SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934

|x| Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.

For the Period ended December 31, 2002.

OR

|_| Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.

Commission File Number: 0-13143

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

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

As of January 23, 2003, 15,155,986 shares of the registrant’s common stock, $.04 par value per share, were outstanding.

Exhibit Index, page 10

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

See accompanying notes to condensed consolidated financial statements.

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

See accompanying notes to condensed consolidated financial statements.

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

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest was $661,000 and $911,000 in fiscal 2003 and 2002.

Income tax payments were $6,000 and $24,000 in fiscal 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. 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, 2002.

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
Manufacturing operations restructuring-

The fiscal 2001 second quarter included 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. The charges were recorded pursuant to a plan announced in January 2001. The charge included approximately $6,380,000 related to asset impairment of property and equipment and $3,374,000 for the impairment of the remaining unamortized balance of the goodwill recorded at the time of the Company’s September 1999 acquisition of ADFlex Solutions, Inc. The charge also includes $1,636,000 of inventory written off related to discontinued product lines and accrued liabilities of $2,156,000 for employee severance and benefits and $6,332,000 for facility abandonment costs. During the fiscal 2002 second quarter 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 December 31, 2002, the restructuring is substantially complete with the exception of the costs accrued to maintain the leased Chandler facility through the June 2003 lease termination.

The remaining restructuring accrual as of December 31, 2002 totaled $812,000. Selected information regarding the restructuring follows (in thousands):

NOTE 3 – EARNINGS PER SHARE

The Company’s basic net loss per share is computed by dividing net loss by the weighted average number of outstanding common shares. The Company’s diluted net loss per share is computed by dividing net loss by the weighted average number of outstanding common shares and common share equivalents relating to stock options when 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. Options to purchase 1,470,673 shares of common stock with a weighted average exercise price of $10.89 were outstanding during the three month period ending December 31, 2001, but were excluded from the computation of common share equivalents because they were not dilutive.

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NOTE 4 – INVENTORIES

Inventories are comprised of the following (in thousands):

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 earnings within the caption 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, 2002, the Company had open forward exchange contracts to buy Thailand baht maturing January 3, 2003 with notional amounts of 700,000,000 and an open forward exchange contract to buy Thailand baht maturing July 3, 2003 with a notional amount of 100,000,000. The total open contracts for 800,000,000 baht equates to approximately $18.5 million U.S. dollars.

THE COMPANY

Innovex is a leading worldwide provider of flexible circuit interconnect solutions to OEMs in the electronics industry. The Company offers 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. The Company targets 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 the Company include notebook computers, LCD displays for portable communication devices, data storage devices such as hard disk drives (“HDDs”), tape drives and arrays, high-end consumer electronics products such as digital video disk(DVD) and compact disk(CD) players and printers. The Company’s principal customers include 3M, Alps, Compaq, Dell, Hewlett Packard, IBM, Iomega, Littelfuse, Maxtor, Medtronic, Motorola, Nokia, Philips, Qualcomm, Quantum, ReadRite, SAE Magnetics, Samsung, Seagate, Staktek, StorageTek, Xerox and other leading electronic OEMs.

Flexible circuits consist of copper conductive patterns on flexible substrate materials, such as polyimide, and provide electrical connection between components in electronic systems. Flexible circuit interconnects frequently incorporate components such as integrated circuits (“ICs”), connectors, stiffeners, resistors and capacitors mounted directly on a flexible circuit. With proliferation of electronic applications, electronic products have become smaller, lighter and more portable. To meet the challenges represented by the increased complexity of miniaturization, form and weight requirements, OEMs have increasingly turned to flexible circuit interconnect solutions because they decrease the weight and expense of connectors and other packaging components, conform to contoured, ergonomic shapes or small spaces and provide mechanical flexure. The Company’s products consist of flexible circuits with high to mid-range tolerances and may include other secondary finishing or assembly operations. The high-end flexible circuits generate the highest gross margin percentages. The mid-range or standard flexible circuits with components added through the performance of additional assembly steps garner lower gross margin percentages due to higher material costs and the increased number of competitors.

Prior to 1999, the Company’s primary products were small lead wire assemblies for computer disk drives. The disk drive industry has transitioned away from lead wire assembly interconnects to integrated interconnects such as the Company’s Head Interconnect Flex (“HIF”) and Flex suspension assembly (“FSA”) products. This transition has had a significant impact on the Company’s operations since 1998 as it has had to manage the rapid increase in its flexible circuit business while controlling the rapid drop in its lead wire assembly operations. Lead wire assembly sales constituted none of fiscal 2002 and 2001 consolidated revenues and less than 1% of fiscal 2000 revenues after comprising over 72% of fiscal 1998 revenues.

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While the trend toward miniaturization and portability increases product complexity, electronic OEMs face escalating time to market, cost and global sourcing requirements. In response, the Company has established manufacturing facilities in Thailand that have lower cost structures and closer proximity to the Company’s OEM customer base. The Company believes it is a preferred supplier for the majority of its customers’ high-end, high-volume flexible circuit interconnect requirements.

Innovex, Inc. was incorporated under the laws of the State of Minnesota in 1972. Its principal executive offices are located at 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359-9003 and its telephone number is (763) 479-5300. Products are developed and manufactured through the Company’s wholly owned subsidiaries, Innovex Precision Components, Inc. and Innovex (Thailand) Ltd. Innovex Precision Components, Inc. is a Minnesota corporation and Innovex (Thailand) Ltd. is a Thailand corporation.

CRITICAL ACCOUNTING POLICIES

This report on Form 10Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the period ended September 30, 2002 for a full discussion of the our accounting policies.

We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we used in applying the critical accounting policies. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely event that would result in materially different amounts being reported.

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, the Company analyzes the level of inventory on hand, its 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:

The Company adopted Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Intangible Assets and as a result discontinued the amortization of goodwill and any other intangible assets determined to have indefinite lives.  The Company has determined goodwill relates to one reporting unit for purposes of impairment testing.  Goodwill and other intangible assets with indefinite lives are tested for impairment annually or whenever an impairment indicator arises.  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:

The Company accounts 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 become less likely than not to occur. The valuation allowance is analyzed periodically by the Company and may result in income tax expense different than statutory rates.

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RESULTS OF OPERATIONS

NET SALES

The Company’s net sales from operations totaled $34,525,000 for the quarter, down 9% from $37,843,000 reported in the same quarter of fiscal 2002. The decrease in net sales for the first quarter of fiscal 2003 as compared to the same quarter of fiscal 2002 was due to lower revenue generated by the disk drive, consumer optical storage and computer applications as a result of economic conditions. Revenue from the disk drive industry generated 73% of the Company’s revenue for the quarter as compared to 77% for fiscal 2002 first quarter, revenue from consumer applications was 8% versus 11% from the prior year, integrated circuit packaging application revenue was 8% versus 2%, network system application revenue was unchanged at 7% and revenue from other industry applications was 4% versus 3% from the prior year.

Fiscal 2003 first quarter net sales increased 15% as compared to the fourth quarter of fiscal 2002 as a result of the introduction of a mobile phone liquid crystal display (LCD) application and increases in revenue generated by Flex Suspension Assembly (FSA), integrated circuit packaging and tape storage applications. Revenue is expected to show a slight increase in the second quarter of fiscal 2003 as new LCD and FSA programs continue to ramp up.

GROSS MARGINS

The Company’s gross profit as a percent of sales for the quarter decreased to 10.1% from the 15.3% reported for the fiscal 2002 first quarter. The decrease was due to lower sales volumes reducing fixed cost leverage and increased costs related to new program introductions. The Company anticipates that gross margins in the last half of fiscal 2003 will improve as the new program introductions reach higher production volumes and revenue levels increase.

OPERATING EXPENSES

Operating expenses were 17.8% of sales for the current quarter, as compared to 14.9% in the prior year’s first quarter. The increase in operating expenses as a percent of sales for the current year is primarily due to severance costs of $400,000 included in the fiscal 2003 first quarter resulting from efforts to increase operational efficiency by consolidating from four to three marketing groups. Operating expenses for the remainder of fiscal 2003 are expected to decrease as a percent of sales due to these cost reductions and anticipated increased revenue in the last half of the year.

RESTRUCTURING CHARGES

The fiscal 2001 second quarter included 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 was primarily related to moving manufacturing operations from the Company’s Chandler, Arizona facility to the Company’s Minnesota locations. The charges included $6,332,000 for Chandler facility abandonment costs. During the fiscal 2002 second quarter 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 December 31, 2002, the restructuring is substantially complete with the exception of the costs accrued to maintain the leased Chandler facility through the June 2003 lease termination.

OPERATING PROFIT (LOSS)

The consolidated operating loss of $3,413,000 in the current quarter was down from an operating profit of $151,000 in the prior year first quarter. The decrease is primarily due to lower revenue and related gross margin for the quarter as compared to the prior year and the restructuring and severance charges included in the fiscal 2003 first quarter.

INCOME TAXES

Income tax benefit for the fiscal 2003 first quarter was $1,777,000 as compared to $121,000 for the same quarter in fiscal 2002. The increase is due to the higher operating loss in the first quarter of fiscal 2003 generating a higher tax benefit as compared to the prior year first quarter.

NET LOSS

Net loss for the fiscal 2003 first quarter was $(2,296,000) as compared to $(297,000) for the prior year first quarter. Basic and diluted net loss per share were ($0.15) as compared to ($0.02) for the prior year first quarter.

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LIQUIDITY AND CAPITAL RESOURCES

Cash and short-term investments increased to $3.1 million at December 31, 2002 from $2.4 million at September 30, 2002.

Accounts receivable at December 31, 2002 increased by $1.1 from September 30, 2002 due to the higher level of revenue in the current quarter as compared to at the quarter ended September 30, 2002. Inventories at December 31, 2002 decreased by $700,000 from September 30, 2002 due to a focused effort to reduce inventory levels. Other current assets increased by $2.0 million from September 30, 2002 primarily due to the tax benefit recorded for the current quarter.

Accounts payable at December 31, 2002 increased by $2.5 million primarily due to higher level of revenue in the current quarter as compared to the quarter ended September 30, 2002 and the increased level of capital expenditures. Other liabilities at December 31, 2002 increased by $556,000 primarily due to additional severance and restructuring accruals recorded during the current quarter.

Working capital totaled ($3.0) million and ($0.5) million at December 31, 2002 and September 30, 2002.

Since September 30, 2002, the Company has invested $1.6 million in capital expenditures primarily for test equipment and capacity increases in selected areas. Capital expenditures of approximately $6 million are expected during the remainder of fiscal 2003. These expenditures will include technological upgrades and capacity increases in specific areas.

In April 2001 the Company entered into a 1.2 billion Thailand baht (approximately $27 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 the Company in Thailand. In June 2002, the Company completed a 300 million Thailand baht (approximately $6.8 million) expansion of its Thailand credit facilities also secured by certain receivables and inventory held by the Company. As of December 31, 2002, the Company had $11 million of borrowing capacity available under the existing credit facilities. The Company is in compliance with covenants under its U.S. and Thailand based financing agreements as of December 31, 2002.

Long-term debt, including current maturities, decreased by $3.1million. The decrease is primarily the result of a $1.6 million payment made on the existing Wells Fargo facility with the remainder being scheduled principal payments made on the Thailand credit facilities and other long term lease financing. The ratio of long-term debt, net of current maturities, to stockholders’ equity was .22 at December 31, 2002 compared to .24 at the end of fiscal 2002.

The Company believes that with the existing U.S. and Thailand credit facilities and cash generated from operations, it will have adequate funds to support projected working capital and capital expenditures for fiscal 2003. The Company is considering alternatives for generating additional working capital and long term financing and will continue to pursue financing opportunities in both Thailand and the U.S to better leverage its assets. The Company’s financing needs and the financing alternatives available to it are subject to change depending on, among other things, general economic and market conditions, changes in industry buying patterns, customer acceptance of the FSA product and cash flow from operations.

NEW PRONOUNCEMENTS

In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 clarifies the accounting for costs associated with exit or disposal activities. This statement is effective for the Company beginning in January 2003 and is not expected to have a material impact.

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 timely availability and acceptance of new products including the FgSA and semiconductor 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. In addition, a significant portion of the Company’s revenue is generated from the disk drive, consumer electronics, computer 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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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in the Company’s market risk during the three-month period ended December 31, 2002.

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 reviewed the Company’s disclosure controls and procedures within 90 days prior to the filing of this report. Based upon this review, these officers believe that the Company’s disclosure 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 Controls.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls during the quarter covered by this report or from the end of the reporting period to the date of this Form 10-Q.

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

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SIGNATURES

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

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CERTIFICATIONS

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I, Thomas Paulson, certify that:

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