INNOVEX INC, 10-K405, 1998-12-29

INNOVEX INC
10-K405, 1998-12-29
ELECTRONIC COMPONENTS, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549
--------------------------
FORM 10-K

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998

or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-13143
--------------------------
INNOVEX, INC.
(Exact name of registrant as specified in its charter)

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

530 Eleventh Avenue South, Hopkins, Minnesota 55343-9904
(Address of principal executive offices (Zip Code)

Registrant's telephone number, including area code: (612) 938-4155
--------------------------
Securities registered pursuant to Section 12 (b) of the Act:
None

Securities registered pursuant to Section 12 (g) of the Act:

(Title of Class)

Common Stock ($.04 par value)

--------------------------

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, and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No__

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (S229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. (X)

The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $232,221,000 at December 9, 1998 when the closing
sale price of such stock, as reported in the Nasdaq National Market System, was
$16.75.

The number of shares outstanding of the Registrant's Common Stock, $.04 par
value, as of December 9, 1998 was 14,781,504 shares.

Documents Incorporated by Reference:

1. Portions of the Company's Proxy Statement to be filed with the Commission
within 120 days after the end of the Registrants fiscal year are incorporated by
reference into Part III of the Form 10-K.

This Form 10-K consists of 28 Pages (including exhibits). The index to exhibits
is set forth on page 22.

<PAGE>

INNOVEX, INC.
1998 FORM 10-K

PART I

ITEM 1. BUSINESS

(a) GENERAL DEVELOPMENT OF BUSINESS

Prior to July 28, 1998, Innovex Inc. and its subsidiaries (the "Company")
operated through three divisions, Precision Products (Precision), Litchfield
Precision Components (LPC) and Iconovex. Each division had its own
administrative, engineering, manufacturing and marketing organizations. During
the quarter ending September 30, 1998, the Company combined the operations of
its two core operating divisions, Precision and LPC into one operating division,
Innovex Precision Components. The combination merged the rapidly growing LPC
flexible circuit fabrication and chemical etching operations with Precision's
high volume fine wire manufacturing expertise. The combination also allows
Innovex to leverage Precision's disk drive industry market and trade knowledge
to disk drive industry flexible circuit applications as the industry transitions
from wire interconnects.

Prior to the divisional combination, the largest division, Precision Products,
developed, engineered and manufactured specialty precision electromagnetic
products for original equipment manufacturers ("OEM's"). Lead wire assemblies
for the thin film disk drive market were the Division's primary product. Lead
wire assemblies are fine twisted magnet wires that connect the back end
electronics of a disk drive with the inductive or magneto resistive thin film
heads that read and write information on the disk.

The Litchfield Precision Components Division, prior to the divisional
combination, designed and manufactured highly complex flexible circuitry and
chemically machined components. Approximately 30% of LPC's sales were medical
product applications, 50% were computer and computer peripheral applications
with the remaining 20% being other applications. The Company purchased
Litchfield Precision Components, Inc. on May 16, 1996. This acquisition reduced
the Company's reliance on the disk drive industry while providing an entry into
the large and rapidly growing flexible circuit market. A large portion of this
growth is expected to be providing the highly intricate flexible circuits
required in chip packaging applications. LPC is one of a limited number of
operations in the world able to produce flexible circuits with line and spacing
tolerances of less than 2 mils for these applications.

The Company was founded in 1972 to acquire the assets of a manufacturer of
needle and wire assemblies used in computer core memories. With the introduction
of solid state memory devices, needle wire assemblies became obsolete and, in
late 1973, the Company moved into related areas of manufacturing utilizing and
expanding its micro-welding and miniature assembly expertise. This expertise is
currently used to manufacture small electromagnetic products, which cannot be
economically produced by its customers.

In 1984, the Company expanded its scope to the photo equipment market by
acquiring Lucht Engineering. This made Innovex the nation's largest supplier of
multi-image printers to the professional photo market. The Company discontinued
its photo business in two stages. Effective November 29, 1992, the operating
assets and liabilities, with the exception of the receivables, were sold to
Lucht Acquisition Corporation (LAC), an unrelated third party, for approximately
$4,000,000 cash and a 40 percent interest in LAC. On November 1, 1993, the
Company sold the remaining 40 percent interest in LAC to LAC's majority
shareholder for $2,850,000 in cash.

On June 1, 1998 the Company sold the assets of its InnoMedica Division. This
division, which produced an immaterial portion of the Company's revenue,
provided contract development and manufacturing services primarily to the
medical device industry as well as pacing/defibrillation leads and adapters for
the implantable bradycardia and tachacardia industry. The Division was formed in
late fiscal 1993 to impart a greater degree of strategic direction and business
discipline to the Company's emerging medical business.

The Iconovex Division was established in fiscal 1994 to market and further
develop a technologically advanced software product purchased in November 1993.
The core software utilizes syntactical analysis to recognize meanings and
relationships among words and phrases in order to prepare indexes and abstracts
of electronically stored information. Syntactical analysis is more accurate than
conventional Boolean search systems that only recognize specific words. In
October 1997, Iconovex became the 51% owner of a joint venture with Solutions
Corporation of America. The joint venture, Smart Solution, is targeting the
corporate intranet market by providing a product to organize, analyze, screen
and index email and to eventually perform the same function for corporate
databases.

Innovex, Inc. was incorporated under the laws of the State of Minnesota in 1972.
Its principal executive offices are located at 530 Eleventh Avenue South,
Hopkins, Minnesota 55343-9904 and its telephone number is (612) 938-4155.
Products are developed and

<PAGE>

manufactured through the Company's wholly owned subsidiaries, Innovex Precision
Components, Inc., Innovex Limited and Iconovex Corporation. These subsidiaries
are Minnesota corporations.

(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

Entering fiscal 1998, Innovex Inc. and its subsidiaries (the "Company") operated
through four divisions, Precision Products (Precision), Litchfield Precision
Components (LPC), InnoMedica and Iconovex. Each division had its own
administrative, engineering, manufacturing and marketing organizations. During
the quarter ending September 30, 1998, the Company combined the operations of
its two core operating divisions, Precision and LPC into one operating division,
Innovex Precision Components. This combined division comprises over 95% of the
Company's revenue, operating profit and identifiable assets. The assets and
operations of InnoMedica, which was not considered a core segment, were sold
June 1, 1998. Iconovex and its Smart Solution joint venture, comprise less than
5% of the Company's revenue, operating profit and identifiable assets and is not
considered a core segment. Financial results will be presented as a single
segment due to the immaterial nature of the non-core operations. Topics covered
throughout this document may be discussed referencing the former divisions where
helpful to the reader's understanding.

INNOVEX PRECISION COMPONENTS
General
The Company's wire operations produce a variety of small lead wire assemblies
primarily for computer disk drives, which cannot be economically produced by its
customers. Manufacture of these products often involves use of such specialized
tasks as miniature wire processing, insulation removal, precision miniature
welding, metal-to-metal bonding, chemical bonding, epoxy encapsulation and
high-resolution optical inspection. The flexible circuit operations design and
manufacture highly complex and intricate flexible circuits and chemically
machined electrical components for the medical, computer and communications
industries. Flexible circuit products utilize the Company's leading edge imaging
technology and are focused on the high end of the market. All products are
manufactured pursuant to individual customer orders and specifications.

Products
The Company's historical principal product is a fine wire lead assembly. Lead
wire assembly sales constituted over 72% of the consolidated revenues during
fiscal 1998 and 54% of the fiscal 1998 fourth quarter revenue. Lead wire
assemblies are fine twisted magnet wires that are attached to inductive or
magneto resistive (MR) thin film heads which read or write the information on
the disk in a computer disk drive assembly. MR lead wire assemblies are
comprised of four or five wires while inductive lead wire assemblies consist of
only two wires. The MR assemblies are more difficult to make and carry a higher
selling price. In order to produce a lead assembly, a portion of the fine magnet
wire is stripped of its insulation. The Company developed technology and
processes which enables it to strip extremely fine magnet wire without damaging
the wire's gold plating. This process utilizes a laser to strip the insulation
from the wire. This manufacturing process and the related equipment was designed
to be flexible enough to produce both inductive and MR lead wire assemblies. By
the end of fiscal 1998, the MR proportion of the lead wire assembly product mix
was over 90%.

A rapidly increasing portion of the Company's revenue is being generated by
chemically etched products. Although these products have similar manufacturing
processes, they fall into three primary product areas: 1.)Flexible circuitry -
The Company is able to build highly precise flexible circuits with copper traces
as small as .001 inches over long lengths on flexible base materials. The base
materials can also be selectively removed to expose the circuitry from the front
and back to facilitate new assembly techniques. These products include hard disk
drive components and test circuits, semiconductor packaging substrates,
integrated circuit testing probes, paging system components and ultrasound
connections. The head interconnect flex (HIF) was the primary flexible circuit
product produced during fiscal 1998, generating 10% of the Company's revenue.
The HIF product was developed to meet the high end head interconnect needs of
the disk drive industry. The HIF provides a technologically advanced solution
for the Company's customers that is believed to be significantly more cost
effective than any competing new technologies. During fiscal 1998, the Company
introduced two new products for the disk drive industry, the Flex Suspension
Assembly (FSA) and the BridgeFlex. The FSA is a HIF that is bonded to a
suspension for customers desiring a more complete solution. The Bridge Flex
product completes the connection from the suspension to the actuator flex for
competing disk drive head interconnect solutions that terminate at the back end
of the suspension. The Company expects that products such as the HIF and FSA
will meet an increasing portion of the worldwide growth in demand for disk drive
head interconnects. Customer acceptance of the FSA and Bridge Flex products
introduced during the quarter will be integral to increasing revenue in fiscal
1999 as demand for lead wire assemblies decreases. 2.)Chemical machining - Using

<PAGE>

metals such as stainless steel, titanium, tungsten and copper, the Company can
resolve down to .001 inch features using advanced imaging techniques. These
products include high precision surface mount fuses, printer components and
components for medical implantable devices. 3.)Film and optical components -
Through the application of high resolution images to glass substrates, the
Company can generate sub-micron features in chrome or other deposited metals on
a variety of glass and film substrates.

INNOMEDICA
Prior to its sale on June 1, 1998, InnoMedica provided contract development and
manufacturing services primarily to the medical device industry as well as
pacing/defibrillation leads and adapters for the implantable bradycardia and
tachacardia industry. Manufacture of these products utilized silicone rubber
molding, similar and dissimilar metal laser welding, product fabrication and
miniature product assembly. Products were either proprietary or made to customer
specifications.

ICONOVEX
Iconovex was established to market and further develop a technologically
advanced software product line that prepares indexes and abstracts of
electronically stored information. The core software utilizes syntactical
analysis to recognize meanings and relationships among words and phrases in
order to prepare indexes and abstracts of documents. Syntactical analysis is
more accurate than conventional Boolean search systems that only recognize
specific words. This core software may be adapted for use in a large number of
applications through the development of appropriate interfaces.

In October 1997, Iconovex entered into a joint venture with Solutions
Corporation of America. The new joint venture, Smart Solution, is 51 percent
owned by Iconovex. Smart Solution targets the corporate intranet market by
providing a product to organize, analyze, screen and index email and to
eventually perform the same function for corporate databases. Prior to the joint
venture, Iconovex had developed a number of industry award winning applications
for retail distribution which had attracted favorable reviews but failed to
generate a profitable level of sales. One of these applications, EchoSearch,
provided the foundation for the products currently being marketed.

RESEARCH AND DEVELOPMENT
The Company continually engages in research, development and engineering
activities. The Company's goals are to utilize these activities to improve and
enhance existing products and to develop new products in order to expand its
market share. During fiscal years 1998, 1997 and 1996, the Company spent
approximately $2,356,000, $1,784,000 and $813,000, on research and development.
The Company's research and development effort is concentrated on improving and
increasing the long run flexible circuit manufacturing capabilities primarily as
it relates to the disk drive industry and semiconductor packaging substrate
applications. Additional efforts are also being focused on improving the
attachment process for the new FSA product. Iconovex and Smart Solution continue
to concentrate on developing software products to utilize the purchased document
storage retrieval and management technology.

The Company expects to continue its past practice of acquiring new technology
from outside sources through the payment of cash, Company stock and royalties.

MARKETING AND CUSTOMERS
The Company markets a number of products directly to the magnetic disk drive
head industry worldwide through the use of an internal sales staff. Although the
demand for disk drive heads was soft in fiscal 1998, the market for disk drive
heads has grown dramatically in recent years and continues to have strong future
growth potential. Demand for increased storage capacity both for personal
computers and for other applications continues to expand. Innovex has benefited
from early entry into this market and has been able to leverage relationships
established through its lead wire assembly interconnects to the next generation
integrated flexible circuit interconnects. This, coupled with the Company's
reputation for high standards of quality and innovative manufacturing processes,
has established Innovex as the predominant supplier of interconnects for the
industry. The Company has established sales with virtually every manufacturer of
disk drive heads in the world and continues to work closely with virtually all
of the world wide disk drive head manufacturers on new generations of disk drive
products. The Company's principal customers for disk drive head interconnects,
each accounting for over 10 percent of the Company's consolidated net sales in
at least one of the last three years are Read-Rite, SAE/TDK, Seagate and Yamaha.
See Note J of Notes to Consolidated Financial Statements for additional
information.

The Company also markets flexible circuits to other non disk drive related
technology companies in the semiconductor, medical, computer and communications
industries through the use of an internal sales staff. Because of the Company's
focus on leading edge imaging technology, its customers include a number of the
leading technology companies in the world including General Electric, Hewlett
Packard, Littelfuse, Medtronic, and Siemens.

<PAGE>

BACKLOG
The backlog for the Company's continuing operations was $15,163,000, $26,101,000
and $24,098,000 at September 30, 1998, 1997 and 1996. The Company's backlog
fluctuates based on the timing of the receipt of orders from customers. During
fiscal 1998, order lead times provided to the Company by its disk drive industry
customers were reduced as the computer industry moved toward a build to order
business model.

Backlog is defined by the Company as firm orders which are scheduled to be
delivered within 12 months from the date of the order. While the Company
currently believes substantially all of its September 30, 1998 backlog will be
delivered within 12 months, customers may determine not to release orders into
production, may extend requested delivery dates or cancel orders. In such cases,
the Company may not realize the revenue indicated by the backlog.

COMPETITION
Although there are a large number of companies engaged in the production of
components for the disk drive industry, the lead wire assembly interconnect
products offered by the Company are relatively unique and currently are produced
by a limited number of competitors. The Company believes that it has the
technical capability and the manufacturing capacity to retain market leadership.
The purchasing decision for the lead wire assemblies produced by the Company is
based on performance, quality, on-time delivery and price. Although the barriers
to market entry by new competitors are not insurmountable, the Company believes
that it is well positioned to compete due to its efficient production process,
capital investment in automation equipment and access to low cost labor. As a
result of the emergence of new interconnect technologies including the Company's
HIF product, demand for lead wire assemblies is expected to decrease during
fiscal 1999. A number of alternative interconnect technologies are being
evaluated for future disk drive industry programs. The Company's HIF and FSA
products have favorable technological comparisons with other competing
integrated interconnect products while also maintaining a considerable price
advantage. As a result, the Company believes it is well positioned to compete
with other emerging interconnect technologies.

There are over 200 flexible circuit manufacturers worldwide competing for a
share of the flexible circuit market. Most of these companies do not focus on
the highly complex and intricate portions of the semiconductor packaging,
medical, computer and communications segments of the market which are served by
Litchfield Precision Components. Some of the competitors involved in this
high-end portion of the business include Sumitomo and 3M.

EMPLOYEES
At September 30, 1998, the Company had 619 employees as compared to 893 at
September 30, 1997. The Company considers its employee relations to be good.

PATENTS
Certain equipment, processes, information and knowledge generated by the Company
and utilized in its products and their manufacturing processes, are regarded as
proprietary by the Company and are believed to be prosecutable by applicable
trade secret and unfair competition laws rather than through patents. However,
the Company believes it could derive a competitive advantage from patents which
may be granted on products currently under development. The Company files patent
applications on its products as deemed necessary.

MANUFACTURING AND SOURCES OF SUPPLY
The Company has devoted a significant amount of time and expense to the
development of certain sophisticated manufacturing processes and controls, and
related equipment, which are essential to the precision and reliability of its
products. To further enhance its capabilities, the Company developed an
automated lead-wire forming laser-based process for the production of lead-wire
assemblies. This process, which produces a superior product and has reduced
manufacturing costs over traditional processes, is utilized to manufacture both
inductive and MR thin film lead wire assemblies. A complete quality control
program has been established for production procedures to ensure product
specifications are met. As part of this program, the Company has implemented
computerized statistical process control ("SPC") which enables machine operators
to continually monitor and control production processes.

Although the Company's three main chemically etched product types have
dissimilar final forms, they have a common manufacturing process based on the
Company's leading edge imaging technology. Images are applied to either glass,
metal or flexible base substrate materials with unwanted material etched away
using chemicals to produce the actual products. The Company has also developed
an automated flexible circuit manufacturing facility capable of maintaining
extremely fine tolerances.

<PAGE>

Raw material used by the Company is generally available from several suppliers.
Although the Company does not anticipate any supply shortages or interruptions,
it is seeking to lessen its dependence on existing suppliers by expanding
alternative supply sources. The Company has not experienced any significant
problem in obtaining its required supplies.

The Company's manufacturing operations are conducted at plants in Hopkins,
Montevideo and Litchfield, Minnesota. See "Properties." The Company also
utilizes subcontractors in Thailand and the Peoples Republic of China.

ITEM 2. PROPERTIES

Effective March 1, 1997, the Company leased a 19,000 square foot facility for
its executive and administrative offices. This building is located in Hopkins,
Minnesota with annual rent of approximately $155,000 under a lease which expires
February 28, 2002.

A portion of the Company's administrative offices, research and development
facilities and certain of its production facilities are located in a 30,000
square foot facility in Hopkins, Minnesota. The building was purchased in 1993
and collateralizes a note used to finance the building. The note has a remaining
principal balance of $528,000 at September 30, 1998.

The Company also owns adjacent 30,000 and 20,000 square foot manufacturing
facilities in Montevideo, Minnesota that are used for the manufacture of wire
products. A portion of the costs to construct and expand these facilities was
financed through bank financing and public development funds. The financing
notes, which are collateralized by the buildings and manufacturing equipment,
have a remaining principal balance of $310,000 at September 30, 1998.

The Company acquired an 88,000 square foot facility in Litchfield, Minnesota as
part of the Litchfield Precision Components acquisition in May 1996. The
facility is used for the manufacture of flexible circuits and other chemically
etched products. During fiscal 1998, the Company completed a 50,000 square foot
automated flexible circuit production facility in Litchfield, Minnesota. The
facility was financed through internally generated cash flows.

Effective December 1993, the Company leased a 10,500 square foot office and
manufacturing facility in Bloomington, Minnesota utilized by the Company's
InnoMedica operation. The lease for the facility which expires in December 1999,
was assumed by the purchaser of the InnoMedica assets on June 1, 1998.

ITEM 3. LEGAL PROCEEDINGS

Neither the Company nor any of its subsidiaries is a party to, and none of its
property is the subject of, any material pending legal proceedings with the
exception of the following:

Mary Curtin, a current director of the Company and a director nominee, has
indicated her intent to commence litigation against the Company and possibly
certain individuals for marital status discrimination and sex discrimination. A
formal complaint has not been served or filed, but a draft complaint was
provided to the Company by Ms. Curtin's counsel on September 25, 1998. In the
draft complaint, Ms. Curtin articulates claims for violations of the Minnesota
Human Rights Act, violations of Title VII of the Civil Rights Act of 1964 and
for negligent retention and intentional infliction of emotional distress. Ms.
Curtin's claims are based on allegations that she was treated differently from
male senior management, and ultimately constructively discharged because she is
married to Thomas Haley, the Company's Chief Executive Officer and a current
director and director nominee of the Company, and because she is a woman. She
claims to have experienced a hostile working environment created by generally
sexist attitudes and sexist epithets directed at her. Ms. Curtin seeks damages
of approximately $10 million. Management has been advised that the individuals
involved in the allegations deny them.

Because Ms. Curtin is a member of the Board of Directors, and the spouse of
Thomas Haley, the Board of Directors of the Company on August 14, 1998 appointed
a special independent committee of its members to investigate, review and take
action with respect to such claims. The special committee is currently comprised
of Bernt M. Tessem, Gerald M. Bestler and Willis K. Drake. William J. Miller, an
initial member of the special committee, resigned as a director of the Company
and a member of the committee on December 7, 1998. The special committee has
reviewed the results of an initial investigation by the Company's outside
counsel into the claims and is presently engaged in efforts to resolve the
dispute on terms satisfactory to the Company. As a result of the committee's
investigation and efforts, the Company believes that the matter may be settled
for an amount which will not have a material adverse effect on the Company's
financial statements. In the event the Company's efforts at settlement are
unsuccessful, the

<PAGE>

Company intends to vigorously defend itself against Ms. Curtin's threatened
claims and believes that any judgment entered against it will not have a
material adverse effect on the Company's financial statements.

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

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

ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT

Name Age Position
- ---- --- --------

Thomas W. Haley* 62 Chairman, Chief Executive Officer and Director
of the Company

William P. Murnane* 36 President and Chief Operating Officer

Allan J. Chan 48 Senior Vice President, Sales and Marketing

Bruce R. Funk 55 Vice President, Asian Operations

Douglas W. Keller 40 Vice President of Finance

Timothy S. McIntee 40 Senior Vice President, Corporate

Steven L. Stiller 51 Vice President, Operations

Mr. Haley served as President of the Company from 1972 to 1988. Since October
1988, Mr. Haley has held the position of Chief Executive Officer. He has been a
Director and Chairman of the Company since its inception in 1972.

Mr. Murnane was promoted to President and Chief Operating Officer in July 1998.
Mr. Murnane joined the Company in July 1995 as Vice President. From June 1993 to
June 1995, Mr. Murnane was Chief Operating Officer of Boutwell, Owens & Co., a
private manufacturer of packaging, in Fitchburg, Massachusetts. From June 1992
to June 1993, Mr. Murnane was Director of Operations for Uniform Printing &
Supply, Inc. in Acton, Massachusetts. Prior to that, he held various operating
and corporate planning positions during a ten year career at United Parcel
Service.

Mr. Chan joined the Company in June 1988 as Director of Sales and Marketing for
the Precision Products Division. In October 1990 Mr. Chan was promoted to Vice
President of Sales and Marketing of the Precision Products Division. In 1991 his
responsibilities were expanded to include manufacturing. In May 1995, he was
promoted to Vice President and General Manager of Precision Products Division.
Prior to joining Innovex, Mr. Chan was the Director of Sales and Marketing for
Braemar Computer Corporation a division of Carlysle Corporation.

Mr. Funk was promoted to Vice President, Asian Operations in July 1998. Mr. Funk
joined the Company in October 1990 as Managing Director of Asian Operations for
the Precision Products Division. From 1988 through October 1990, Mr. Funk was
President of Technical Memory Products Co., a sales representative company
specializing in the sale of magnetic recording heads and disk drives to the
Asian market.

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

Mr. McIntee joined the Company in August 1997 as Vice President, Corporate
Development and was promoted to Senior Vice President, Corporate in July 1998.
From 1984 to 1997, Mr. McIntee was an attorney for the law firm of Lindquist &
Vennum in the Mergers & Acquisitions Division. Prior to that, he was a CPA for
several years.

<PAGE>

Mr. Stiller was promoted to Vice President, Operations in July 1998. Mr. Stiller
joined the Company in December 1994 as a Product Development Engineer and was
promoted to Director of U.S. Operations, Precision Products Division in August
1996. From 1993 to 1994, Mr. Stiller performed management consulting for start
up magnetic head companies. From 1986 through 1993, he owned MEC, Inc., a
magnetic tape head manufacturing company.

*Mr. Murnane is the first cousin of Mary E. Curtin, a current director and
director nominee of the Company. Ms. Curtin is Mr. Haley's spouse.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

COMMON STOCK INFORMATION
The Company's common stock is traded in the over-the-counter market under the
symbol "INVX". The table below sets forth the high and low closing sale prices
as reported by NASDAQ. As of October 22, 1998, the Company had 634 shareholders
of record. Dividends of $.035 per share have been paid for the most recent three
quarters. The Company's intention is to continue this policy.

<TABLE>
<CAPTION>
Price Range of Common Stock 1998 1997
-----------------------------------------------
High Low High Low
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $33-3/8 $18-7/8 $30-1/4 $ 8-15/16
Second Quarter 26-7/8 18-3/8 35-1/4 18-1/2
Third Quarter 28-1/8 11-1/4 42-7/8 24-1/2
Fourth Quarter 16-1/2 9-15/16 36-1/2 27-1/4
</TABLE>

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data has been derived from the
consolidated financial statements of the Company for each of the years in the
five year period ended September 30, 1998. The following information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of the Company and related notes thereto included elsewhere in this report.

<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $96,277,930 $142,003,743 $69,570,222 $50,193,952 $30,564,009
Net income 15,911,079 35,093,603 13,121,006 10,029,387 3,515,283
Net income per share:
Basic $1.08 $2.43 $0.93 $0.73 $0.26
Diluted $1.05 $2.31 $0.91 $0.70 $0.26
Cash dividends per share $0.135 $0.113 $0.088 $0.079 $0.072
Total assets 109,651,849 97,274,754 58,244,346 41,283,483 29,934,424
Long-term debt, less current maturities 755,024 950,733 1,063,253 1,172,798 1,532,140
Stockholders' equity 102,418,060 86,817,374 48,400,116 36,029,173 24,716,307
</TABLE>

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

EARNINGS SUMMARY
The Company reported net income of $15,911,000, or $1.08 basic and $1.05 diluted
net income per share for the fiscal year ended September 30, 1998. This compares
to net income of $35,094,000, $2.43 basic and $2.31 diluted net income per share
in fiscal 1997 and $13,121,000, or $0.93 basic and $0.91 diluted net income per
share in 1996. Fiscal 1998 results decreased in comparison to 1997 due to
softness in the cyclical disk drive industry. The softness was primarily the
result of an oversupply of disk drives caused by excess disk drive production in
1997 and the reduction of inventory levels by computer manufacturers as they
adopted a "build to order" business model. The drop in gross margin percent
during 1998 resulted principally from lower shipments of disk drive lead wire
assemblies and the start up costs of the new Litchfield facility. Fiscal 1997
results, as compared to 1996, benefited from an

<PAGE>

increase in net sales due to strong demand for lead wire assemblies and an
increased portion of high end magneto resistive (MR) assemblies in the product
mix. Also contributing was a full year of sales from the operation of Litchfield
Precision Component's (LPC) flexible circuit business.

Operating expenses were 12% of revenue in fiscal 1998 as compared to 9% and 12%
of revenue in fiscal years 1997 and 1996, respectively. The percentage increase
in 1998 from 1997 was due to decreased revenues as actual operating expenses
dropped by $815,000.

RESULTS OF OPERATIONS
NET SALES. Net sales for fiscal 1998 were $96,278,000, a 32% decrease from 1997
net sales of $142,004,000. The decrease in 1998 sales was related to softness in
the disk drive industry. The softness was primarily the result of an oversupply
of disk drives caused by excess disk drive production in 1997 and the reduction
of inventory levels by computer manufacturers as they adopted a "build to order"
business model. Another contributing factor was a reduction in the average
number of heads per disk drive. This reduction is the result of the conversion
to MR heads, which increased the storage capacity per disk drive platter and
reduced the number of heads required to provide the same disk drive capacity.
The higher prices obtained from the sale of MR assemblies, which have a higher
value added content and sell for a higher price than the low end inductive
assemblies, have partially offset the decreased number of assemblies being sold.
The fourth quarter was also impacted by the disk drive industry's transition
away from lead wire assembly interconnects and into alternative interconnect
technologies, including the Company's Head Interconnect Flex (HIF), Flex
Suspension Assembly (FSA) and Bridge Flex products. The increase in fourth
quarter HIF shipments did not offset the decrease in lead wire assembly
shipments.

Net sales for fiscal 1997 increased 104% from 1996 net sales of $69,570,000.
Increased shipments of lead wire assemblies and the higher portion of MR lead
wire assemblies included in the product mix explained sales growth in 1997.

Flexible circuit sales continue to increase as a proportion of total sales,
providing over 25% of the sales for fiscal 1998 and over 45% for the fourth
quarter. The increase is primarily due to shipments from the Company's new high
volume, flexible circuit production facility. The facility is currently being
utilized to produce the HIF for the disk drive industry. In the near future it
will also produce other high technology flexible circuits, including
semiconductor packaging substrates.

Fiscal 1999 should benefit from continued growth in the demand for high
technology flexible circuits including rapidly increasing shipments of the
Company's HIF, FSA and Bridge Flex. Customer acceptance of the FSA and Bridge
Flex products introduced during the quarter will be integral to increasing
revenue in fiscal 1999 as demand for lead wire assemblies decreases. The
divestiture of the InnoMedica Division will have an immaterial impact on sales
going forward. Sales from Iconovex made up less than 1% of the Company's total
revenue in fiscal 1998.

Export sales accounted for 83% of the Company's revenue in fiscal 1998 as
compared to 86% for 1997 and 74% for 1996, reflecting the higher level of
interconnect shipments to disk drive manufacturers in Japan and other Pacific
Rim countries. A significant portion of the remaining domestic sales are
subsequently shipped internationally by the Company's customers.

GROSS MARGIN. The Company's gross profit margin decreased to 33.3% of sales in
fiscal 1998 as compared to 42.9% in 1997. Gross margin percents decreased
primarily due to the lower demand for lead wire assemblies which reduced the
leverage of the fixed overhead costs related to their production. Also, pricing
pressures returned to normal after being unusually low due to the heavy demand
for lead wire assemblies during 1997. The flexible circuit gross margin percent
was impacted by the increased level of fixed costs relating to the ramp up of
the new high volume flexible circuit facility. Flexible circuit gross margins
will improve in fiscal 1999 as the production volume and yields in the new
facility increase. Future lead wire assembly gross margins will fluctuate as
expenses are adjusted to match the level of demand for those assemblies.

In 1997, the Company's gross profit as a percentage of sales increased to 42.9%
as compared to 38.8% in 1996. This improvement was a result of the large
increase in units shipped and limited pricing pressure for portions of 1997 due
to supply shortages. Gross margin percentages in both years benefited from more
efficient use of the Company's manufacturing automation technology and the
increased utilization of subcontractors in Thailand and China for labor
intensive processes. High sales volume and increased manufacturing efficiency
allowed the Company to maintain strong margins even while responding to pricing
pressures.

OPERATING EXPENSES. Selling, general and administrative expenses were
7.7% of net sales in 1998 as compared to 6.2% in 1997 and 8.7% in 1996. The
increase in 1998 expenses as a percent of sales is primarily due to the decrease
in lead wire assembly sales. Total selling, general and administrative expenses
for fiscal 1998 decreased from 1997 primarily due to reduced headcount, a change
in

<PAGE>

estimated bad debts and lower bonus accruals. The increase in fiscal 1997 over
1996 is primarily due to the addition of infrastructure required to handle the
higher level of activity and the first full year of expenses related to the
operation of Litchfield Precision Components.

Engineering expense increased to 4.3% of net sales in fiscal 1998 from 2.5% in
1997 and 3.6% in 1996. The increase in 1998 is due both to the decrease in lead
wire assembly sales and an increased level of spending. The actual spending in
fiscal 1998 increased 16% over 1997 as a result of new product development costs
for both wire and flexible circuit products and costs related to the new high
volume, flexible circuit production facility. The decrease of engineering
expenses as a percent of sales in 1997 from 1996 is primarily due to the rapid
increase in lead wire assembly sales. Increases in fiscal 1999 engineering
spending are expected to concentrate on further HIF, FSA, semiconductor
packaging substrate and other high end flexible circuit technology development.
The Company will also be increasing high volume production capabilities.

Interest income increased to $2,029,000 in fiscal 1998 from $1,338,000 and
$936,000 in 1997 and 1996, respectively. These increases correspond to increases
in average cash and short-term investments. Interest expense decreased to
$69,000 in 1998, from $96,000 in 1997 and $113,000 in 1996. Net other income
(expense) included a $500,000 write off of intangible assets at InnoMedica in
1996. These intangible assets related to purchased proprietary technology which
was not expected to be supported by revenue from associated products.

INCOME BEFORE PROVISION FOR INCOME TAXES. Income before provision for income
taxes was $22,654,000 for fiscal 1998 as compared to $49,978,000 for 1997 and
$18,742,000 for 1996. As a percent of net sales, income before provision for
income taxes was 23.4% for 1998 as compared to 35.2% and 26.9% for 1997 and
1996. The decrease in 1998 was primarily due to the decrease in lead wire
assembly sales. The increase in the 1997 percent over 1996 was primarily due to
the Company's improved leverage of its fixed costs as a result of the large
increase in sales. The dollar decrease in 1998 from 1997 and increase over 1996
was due to the fluctuation of lead wire assembly sales.

LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments increased by $19,573,000 to $57,455,000 at
September 30, 1998. Net cash provided by operating activities increased in 1998
to $32,207,000 from $30,407,000 in 1997 and $13,108,000 in 1996. The increase in
1998 cash and short-term investments was primarily due to cash flows from
operations. During fiscal 1998 the Company invested 12,730,000 in capital
expenditures. These expenditures included a portion of the costs to construct
and equip an automated flexible circuit production facility. This facility was
constructed to meet the expected demand for high volume applications including
the HIF, FSA and semiconductor packaging related products. The first phase of
this facility provided a capacity of over 2 million units per week with
expansions in process to increase capacity to 5 million units per week. The
increase in 1997 cash provided by operating activities over 1996 was primarily
due to improved operating results related to the increase in demand for lead
wire assemblies.

Accounts receivable at September 30, 1998 decreased by $11,121,000 from the
prior year due to the decreased level of lead wire assembly sales in 1998.

Working capital rose by $11,225,000 to $73,068,000 at September 30, 1998. The
Company's current ratio was 12.7 to 1 at fiscal 1998 year-end, compared to 7.5
to 1 at the end of fiscal 1997.

Net property, plant and equipment increased by $4,753,000 to $28,501,000 at
September 30, 1998. Intangible assets decreased $23,000 to $1,826,000 at
September 30, 1998.

Long-term debt, net of current maturities, decreased by $196,000 to $755,000 at
September 30, 1998. The ratio of long-term debt to stockholders' equity was .007
at September 30, 1998, compared to .011 at the end of fiscal 1997.

Management believes that existing cash and investments and cash generated from
operations will provide an adequate source of funds to support projected working
capital, capital expenditures and dividends in fiscal 1999.

YEAR 2000
The Company is taking steps to ensure that it is not adversely affected by the
Year 2000 equipment and software failures that may arise in software
applications and equipment with embedded logic where two-year digits are used to
define the applicable year. A review is being conducted in all of the Company's
computer hardware and software and equipment with embedded logic to identify
those areas. The vendor for the Company's primary manufacturing and financial
software packages has indicated that this software is Year 2000 compliant. The
Company plans to complete the process of upgrading other systems that are not
compliant by mid 1999

<PAGE>

and does not believe the cost of any such upgrades will be material. Contingent
plans are being developed in the event that systems fail. The Company has also
communicated with many of its suppliers, service providers and customers
regarding their compliance with Year 2000 requirements. As a result of such
inquiries, no significant deficiencies have been identified. The Company will
continue to monitor these third parties for Year 2000 compliance. Because the
Company is still reviewing and assessing its overall Year 2000 exposure, it has
not developed its "most reasonably likely worst case Year 2000 scenarios" and,
therefore, cannot at this time state with certainty that the Year 2000 issues
will not have a material adverse impact on its financial condition, results of
operations and liquidity. Future disclosures by the Company with respect to Year
2000 issues will include worst case scenarios and contingency plans as they
become available.

There can be no assurance that all non-complying equipment and software will be
identified and upgraded on a timely basis. In addition, there can be no
assurance that the Company's customers and suppliers will not be adversely
affected by their own Year 2000 issues, which may indirectly adversely affect
the Company.

FORWARD-LOOKING INFORMATION
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, in the letter to shareholders, elsewhere in
the Annual Report, in the Company's Form 10-K 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 and the impact of competitive products and pricing. In addition, a
significant portion of the Company's revenue is generated from the disk drive
industry and any changes in the industry structure, technology or outlook could
have a significant 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not hold any derivative financial instruments, derivative
commodity instruments or other financial instruments except as noted in Notes A
and C to the financial statements and the information required herein pursuant
to Item 305 of Regulation S-K is incorporated by reference to such Notes.
The Company engages neither in speculative nor derivative trading activities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL DATA

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants 12
Consolidated Balance Sheets at September 30, 1998 and 1997 13
Consolidated Statements of Operations for each of the three years in the period ended September 30, 1998 14
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended September 30, 1998 15
Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1998 16
Notes to Consolidated Financial Statements 17-21
Quarterly Financial Data (unaudited) 21
</TABLE>

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Innovex, Inc.

We have audited the accompanying consolidated balance sheets of Innovex, Inc.
and Subsidiaries as of September 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innovex, Inc. and
Subsidiaries as of September 30, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles.

We have also audited Schedule II of Innovex, Inc. and Subsidiaries to Form 10-K
for each of the three years in the period ended September 30, 1998. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.

\s\ Grant Thornton LLP

Minneapolis, Minnesota
November 4, 1998 (except for Note K, as to which the date is November 24, 1998)

<PAGE>

CONSOLIDATED BALANCE SHEETS
INNOVEX, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
September 30,
Assets 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and equivalents $ 17,021,264 $ 9,442,620
Short-term investments 40,434,000 28,440,000
Accounts receivable, less allowance for doubtful
accounts of $213,000 (1997 - $621,000) 10,521,518 22,052,121
Inventories 5,717,330 7,252,596
Income taxes receivable 938,447 --
Other 4,686,504 4,161,938
-------------------------------------
Total current assets 79,319,063 71,349,275

Property, plant and equipment - at cost:
Land and land improvements 679,250 636,851
Buildings and leasehold improvements 14,923,082 9,232,030
Machinery and equipment 25,662,596 23,088,606
Office furniture and fixtures 3,053,366 2,993,286
-------------------------------------
44,318,294 35,950,773
Less accumulated depreciation and amortization 15,816,851 12,202,141
-------------------------------------
Net property, plant and equipment 28,501,443 23,748,632

Intangible assets, net of accumulated amortization of
$2,236,000 (1997 - $3,099,000) 1,826,343 1,849,381
Other assets 5,000 327,466
-------------------------------------
$109,651,849 $ 97,274,754
=====================================

Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 83,000 $ 104,000
Accounts payable 3,688,148 4,662,543
Accrued compensation 1,604,845 2,980,086
Income taxes payable -- 864,313
Other accrued liabilities 875,140 895,705
-------------------------------------
Total current liabilities 6,251,133 9,506,647

Long-term debt, less current maturities 755,024 950,733
Deferred income taxes 227,632 --
Contingency -- --

Stockholders' equity:
Common stock, $.04 par value; 30,000,000 shares
Authorized, 14,779,604 shares issued and outstanding
(1997 - 14,619,504) 591,184 584,780
Capital in excess of par value 15,732,350 14,065,186
Retained earnings 86,094,526 72,167,408
-------------------------------------
Total stockholders' equity 102,418,060 86,817,374
-------------------------------------
$109,651,849 $ 97,274,754
=====================================
</TABLE>

The accompanying notes are an integral part of these statements.

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
INNOVEX, INC. AND SUBSIDIARIES

Costs and Expenses:
Cost of sales 64,225,956 81,027,750 42,592,404
Selling, general and administrative 7,372,209 8,764,366 6,066,278
Engineering 4,148,895 3,572,203 2,508,277
Interest expense 68,510 95,670 112,531
Interest income (2,029,496) (1,338,421) (935,809)
Other (income) expense (162,223) (95,428) 484,535
-----------------------------------------------------------
73,623,851 92,026,140 50,828,216
-----------------------------------------------------------

Income Before Provision For Income Taxes 22,654,079 49,977,603 18,742,006
Provision For Income Taxes (6,743,000) (14,884,000) (5,621,000)
-----------------------------------------------------------
Net Income $ 15,911,079 $ 35,093,603 $ 13,121,006
===========================================================

Net Income Per Share:
Basic $ 1.08 $ 2.43 $ 0.93
===========================================================
Diluted $ 1.05 $ 2.31 $ 0.91
===========================================================

Common and Common Equivalent Shares Outstanding:
Basic 14,695,214 14,424,427 14,170,652
Diluted 15,125,790 15,161,820 14,475,780
</TABLE>

The accompanying notes are an integral part of these statements.

<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INNOVEX, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
Capital in Total
Common Excess of Retained Stockholders'
For the years ended September 30, 1998, 1997, and 1996 Stock Par Value Earnings Equity
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at October 1, 1995 $ 282,485 $ 8,930,301 $ 26,816,387 $ 36,029,173

Shares issued through exercise of stock options 1,940 283,075 285,015
Tax benefits derived from exercise of stock options 205,000 205,000
Dividends paid ($0.0875 per share) (1,240,078) (1,240,078)
Net income 13,121,006 13,121,006
----------------------------------------------------------------------
Balance at September 30, 1996 284,425 9,418,376 38,697,315 48,400,116

Shares issued through exercise of stock options 14,126 2,068,039 2,082,165
Tax benefits derived from exercise of stock options 2,865,000 2,865,000
Dividends paid ($0.1125 per share) (1,623,510) (1,623,510)
Two-for-one stock split 286,229 (286,229) --
Net income 35,093,603 35,093,603
----------------------------------------------------------------------
Balance at September 30, 1997 584,780 14,065,186 72,167,408 86,817,374

Shares issued through exercise of stock options 6,404 1,120,359 1,126,763
Tax benefits derived from exercise of stock options 546,805 546,805
Dividends paid ($0.135 per share) (1,983,961) (1,983,961)
Net income 15,911,079 15,911,079
----------------------------------------------------------------------
Balance at September 30, 1998 $ 591,184 $ 15,732,350 $ 86,094,526 $102,418,060
======================================================================
</TABLE>

The accompanying notes are an integral part of these statements.

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
INNOVEX, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
For the years ended September 30,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,911,079 $ 35,093,603 $ 13,121,006
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 6,960,581 4,863,417 3,636,327
Deferred income taxes 992,927 (612,603) (557,816)
Other non-cash items 540,564 117,206 676,784
Changes in operating assets and liabilities, net of business
acquisition/disposal:
Accounts receivable 11,121,212 (10,017,772) (4,595,197)
Inventories 1,094,814 (1,682,014) (2,030,030)
Other current assets (609,670) (937,637) (617,547)
Accounts payable (921,974) 1,080,915 1,089,475
Other current and long-term liabilities (1,626,823) 581,480 431,229
Income taxes (1,255,954) 1,920,275 1,953,678
-------------------------------------------------------
Net cash provided by operating activities 32,206,756 30,406,870 13,107,909

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (12,730,141) (15,613,246) (4,226,053)
Business or product line acquisitions -- -- (7,389,990)
Proceeds from sale of assets 1,169,936 75,327 16,183
Purchase of held-to-maturity securities (44,749,000) (30,730,000) (15,360,000)
Maturities of held-to-maturity securities 32,755,000 18,430,000 14,350,000
Other assets -- 884,000 (884,000)
-------------------------------------------------------
Net cash used in investing activities (23,554,205) (26,953,919) (13,493,860)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (216,709) (104,520) (407,750)
Proceeds from exercise of stock options 1,126,763 2,082,165 285,015
Dividends paid (1,983,961) (1,623,510) (1,240,078)
-------------------------------------------------------
Net cash provided by (used in) financing activities (1,073,907) 354,135 (1,362,813)
-------------------------------------------------------

Increase (decrease) in cash and equivalents 7,578,644 3,807,086 (1,748,764)
Cash and equivalents at beginning of year 9,442,620 5,635,534 7,384,298
-------------------------------------------------------
Cash and equivalents at end of year $ 17,021,264 $ 9,442,620 $ 5,635,534
=======================================================
</TABLE>

SUPPLEMENTAL DISCLOSURES:
Cash paid for interest was $66,000, $118,000 and $125,000 in 1998, 1997 and
1996.

Income tax payments were $7,005,000, $13,813,000 and $4,225,000 in 1998, 1997
and 1996.

Tax benefits derived from exercise of stock options totaling $547,000,
$2,865,000 and $205,000 in 1998, 1997 and 1996, were recorded as a reduction of
current income taxes payable and an increase in capital in excess of par value.

Liabilities of $1,814,000 were assumed as part of the May 1996 acquisition of
Litchfield Precision Components.

A $400,000 note receivable was received as partial consideration for the June
1998 sale of InnoMedica assets.

The accompanying notes are an integral part of these statements.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INNOVEX, INC. AND SUBSIDIARIES
September 30, 1998,1997 and 1996

NOTE A. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company is a diversified manufacturer of electrical
components for the computer, medical and telecommunications markets, as well as
a developer of computer software. During 1998, the Company combined the
operations of its Litchfield Precision Components subsidiary, its Precision
Products subsidiary and various other corporate functions into one operating
unit. Substantially all of the Company's revenues, operating profits and assets
relate to this operating unit. Company customers are located throughout the
United States and the Pacific Rim. The Company has manufacturing facilities in
Hopkins, Litchfield and Montevideo, Minnesota.

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

PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR - The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany transactions have been eliminated in
consolidation.

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 the year ended September 30. The fiscal year ended September 30, 1998
includes fifty-three weeks of operations.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - The Company considers all highly
liquid temporary investments with an original maturity of three months or less
to be cash equivalents. Cash equivalents, which consist of money market funds
and weekly put bonds, totaled $18,299,000 and $7,915,000 at September 30, 1998
and 1997 and are recorded at cost, which approximates market value. Debt and
equity securities have been classified as available-for-sale securities, with
unrealized gains and losses reported within stockholders' equity, or
held-to-maturity securities, which are reported at amortized cost. The Company
uses the specific identification method in determining realized gains and
losses.

ACCOUNTS RECEIVABLE - The Company grants credit to customers in the
normal course of business, but generally does not require collateral or any
other security to support amounts due. Management performs ongoing credit
evaluations of customers. The Company maintains allowances for potential credit
losses.

INVENTORIES - Inventories are stated at the lower of cost or market, with
cost determined by the first-in, first-out method.

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

INTANGIBLE ASSETS - Intangible assets include goodwill, patents, licenses,
technology and trademarks, which are capitalized at cost and amortized on the
straight-line basis over their estimated useful lives. Useful lives range from 3
to 10 years. Management reviews the valuation and amortization of goodwill on an
ongoing basis. As part of this review, management estimates the value and future
benefits of the net income to be generated by the product lines acquired to
determine whether an impairment of goodwill has occurred.

Intangible assets also include computer software development costs, which are
capitalized, when applicable, to the extent they are incurred after the
technological feasibility of the software has been determined and until the
software is available for general release to customers. These costs are then
amortized on a per unit sold basis or the straight-line method over the
remaining estimated economic life of the product, whichever amount is greater.
Unamortized capitalized software costs were $823,000 and $713,000 as of
September 30, 1998 and 1997. Capitalized software costs of $463,000 and $615,000
were amortized during the fiscal years ending September 30, 1998 and 1997.

NET INCOME PER SHARE - On December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." All share and per
share information for prior periods have been restated to conform to conform to
the provisions of SFAS 128.

The Company's basic net income per share is computed by dividing net income by
the weighted average number of outstanding common shares. The Company's diluted
net income per share is computed by dividing net income by the weighted average
number of outstanding common shares and common share equivalents related to
stock options, when dilutive. Options to purchase 196,250, 38,000 and 165,500
shares of common stock with weighted average exercise purchase prices of $28.76,
$30.23 and $17.45 were outstanding during 1998, 1997 and 1996, but were excluded
from the computation of common share equivalents because they were antidilutive.

RECLASSIFICATIONS - Certain 1997 and 1996 amounts have been reclassified to
conform with the 1998 presentation.

REVENUE RECOGNITION - Sales are recorded at the time of shipment and provision
for anticipated returns, net of exchanges, is recorded based on historical
experience.

USE OF ESTIMATES - Preparation of the Company's 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.

<PAGE>

STOCK BASED COMPENSATION - The Company utilizes the intrinsic value method of
accounting for its employee stock based compensation plans. Pro forma
information related to the fair value based method of accounting is contained in
Note F.

RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, the FASB issued Statement
No. 130 "Reporting Comprehensive Income" and Statement No. 131 "Disclosures
about Segments of an Enterprise and Related Information" which are effective for
fiscal years beginning after December 15, 1997. Statement No. 130 will require
the Company to display an amount representing total comprehensive income as part
of the Company's basic financial statements. Comprehensive income will include
such items as unrealized gains or losses on certain investment securities and
foreign currency items. Statement No. 131 will require the Company to disclose
financial and other information about its business segments, their products and
services, geographic areas, major customers, revenues, profits, assets and other
information. The adoption of these two statements is not expected to have a
material effect on the consolidated financial statements of the Company.

NOTE B. - BUSINESS AND PRODUCT LINE ACQUISITIONS
On May 16, 1996, the Company purchased substantially all of the assets of
Litchfield Precision Components, Inc. The purchase price of approximately
$9,178,000 was in the form of $3,500,000 in cash and the assumption of
liabilities totaling $5,678,000. The following unaudited pro forma results of
operations for the year ended September 30, 1996 assumes the acquisition
occurred as of October 1, 1995. (in thousands of dollars except per share
amounts):

1996
- ----------------------------------------------------------------------------
Net sales $77,617
Net income 13,190
Net income per share:
Basic $0.93
Diluted $0.91

The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition been consummated
on the assumed date, nor are they necessarily indicative of future operating
results.

NOTE C. - SHORT-TERM INVESTMENTS
Short-term investments consist primarily of a diversified portfolio of tax
exempt municipal bonds that are classified as held-to-maturity securities at
September 30, 1998 and 1997. As of September 30, 1998 and 1997, substantially
all of the short-term investments had maturities within one year. Gross realized
and unrealized gains and losses related to these securities were not material.

NOTE D. - INVENTORIES
Inventories are comprised of the following at September 30:

1998 1997
--------------------------------------
Raw materials and purchased parts $2,237,266 $2,652,028
Work-in-process and finished goods 3,480,064 4,600,568
--------------------------------------
$5,717,330 $7,252,596
======================================

NOTE E. - LONG-TERM DEBT
Long-term debt consists of various mortgage, promissory and industrial
development revenue notes which are collateralized by certain buildings,
improvements and equipment. Interest rates on these notes range from 5% to 7.5%.
Aggregate maturities of long-term debt for the next five years are as follows:
1999 - $83,000; 2000 - $93,000; 2001 - $98,000; 2002 - $106,000; 2003 -
$112,000; thereafter - $346,000. The recorded value of long-term debt
approximates fair market value.

NOTE F. - STOCKHOLDERS' EQUITY
Stock Splits -
On November 23, 1996, the Company's Board of Directors declared a two-for-one
split of the Company's common stock and increased the authorized shares from
15,000,000 to 30,000,000. The additional shares were distributed on December 23,
1996 to stockholders of record on December 16, 1996. All share and per share
information throughout the financial statements reflect the split.

Stock Option Plans -
The Company has stock option plans that provide for incentive and non-qualified
stock options to be granted to directors, officers and other key employees or
consultants. The stock options granted generally have a ten year life, vest over
a period of six months to five years, and have an exercise price equal to the
fair market value of the stock on the date of grant. At September 30, 1998, the
Company had 536,150 shares of common stock available for issue under the plans.

Transactions under the plans during each of the three years in the period ending
September 30, 1998 are summarized as follows:

<PAGE>

<TABLE>
<CAPTION>
Number of Weighted
Shares Under Average
Option Exercise Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at October 1, 1995 892,910 $5.29

Granted 348,000 7.05
Forfeited (76,400) 4.76
Exercised (97,000) 2.94
- -------------------------------------------------------------------------------------------
Balance at September 30, 1996 1,067,510 6.11

Granted 387,000 12.18
Forfeited (111,796) 6.55
Exercised (398,250) 5.23
- -------------------------------------------------------------------------------------------
Balance at September 30, 1997 944,464 8.92

Granted 187,750 28.52
Forfeited (137,300) 13.39
Exercised (160,100) 7.04
- -------------------------------------------------------------------------------------------
Balance at September 30, 1998 834,814 12.95
=================
</TABLE>

Options exercisable at September 30:

<TABLE>
<CAPTION>
Weighted
Number Average
Exercisable Exercise Price
----------------------------------
<S> <C> <C>
1996 247,310 $4.70
1997 122,865 6.23
1998 270,564 7.97
</TABLE>

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

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.33 -$ 3.46 39,764 5.8 years $ 2.12 39,764 $ 2.12
6.81 - 10.22 598,800 7.5 years 8.49 214,800 7.66
27.44 - 32.44 196,250 9.0 years 28.76 16,000 26.63
- ------------------------------------------------------------------------------------------------------------------
834,814 270,564
======= =======
</TABLE>

The Company's 1998, 1997 and 1996 pro forma net income and diluted net income
per share would have been $15,307,000, $34,695,000 and $13,026,000 or $1.02,
$2.30 and $0.90 had the fair value method been used for valuing options granted
during those years. The impact on net income may differ in future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before 1996. The weighted average value of options granted in 1998,
1997 and 1996 was $12.35, $5.56 and $1.43. The value was computed by applying
the following weighted average assumptions to the Black Scholes options pricing
model: volatility of 53%, 60% and 20%; dividend yield of 0.4%, 1.7% and 1.1%;
risk-free rate of return of 6.0%, 5.8%and 5.8%; and an average term of 3.5 years
for 1998, 1997 and 1996.

NOTE G. - INCOME TAXES
The effective income tax rates differed from the federal statutory income tax
rate as follows for the years ended September 30:

<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 34.6% 34.7% 34.0%
State income taxes 1.8 1.9 2.4
FSC benefit (6.2) (5.0) (6.0)
Tax exempt interest (2.8) (0.8) (2.1)
Other 2.4 (1.0) 1.7
----------------------------------------
29.8% 29.8% 30.0%
========================================
</TABLE>

Components of the provision for income taxes are as follows for the years ended
September 30 (thousands of dollars):

<PAGE>

<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $5,128 $14,027 $5,509
State 622 1,470 670
----------------------------------------
5,750 15,497 6,179
Deferred 993 (613) (558)
----------------------------------------
$6,743 $14,884 $5,621
========================================
</TABLE>

The cumulative temporary differences between the tax bases of assets and
liabilities and their carrying amounts for financial statement purposes are as
follows at September 30 (thousands of dollars):

<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Current deferred tax assets:
Inventories $ 331 $ 509
Receivables 140 257
Compensation and benefits 217 364
Other 10 11
----------------------------
$ 698 $ 1,141
============================
Long-term deferred tax assets (liabilities) - net:
Accelerated depreciation $ (170) $ (81)
Intangibles (58) 403
----------------------------
$ (228) $ 322
============================
</TABLE>

NOTE H. - RETIREMENT AND PROFIT-SHARING PLANS
The Company sponsors a 401K retirement plan for all of its employees meeting
minimum eligibility requirements. The plan provides Company matching
contributions of 50% of the first 6% of employee contributions to the plan.
Company contributions were approximately $435,000, $404,000 and $286,000 for the
years ended September 30, 1998, 1997 and 1996.

NOTE I. - RESEARCH AND DEVELOPMENT COSTS
The Company incurred research and development costs of approximately $2,356,000,
$1,784,000 and $813,000 for the years ended September 30, 1998, 1997 and 1996.

NOTE J. - FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS
The Company has no foreign-based operations; however, the Company utilizes
subcontractors in Thailand and China to perform certain labor intensive
procedures on a large portion of its products. Management believes that there
are alternative subcontractors that could perform these procedures if such a
change should be necessary; however, any unforeseen change could cause a delay
in shipments that could affect operations adversely. The Company had aggregate
export sales of $79,957,000, $122,379,000 and $51,467,000 for the years ending
September 30, 1998, 1997 and 1996, principally to Pacific Rim customers.

Revenues from four customers made up a significant portion of the Company's
total net sales during the years ending September 30:

<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Customer A 28% 25% 16%
Customer B 20 15 18
Customer C 14 5 2
Customer D 12 28 31
</TABLE>

Accounts receivable from the above four customers also make up a significant
portion of the Company's accounts receivable at September 30, 1998 and 1997.

NOTE K. - CONTINGENT LIABILITY
On November 24, 1998 the Company entered into discussions in an attempt to
resolve certain threatened litigation. The plaintiff, a former Executive Vice
President, current director and spouse of the Chairman of the Board of Directors
and Chief Executive Officer of the Company, has indicated her intent to commence
litigation against the Company and possibly certain individuals for marital
status discrimination and sex discrimination. A formal complaint has not been
served or filed, but a draft complaint was provided to the Company. The draft
complaint articulates claims for violations of the Minnesota Human Rights Act,
violations of Title VII of the Civil Rights Act of 1964 and for negligent
retention and intentional infliction of emotional distress. The plaintiff's
claims are based on allegations that she was treated differently from male
senior management, and ultimately constructively discharged because she is
married to the Company's Chief Executive Officer and a current director of the
Company, and

<PAGE>

because she is a woman. She claims to have experienced a hostile working
environment created by generally sexist attitudes directed at her. She seeks
damages of approximately $10 million.

Because the plaintiff is a member of the Board of Directors, and the spouse of
the Chairman of the Board of Directors and Chief Executive Officer of the
Company, the Board of Directors appointed a special independent committee of its
members to investigate, review and take action with respect to such threatened
claims. The special committee has reviewed the results of an initial
investigation by the Company's outside counsel into the claims and is presently
engaged in efforts to resolve the dispute on terms satisfactory to the Company.
As a result of the committee's investigation and efforts, the Company believes
that the matter may be settled for an amount which will not have a material
adverse effect on the Company's financial statements. In the event the Company's
efforts at settlement are unsuccessful, the Company intends to vigorously defend
itself against the threatened claims and the Company believes that the ultimate
outcome of any litigation will not have a material adverse effect on the
Company's financial statements.

QUARTERLY FINANCIAL DATA
(Unaudited)

<TABLE>
<CAPTION>
1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $33,008,635 $25,105,195 $20,298,838 $17,865,262 $96,277,930
Gross profit 13,106,642 8,851,552 5,398,125 4,695,655 32,051,974
Net income 7,274,164 4,261,641 2,410,663 1,964,611 15,911,079
Net income per share:
Basic $0.50 $0.29 $0.16 $0.13 $1.08
Diluted $0.48 $0.28 $0.16 $0.13 $1.05

1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
- -------------------------------------------------------------------------------------------------------------------------
Net sales $29,311,887 $38,388,938 $41,960,060 $32,342,858 $142,003,743
Gross profit 12,107,647 17,581,853 18,362,927 12,923,566 60,975,993
Net income 6,338,346 10,056,369 10,942,318 7,756,570 35,093,603
Net income per share:
Basic $0.44 $0.70 $0.76 $0.53 $2.43
Diluted $0.42 $0.66 $0.72 $0.51 $2.31
</TABLE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the section entitled "Election of Directors" in the
Registrant's definitive proxy statement to be mailed to shareholders on or about
December 21, 1998, and filed with the Securities and Exchange Commission.
Information on executive officers is set forth in Part I, Item 4A hereto.

ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the section entitled "Executive Compensation" and "Election
of Directors" in the Registrant's definitive proxy statement to be mailed to the
Shareholders on or about December 21, 1998, and filed with the Securities and
Exchange Commission.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the section entitled "Security Ownership of Certain
Beneficial Owners and Management" and "Election of Directors" in the
Registrant's definitive proxy statement to be mailed to Shareholders on or about
December 21, 1998, and filed with the Securities and Exchange Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the section entitled "Certain Transactions and Legal
Proceedings" in the Registrant's definitive proxy statement to be mailed to
Shareholders on or about December 21, 1998, and filed with the Securities and
Exchange Commission.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT

(1) Financial Statements Page Numbers
-------------------- ------------
The following Consolidated Financial Statements of the
Registrant, Innovex Inc. and subsidiaries, are included in
Item 8.
Consolidated Balance Sheets at September 30, 1998 and 1997 13
Consolidated Statements of Operations for each of the three
years in the period ended September 30, 1998 14
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended September 30, 1998 15
Consolidated Statements of Cash Flows for each of the three
years in the period ended September 30, 1998 16
Notes to Consolidated Financial Statements 17-21

(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the
three years ended September 30, 1998 24

All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
have been omitted because they are not required, are inapplicable
or the information is included in the Consolidated Financial
Statements or Notes thereto.

(3) Exhibits Page Numbers
-------- ------------
3(a) Articles of Incorporation, as amended are incorporated by
reference to Exhibit 3 of the Registrant's Form 10Q for
the Quarter Ended December 31, 1996.
3(b) Bylaws, as amended are incorporated by reference to Exhibit
3(b) of the Registrant's Form S-1 Registration
Statement dated June 19, 1986, (Commission File No.
33-6594).
10(a) 1983 Employee Incentive Stock Option Plan is incorporated by
reference to Exhibit 4(a) of the Registrant's Form S-8
dated June 3, 1987 (Commission File No. 33-14776).
10(b) 1987 Employee Stock Option Plan, as amended, is incorporated
by reference to Exhibit 4(a) of the Registrant's Form
S-8 dated March 17, 1989 (Commission File No.
33-27530).
10(c) Innovex, Inc. & Subsidiaries Employees' Retirement Plan is
incorporated by reference to Exhibit 10(i) of the
Registrant's Form 10-K for the Year Ended September 30,
1992.
10(d) 1994 Stock Option Plan is incorporated by reference to
Exhibit 10.1 of the Registrant's Form 10-Q for the
Quarter Ended March 31, 1995.
10(e) Form of Employment Agreement between certain executive
officers and the Company is incorporated by reference
to Exhibit 10(g) of the Registrant's Form 10-K for the
year ended September 30, 1996.
10(f) Lease Agreement between Karon-Baronbaum LLC, Landlord and
Innovex, Inc., tenant for Hopkins facility is
incorporated by reference to Exhibit 10.1 of the
Registrant's Form 10-Q for the quarter ended March 31,
1997
10(g) Operating Agreement of Smart Solution, LLC is incorporated
by reference to Exhibit 10(i) of the Registrant's Form
10-K for the year ended September 30, 1997.
21 Subsidiaries of Registrant. 26
23 Consent of Grant Thornton LLP. 27
27 Financial Data Schedule. 28

(b) REPORTS ON FORM 8-K
None

(d) SCHEDULES
Reference is made to Item 14 (a) 2.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

INNOVEX, INC.

By \s\ Thomas W. Haley
Thomas W. Haley
Chairman and Chief Executive Officer

Date December 29, 1998 By \s\ Douglas W. Keller
Douglas W. Keller
Vice President, Finance

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on this 29th day of December, 1998.

\s\ Thomas W. Haley Chairman and Chief Executive Officer
Thomas W. Haley and Director
(principal executive officer)

\s\ Douglas W. Keller Vice President, Finance
Douglas W. Keller (principal financial officer)

Director
Gerald M. Bestler

Director
Mary E. Curtin

\s\ Willis K. Drake Director
Willis K. Drake

\s\ Michael C. Slagle Director
Michael C. Slagle

\s\ Bernt M. Tessem Director
Bernt M. Tessem

<PAGE>

Innovex Inc. and Subsidiaries

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

For The Three Years Ended September 30, 1998

<TABLE>
<CAPTION>
Charged to
Balance at Charged to Other Balance at
Beginning of Costs and Accounts - Deductions = End of
DESCRIPTION Period Expenses Describe Describe Period
------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Miscellaneous valuation and qualifying accounts (a)
Year ended September 30, 1998 $ 903,000 $ - $ - $ - $ 445,000

Year ended September 30, 1997 640,000 - - - 903,000

Year ended September 30, 1996 372,000 - - - 640,000
</TABLE>

(a) Additions, deductions and balances were not individually significant.

<PAGE>

UNITIED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

INNOVEX, INC.

FOR

FISCAL YEAR ENDED SEPTEMBER 30, 1998

-------------------------------------------------------------

EXHIBITS

EXHIBIT 21. SUBSIDIARIES OF INNOVEX, INC.

State or other jurisdiction of
Name Incorporation or Organization
- ---- -----------------------------

Innovex Precision Components, Inc. Minnesota

Iconovex Corporation Minnesota

Innovex Limited Minnesota

Mar Engineering, Inc. Minnesota

Innovex Sales Limited Jamaica

Smart Solution, LLC Delaware

EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our report dated November 4, 1998(except for Note K, as to which
the date is November 24, 1998), accompanying the consolidated financial
statements included in the Annual Report of Innovex, Inc. on Form 10-K for the
year ended September 30, 1998. We hereby consent to the incorporation by
reference of said report in the Registration Statements of Innovex, Inc. on
Forms S-8 (File No. 33-14776, effective June 3, 1987, File No. 33-27530,
effective March 17, 1989, File No. 33-59035, effective May 2, 1995, File No.
333-10045, effective August 12, 1996 and File No. 333-10047, effective August
12, 1996.)

\s\ GRANT THORNTON LLP

Minneapolis, Minnesota
December 23, 1998

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS INCLUDED IN FORM 10-K FOR THE YEAR ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 17,021
<SECURITIES> 40,434
<RECEIVABLES> 10,735
<ALLOWANCES> 213
<INVENTORY> 5,717
<CURRENT-ASSETS> 79,319
<PP&E> 44,318
<DEPRECIATION> 15,817
<TOTAL-ASSETS> 109,652
<CURRENT-LIABILITIES> 6,251
<BONDS> 755
591
0
<COMMON> 0
<OTHER-SE> 101,827
<TOTAL-LIABILITY-AND-EQUITY> 109,652
<SALES> 96,278
<TOTAL-REVENUES> 96,278
<CGS> 64,226
<TOTAL-COSTS> 64,226
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (408)
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> 22,654
<INCOME-TAX> 6,743
<INCOME-CONTINUING> 15,911
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,911
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.05

</TABLE>