds from a secondary offering of our common stock received on August 4, 2003, we will have adequate funds to support projected working capital and capital expenditures for the next twenty-four months. We are considering alternatives for generating additional working capital and long-term financing and will continue to pursue financing opportunities to better leverage our assets. Our financing needs and the financing alternatives available to us are subject to change depending on, among other things, general economic and market conditions, changes in industry buying patterns, customer acceptance of our FSA, actuator flex, stacked memory flex and display flex products and cash flow from operations.

Recent Accounting Pronouncements

          There have been no relevant accounting pronouncements since the end of fiscal 2003.

Forward Looking Statements

          Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in this report and in future filings by the Company with the SEC, except for the historical information contained herein and therein, are “forward-looking statements” that involve risks and uncertainties. These risks and uncertainties include: the increased utilization by our largest customer of alternative interconnect technologies that compete with our FSA product, the timely availability and acceptance of new products including the FgSA, display flexible circuits and integrated circuit packaging substrates, the impact of competitive products and pricing, interruptions in the operations of the Company’s single source suppliers, changes in manufacturing efficiencies and other risks detailed from time to time in the Company’s reports filed with the Securities and Exchange Commission, including those risks described under the heading “Risks Related to Our Business” in our Annual Report on Form 10-K for the year ended September 30, 2003. In addition, a significant portion of the Company’s revenue is generated from the disk drive, integrated circuit substrates, consumer electronics and data storage industries and the global economic downturn has had and a continued economic downturn will continue to have an adverse impact on the Company’s operations. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect subsequent events or circumstances or the occurrence of unanticipated events.

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PART 1:   ITEM 3:   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

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

          We periodically review the outlook for expected currency exchange rate movements as well as the policy on desired future foreign currency cash flow positions (long, short or balanced) for those currencies in which we have significant activity. Expected future cash flow positions and strategies are continuously monitored. At December 31, 2003, we had open forward exchange contracts to buy Thailand baht maturing January 9, 2004 with a notional amount of 150 million Thailand baht, (approximately $3.8 million). No assurance can be given that our strategies will prevent future currency fluctuations from adversely affecting our business, financial condition and results of operations.

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

PART 1:  ITEM 4:   CONTROLS AND PROCEDURES

(a)  Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer, William P. Murnane, and Chief Financial Officer, Thomas Paulson, have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that review, they have concluded that these controls and procedures are effective in ensuring that material information related to the Company is made known to them by others within the Company.

(b)   Changes in Internal Control Over Financial Reporting

There have been no significant changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Responses to Items 1 through 5 are omitted since these items are either inapplicable or the response thereto would be negative.

ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibits are included herein:

3(b) Bylaws, as amended through January 20, 2004

10 Form of Employment Agreement

31.1 Certification of Chief Executive Officer pursuant Rules 13a-14 and 15d-14 of the Exchange Act.

31.2 Certification of Chief Financial Officer pursuant Rules 13a-14 and 15d-14 of the Exchange Act.

32 Certificate pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

(b) Reports on Form 8-K.

On November 3, 2003, the Company furnished a Current Report on Form 8-K to the Securities and Exchange Commission reporting under Item 12 the disclosure of material non-public information relating to the Company’s results of operations for the year and quarter ended September 30, 2003 and attaching at Item 7 Company’s November 3, 2003 earnings release.

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SIGNATURES

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

INNOVEX, INC.
Registrant

Date: February 3, 2004

By \s\ William P. Murnane
William P. Murnane
President and Chief Executive Officer

By \s\ Thomas Paulson
Thomas Paulson
Chief Financial Officer

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EX-3.(B)

Exhibit 3(b)

AMENDED AND RESTATED

BYLAWS

OF

INNOVEX, INC.

ARTICLE I

Shareholders

Section 1. The shareholders of this corporation shall hold an annual meeting in each calendar year at such time and place, within or without the State of Minnesota, as may be designated by the Board of Directors, provided, however, that the interval between two consecutive annual meetings shall not be more than fourteen (14) months nor less than ten (10) months. A notice setting out the time and place of the annual meeting shall be mailed by the secretary of the corporation, or his delegate, postage prepaid, to each shareholder of record at his address as it appears on the records of the corporation, or, if no such address appears, at his last known place of residence, at least ten (10) days prior to said annual meeting, but any shareholder may waive such annual notice by a signed waiver in writing.

Section 2. At the annual meeting the shareholders shall elect directors of the corporation and shall transact such other business as may come before them.

Section 3. A special meeting of the shareholders may be called at any time by the president, and shall be called by the president or the secretary upon the request in writing, or by vote of, one third of the directors or upon the request in writing of shareholders of record owning one-fourth of the outstanding shares of common stock. Such meeting shall be called by mailing a notice thereof as above provided in the case of the annual meeting of shareholders, which notice shall state the purpose or purposes of the meeting.

Section 4. At any shareholders’ meeting, each shareholder shall be entitled to one (1) vote for each share of common stock standing in his name on the books of the corporation as of the date of the meeting. Any shareholder may vote either in person or by proxy. The presence in person or by proxy of the holders of a majority of the shares of common stock entitled to vote at any shareholders’ meeting shall constitute a quorum for the transaction of business. If no quorum be present at any meeting, the shareholders present in person or by proxy may adjourn the meeting to such future time as they shall agree upon without further notice other than by announcement at the meeting at which such adjournment is taken.

ARTICLE II

Directors

Section 1. The Board of Directors shall have the general management and control of all business and affairs of the corporation and shall exercise all the powers that may be exercised or performed by the corporation under the statutes, its Articles of Incorporation and its Bylaws.

Section 2. The Board of Directors consists of not less than 3 nor more than 9 directors, as may be designated by resolution of the Board of Directors from time to time.

Section 3. The term of office of each director shall extend from the annual meeting of shareholders at which he was elected until the next annual meeting.

Section 4. If a vacancy or vacancies in the Board of Directors occur for any reason, such vacancy or vacancies may be filled, until the next annual meeting of shareholders, by a vote of a majority of the remaining directors.

Section 5. The Board of Directors may meet regularly at such time and place as it shall fix by resolution, and no notice of regular meetings shall be required. Special meetings of the Board of Directors may be called by the Chairman of the Board, the president or by any two (2) directors by giving at least twenty-four (24) hours’ notice to each of the other directors by mail, telephone, telegraph, or in person.

Section 6. A majority of the directors shall constitute a quorum for the transaction of business. Any act which might have been taken at a meeting of the Board of Directors may be taken without a meeting if authorized in a writing signed by all of the directors, any such action shall be as valid and effective in all respects as if taken by the Board at a regular meeting.

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Section 7. The Board of Directors shall fix and change, as it may from time to time determine, the compensation to be paid the president, and may fix and change, as it may from time to time determine, the compensation to be paid the other officers of the corporation.

Section 8. The Board of Directors may designate two (2) or more of their number to constitute an Executive Committee which, to the extent determined by the Board, shall have and exercise the authority of the Board in the management of the business of the corporation. Such Executive Committee shall act only in the interval between meetings of the Board and shall be subject at all times to the control and direction of the Board.

ARTICLE III

Officers

Section 1. The officers of this corporation shall be a president, a treasurer, a secretary and such vice presidents and other officers as may from time to time be elected by the Board of Directors. If a Chairman of the Board of Directors is elected, he shall have the status of an officer of the corporation. All officers shall be elected by the Board of Directors and shall serve at the pleasure of the Board of Directors. Any two (2) of the offices except those of the president and vice president may be held by the same person.

Section 2. The president may fix and change, as he may from time to time determine, the compensation to be paid the officers, other than the president, and the employees of the corporation, subject to the power of the directors to fix and change the compensation of the officers.

Section 3. The vice president, or first vice president if there is more than one, shall perform the duties and assume the responsibilities of the president in the absence or inability to act of the president. In case of the death, resignation or permanent disability of the president, the vice president shall act as president until the Board of Directors designates such new president.

Section 4. The secretary shall keep a record of the minutes of the proceedings of meetings of directors and of shareholders, have custody of the corporate seal and shall give notice of such meetings as required in these Bylaws or by the Board of Directors.

Section 5. The treasurer shall keep accounts of all monies and other assets of the corporation received or disbursed, shall deposit all monies and valuables in the name of and to the credit of the corporation in such banks or depositories or with such custodians as may be authorized to receive the same by these Bylaws and by the Board of Directors, and shall render such accounts thereof as may be required by the Board of Directors, the president or the shareholders.

Section 6. The Chairman of the Board of Directors, or the president if there be no Chairman, shall preside at all meetings of the Board of Directors and of the shareholders, shall make such reports to the Board and the shareholders as may from time to time be required of him and shall have such other powers and perform such other duties as are incident to his office or as may be from time to time assigned to him by the Board of Directors.

ARTICLE IV

Office

The principal office of the corporation shall be in the City of Minneapolis in the State of Minnesota. The corporation may also have an office or offices in such other places and in such other states as the Board of Directors may from time to time authorize and establish.

ARTICLE V

Seal; Stock Certificates

Section 1. The corporate seal of the corporation shall consist of the name of the corporation and the name of the state of incorporation and shall be in such form and bear such other inscription as the Board of Directors may determine.

Section 2. Stock certificates issued by the corporation shall be signed by any two (2) officers. When a certificate is signed by a transfer agent or registrar, the signature of any such officer and the corporate seal may be facsimiled, engraved or printed.

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ARTICLE VI

Closing of Stock Records of

Fixing of Record Date

The Board of Directors shall have power to close the stock records of the corporation for a period not to exceed sixty (60) days preceding the date of any meeting of shareholders, or the date for payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or for a period of not exceeding sixty (60) days in connection with obtaining the consent of the shareholders for any purpose; provided, however, that in lieu of closing the stock records, the Board of Directors may fix in advance a date not exceeding sixty (60) days preceding the date of any meeting of shareholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining such consent of shareholders, as a record date for the determination of the shareholders entitled to receive notice of and to attend such meeting of shareholders, or for the determination of shareholders entitled to receive payment of any such dividend or to receive any such allotment of rights or to exercise rights in respect of any such change, conversion or exchange of capital stock, or to give any such consent, as the case may be, and in such case only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to such notice of and to attend such meeting, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise any rights, or to give such consent, as the case may be, notwithstanding the transfer of any stock on the books of the corporation after any such record date fixed as aforesaid.

ARTICLE VII

Indemnification

Section 1. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, wherever brought, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

Section 2. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of another corporation, or is or was serving at the request of the corporation as director or officer of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the District Court of the State of Minnesota or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the District Court of the State of Minnesota or such other court shall deem proper.

Section 3. To the extent that any person referred to in Sections 1 and 2 of this Article VII has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to herein or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.

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Section 4. Any indemnification under Sections 1 and 2 of this Article VII (unless ordered by a court) shall be made by the corporation, only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 1 and 2 of this Article VII. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such quorum is not obtainable, or even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders.

Section 5. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of the director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as provided in this Article VII.

Section 6. The indemnification provided by this Article VII shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any statutes, bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person.

Section 7. The corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VII.

Section 8. The Board of Directors may, by resolution, extend the indemnification provisions of the foregoing Article VII to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he is or was an employee or agent of the corporation, or is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise.

ARTICLE VIII

Indemnification of Corporation

Any payment made to an officer of the corporation such as salary, commission, bonus, interest or rent, or entertainment expense incurred by him, which shall be disallowed in whole or in part as a deductible expense by the Internal Revenue Service shall be reimbursed by such officer to the corporation to the full extent of such disallowance. It shall be the duty of the directors, as a Board, to enforce payment of such amount disallowed. In lieu of payment by the officer, subject to the determination of the directors, proportionate amounts may be withheld from his future compensation payments until the amount owed to the corporation has been recovered.

ARTICLE IX

Adoption and Amendment of Bylaws

Section 1. The Board of Directors may alter or amend these Bylaws and may make or adopt additional Bylaws subject to the power of the shareholders to change or repeal the Bylaws, except that the Board of Directors shall not make or alter any Bylaws fixing their qualifications, classifications or term of office, or reducing their number.

Section 2. The shareholders may alter or amend these Bylaws and may make or adopt additional Bylaws by a majority vote at any annual meeting of the shareholders or at any special meeting called for that purpose.

Amended By the Board of Directors: October 10, 2003
Amendments Approved by Shareholders: January 20, 2004

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EX-10

Exhibit 10

EMPLOYMENT AGREEMENT

          This Employment and Confidentiality Agreement (hereinafter “Agreement”) is entered into between Innovex, Inc. and Name (“Employee”) effective as of Date.

          WHEREAS, Innovex is a technology company engaged in continuing research and development; and

          WHEREAS, the Employee has been hired by Innovex as Position, to perform such duties as may from time to time be directed by Innovex; and

          WHEREAS, Innovex and the Employee deem it essential to formalize the conditions of Employee’s employment by written agreement; and

          WHEREAS, the Employee has entered into this Agreement in consideration of Innovex’s continuing employment and the benefits associated with that employment;

          NOW THEREFORE, in consideration of the mutual covenants, terms and conditions herein contained, it is hereby agreed by and between the parties hereto as follows:

1. Employment Duties and Obligations. Innovex hereby employs the Employee and the Employee accepts such employment on the following terms and conditions:

1.1. Duties. Except as otherwise herein provided at Section 1.3, the Employee shall devote his full business time and best efforts to the operations of Innovex, including normal duties as Position. Employee agrees to faithfully and diligently exert his best efforts to perform the duties and responsibilities of employment, promote the interest and welfare of Innovex and its business, be familiar with Innovex’s policies that relate to his duties and to abide by these policies, and do nothing which may cause loss or damage to Innovex, its business or its business reputation and goodwill. During the period of employment, Employee agrees not to solely, or jointly with others, undertake or join any planning for or organization of any business activity competitive with the business activities of Innovex. Employee further agrees to comply with all reasonable rules, regulations, orders and directives of Innovex, its management and/or its Board of Directors (“Innovex Management”).

1.2. Supervision. Employee shall at all times discharge his duties in consultation with, and under the supervision of, Innovex Management.

1.3. Outside Activities. This Agreement shall not preclude the Employee from participating in the affairs of any other business organization, or any governmental, educational or other charitable institution, provided that the Board is notified in advance of such participation and has determined that such activities do not unreasonably interfere with Innovex’s business or diminish the Employee’s obligations under this Agreement. Such determination by the Board shall not be unreasonably withheld.

2. Compensation and Benefits. In return for the Employee’s services to Innovex, the Employee shall receive compensation and benefits which shall include the following:

2.1. Salary. The Employee shall receive an initial salary of no less than $Annual $ amount per year. Employee’s salary shall be paid no less frequently than twice per month in approximately equal installments. Salary reviews shall occur at least once per year, beginning September, 20   , and Innovex Management shall grant Employee such salary adjustments based upon the Employee’s performance as Innovex Management in its sole discretion deems appropriate.

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2.2. Incentive Stock Options. As partial consideration for this Agreement, Employee has been granted # of options stock options. In addition, Innovex may grant Employee stock options based upon performance and in addition to any cash bonus. These stock option bonuses shall be at the sole discretion of the Board of Directors. Stock option bonuses are generally granted at the end of Innovex’s fiscal year (September), and the exercise price for stock option bonuses is the fair market value of the stock on the date these options are granted, as determined by the mean of the high and low NASDAQ bid price for Innovex stock on the applicable date.

2.3. Stock Option Plans. All options granted pursuant to paragraph 2.2 herein shall be granted pursuant to and subject to the conditions of the applicable Stock Option Plan(s) adopted by the Board of Directors and approved by the shareholders, subject further to any amendments thereto. The terms and conditions relating to the Option Stock shall be governed by the Incentive Stock Option Agreement entered into by and between the Employee and Innovex effective as of the date of this Agreement.

2.4. Other Options and Bonuses. All other options or bonuses, whether in cash or stock, shall be granted at the sole discretion of Innovex Management, and the Employee shall not earn or accrue any right or additional compensation by reason of his employment.

2.5. Other Employee Benefits. The Employee shall receive such employee benefits as are offered by Innovex to other employees. Innovex will also provide the Employee with additional benefits, including but not limited to, dependent medical and dental coverage, life insurance plans, and participation in Innovex’s 401(k) plan. Innovex may terminate any or all such plans at any time and with respect to all employees and/or may choose not to adopt any additional plans. Employee’s rights under any benefit plans now in force or later adopted by Innovex shall be governed solely by their terms.

2.6. Reimbursable Business Expenses. In addition to salary and other benefits, subject to compliance with Innovex policy, Innovex will advance or reimburse Employee for any ordinary, necessary, and reasonable expenses incurred by Employee in the interest of Innovex. Innovex shall reimburse the Employee upon submission to Innovex of any records and documentation required by Innovex to substantiate said expenses.

2.7. Holidays. Employee shall be entitled to holidays which are normally granted to other employees.

2.8. Death. In the event that Employee dies during the term of this Agreement, Innovex shall be required to pay the Employee’s estate the biweekly installment otherwise due and payable at the end of that biweekly period in which the Employee shall have died, and thereafter no further compensation shall be payable by Innovex to Employee hereunder, except for normal and customary life insurance benefits and vested pension benefits, if any.

3. Termination. Employee understands and agrees that he is an employee at will, and as such, his employment can be terminated by Innovex at any time, with or without reason or cause. However, should Employee’s employment be terminated by Innovex involuntarily for any of the following reasons, Employee will be entitled to a lump sum payment equal to # of months ( ) months of his base salary at the time of termination. The circumstances that shall require such termination pay to Employee are as follows:

(a) involuntary termination for other than cause, to include, without limitation, termination due to corporate restructuring;

(b) the termination of Innovex’s operations as a result of bankruptcy or insolvency; or

(c) Employee’s “Total Disability.”

3.1. Termination for Cause. For purposes of this Agreement, a “Termination for Cause” shall occur if:

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3.1.1. The Employee is indicted or any information is brought against him alleging the commission of a felony or any misdemeanor arising out of a theft, embezzlement, other act of dishonesty, moral turpitude, or any willful violation of the Securities Exchange Act of 1934, as amended; or

3.1.2. The Employee breaches any of his obligations under this Agreement; or

3.1.3. Gross mismanagement.

In the case of termination pursuant to paragraphs 3.1.2 or 3.1.3 herein, Employee shall be given written notice of the facts believed to constitute grounds for termination and a 30-day period in which to cure those grounds to the satisfaction of Innovex Management, in its sole discretion.

3.2. Total Disability. For purposes of this Agreement, the Employee’s “Total Disability” shall occur if Employee becomes unable to substantially perform his duties under this Agreement by reason of any medically determinable physical or mental impairment which is expected to last for a continuous period of 12 months or more or is likely to result in death. The existence of a “Total Disability,” if one exists, must be attested to by a duly licensed physician with an acknowledged specialty, or board certification, if applicable, in the type of disability alleged to exist.

3.3. Change in Control. As used in this Agreement, a “Change in Control” shall mean a Change in Control which would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”), whether or not Innovex is then subject to such reporting requirements and which dos not arise from a transaction or a series of transactions authorized , recommended or approved by formal action taken by the Board, including, without limitation, if:

3.3.1. Any “person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), other than Innovex’s officers and directors as a group, directly or indirectly, of securities of Innovex representing a 20% or more of the combined voting power of Innovex’s then outstanding securities; or

3.3.2. There ceases to be a majority of the Board comprised of individuals described below.

For purposes of this Subsection 3.3 only, the “Board” shall mean: (a) individuals who on the date hereof constituted the Board of Innovex; and (b) any new director who subsequently was elected or nominated for election by a majority of the directors who held such office immediately prior to a Change in Control.

3.4 Continued Employment After Change in Control. Employee agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of Innovex occurring after the date hereof, Employee will remain in the employ of Innovex for a period of ninety (90) days from the occurrence of such Change in Control. This continued employment shall not affect the Employee’s right to termination pay as provided for in Section 3 of this Agreement.

3.5 Termination by Employee. Employee may terminate his employment pursuant to this Agreement at any time by giving Innovex #of days ( ) days’ written notice and further agrees that during the notice period he will provide all reasonable aid and assistance in hiring, training, and introducing his replacement as may be requested by Innovex and will undertake such other responsibilities as Innovex may direct. Innovex may shorten or waive entirely the notice period at Innovex’s sole discretion.

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4. Indemnification. Employee shall be indemnified from loss and expenses arising out of his conduct as an employee of Innovex to the fullest extent permitted by the laws of the State of Minnesota.

5. Confidentiality. During the term of employment with Innovex, Employee will have access to and become acquainted with various trade secrets and other proprietary and confidential information which are owned by Innovex and which are used in the operation of Innovex’s business. “Trade secrets and other proprietary and confidential information” shall be understood to mean any information or knowledge possessed by Innovex which is not generally known to or readily ascertainable by outside parties who can obtain economic value from its use or disclosure. This shall include, without limitation, inventions, discoveries, ideas, know-how, research and development information, designs, specifications, formulas, patterns, compilations, computer programs, devices, methods, techniques, processes, data, improvements, ideas, algorithms, computer processing systems, drawings, proposals, job notes, reports, records, specifications, information concerning any matters relating to the business of Innovex and any of its customers, customer contacts, licenses, the prices it obtains or has obtained for the licensing of its software products and services, or any other information concerning the business of Innovex and Innovex’s good will.

5.1. Nondisclosure. Employee shall not disclose or use in any manner, directly or indirectly, any such trade secrets or other proprietary and confidential information either during the term of his employment or at any time thereafter, except as required in the course of employment with Innovex.

5.2. Information Disclosed Remains Property of Innovex. All ideas, concepts, information, and written material disclosed to Employee by Innovex, or acquired from a customer or prospective customer of Innovex, are and shall remain the sole and exclusive property and proprietary information of Innovex or such customers, and are disclosed in confidence by Innovex or permitted to be acquired from such customers in reliance on Employee’s agreement to maintain them in confidence and not to use or disclose them to any other person except in furtherance of Innovex’s business.

5.3. Return of Material. Employee agrees that, upon request of Innovex or upon termination of employment, Employee shall turn over to Innovex originals and any copies of all documents, files, disks or other computer media, or other material in his possession or under his control that (a) may contain or be derived from ideas, concepts, creations, or trade secrets and other proprietary and confidential information as set forth in paragraphs 5, 5.1, and 5.2 above, or (b) are connected with or derived from Employee’s services to Innovex.

6. Inventions and Creations. Any and all inventions, discoveries, improvements, or creations (collectively, “Inventions”) made or conceived by Employee during the period of his employment by Innovex shall be the property of Innovex. Employee hereby assigns to Innovex all of his rights to any such Inventions and agrees to promptly disclose any such Inventions in writing to Innovex. Employee further agrees to execute and assign any and all proper applications, assignments and other documents and to render all assistance reasonably necessary to apply for patent, copyright or trademark protection in all countries.

6.1. Exceptions. Paragraph 6 of this Agreement does not apply to an Invention for which no equipment, supplies, facility or trade secret information of Innovex was used and which was developed entirely on Employee’s own time and (a) which does not relate (i) directly to the business of Innovex or (ii) to Innovex’s actual or demonstrably anticipated research or development; or (b) which does not result from any work performed by Employee for Innovex. Attachment 1 hereto constitutes a complete list of the inventions made by Employee prior to employment by Innovex as to which he has at least partial ownership. Innovex shall have no claim of right or title to the inventions listed on Attachment 1.

6.2. Definition of Inventions. For purposes of this Agreement, the term “Inventions” shall mean discoveries, improvements, and ideas (whether or not shown or described in writing or reduced to practice) and works of authorship, whether or not patentable or copyrightable, which (a) relate directly to the business of Innovex; (b) relate to Innovex’s actual or demonstrably anticipated research or development; or (c) result from any work performed by Employee for Innovex, or for which equipment, supplies, facilities or trade secret information of Innovex is used, or which is developed on Innovex time.

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6.3. Non-Covered Inventions. Should the Employee make a discovery, improvement or Invention that is not covered by the provisions of this Agreement (a “Non-Covered Invention”), the Employee may, at his sole option, disclose the Non-Covered Invention to Innovex and Innovex shall then have a right of first refusal to enter into a license agreement with Employee to acquire rights thereunder. If negotiations extend for more than six (6) months from the date of disclosure to Innovex, Employee shall be free to submit the Non-Covered Invention to others without obligation to Innovex and with respect to such Non-Covered Invention.

7. Covenant Not to Compete. Employee agrees that he will not, during the course of employment, or for a period of # of months ( ) months commencing upon expiration of employment, voluntarily or involuntarily, directly or indirectly, anywhere in the world, develop, or assist others to be developed, any product functionally similar to the product(s) developed or under development by Innovex. Employee further agrees that he will not, during the course of employment or for a period of eighteen (18) months commencing upon the expiration of employment, voluntarily or involuntarily, directly or indirectly, anywhere in the world, perform services for any competing business in the same field of commercial activities or engage or assist (a) in the organization of any competing business or (b) in any preparations for the manufacture, assembly, production, or design of any product which competes with products of Innovex.

7.1. Employee’s Acknowledgments and Agreements. Employee acknowledges and agrees that the products developed by Innovex are or are intended to be marketed and licensed to customers throughout the world. Employee further acknowledges and agrees to the reasonableness of this covenant not to compete and the reasonableness of the geographic area and duration of time which are part of said covenant.

7.2. Inducing Employees to Leave Innovex; Employment of Employees. Any attempt on the part of Employee to induce others to leave Innovex’s employ, or any effort by employee to interfere with Innovex’s relationship with its other employees would be harmful and damaging to Innovex. Employee agrees that during the term of employment and for a period of two years thereafter, Employee will not in any way, directly or indirectly (a) induce or attempt to induce any employee of Innovex to quit employment with Innovex; (b) otherwise interfere with or disrupt Innovex’s relationship with its employees; (c) solicit, entice, or hire away any Employee of Innovex; or (d) hire or engage any employee of Innovex or any former employee of Innovex whose employment with Innovex ceased less than one year before the date of such hiring or engagement.

7.3. Nonsolicitation of Business. For a period of two years from the date of termination of employment, Employee will not divert or attempt to divert from Innovex any business Innovex had enjoyed or solicited from its customers during the year prior to termination of his employment.

8. Miscellaneous Provisions.

8.1. Remedies – Injunction. In the event of a breach or threatened breach by Employee of any of the provisions of this Agreement, Employee agrees that Innovex, in addition to and not in limitation of any other rights, remedies or damages available to Innovex at law or in equity, shall be entitled to a permanent injunction in order to prevent or restrain any such breach by Employee or by Employee’s partners, agents, representatives, servants, employees, and/or any and all persons directly or indirectly acting for or with Employee.

8.2. Severability. In the event that any of the provisions of this Agreement shall be held to be invalid or unenforceable in whole or in part, those provisions to the extent enforceable and all other provisions shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable parts had not been included in this Agreement. In the event that any provision relating to the time period or scope of a restriction shall be declared by a court of competent jurisdiction to exceed the maximum time period or scope such court deems reasonable and enforceable, then the time period or scope of the restriction deemed reasonable and enforceable by the court shall become and shall thereafter be the maximum time period or the applicable scope of the restriction.

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8.3. Governing Law. This Agreement shall be construed and enforced according to the laws of the State of Minnesota. All legal actions arising under this Agreement shall be instituted in, and both Innovex and Employee consent to the jurisdiction of, the court of Hennepin County, Minnesota.

8.4. “Innovex” Defined. “Innovex” shall mean Innovex, Inc., Innovex Precision Components, Inc., Innovex Southwest, Inc., and any of their existing or future affiliates, including parent companies, subsidiaries, divisions, joint ventures, and partnerships.

8.5. Amendment or Termination. This Agreement replaces and supersedes all prior agreements between Innovex and Employee relating to the same subject matter. This Agreement may not be terminated, amended, or modified in any way, except in writing signed by both Innovex and Employee.

8.6. Survival. The obligations of the parties under this Agreement do not depend on conditions outside this Agreement and shall survive Employee’s termination of employment with Innovex, regardless of the reason for termination.

8.7. Agreement Read, Understood, and Fair. Employee has carefully read and considered all provisions of this Agreement and agrees that all of the restrictions set forth are fair and reasonable and are reasonably required for the protection of the interests of Innovex.

AGREED:

Dated: _______________________ ___________________________________
Employee Name

INNOVEX, INC.

Dated: _______________________ ___________________________________
By: William P. Murnane
Its: President and CEO

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, William P. Murnane, certify that:

1. I have reviewed this Form 10-Q of Innovex Inc;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 3, 2004 /s/ William P. Murnane
————————————
President and
Chief Executive Officer

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EX-31.2

Exhibit 31.2

I, Thomas Paulson, certify that:

6. I have reviewed this Form 10-Q of Innovex Inc.;

7. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

8. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

9. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

10. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 3, 2004 /s/ Thomas Paulson
————————————
Chief Financial Officer

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EX-32

Exhibit 32

CERTIFICATION

The undersigned certify pursuant to 18 U.S.C. § 1350, that:

(1) The accompanying Quarterly Report on Form 10-Q for the period ended December 31, 2003, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the accompanying Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 3, 2004 /s/ William P. Murnane
————————————
President and
Chief Executive Officer

Date: February 3, 2004 /s/ Thomas Paulson
————————————
Chief Financial Officer

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