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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

KEY TRONIC CORPORATION

North 4424 Sullivan

Spokane, Washington 99216

(509) 928-8000

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.    Yes  x    No  ¨.

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

At May 7, 2004, 9,672,580 shares of Common Stock, no par value (the only class of common stock), were outstanding.

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KEY TRONIC CORPORATION

Index

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PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to consolidated financial statements.

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KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to consolidated financial statements.

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KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to consolidated financial statements.

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KEY TRONIC CORPORATION AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all adjustments of a normal and recurring nature necessary for a fair presentation, in all material respects, of the financial position, results of operations, and cash flows for the periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s 10-K report for the fiscal year ended June 28, 2003. Certain reclassifications have been made for consistent presentation.

The Company’s reporting period is a 52/53 week fiscal year ending on the Saturday closest to June 30. The quarter ended April 3, 2004 was a 14 week period, and the quarter ended March 29, 2003 was a 13 week period. Consequently, the first nine months of fiscal 2004 include 40 weeks, and the first nine months of fiscal 2003 consisted of 39 weeks.

On October 24, 2002, the Company announced the settlement of the litigation with F&G Scrolling Mouse LLC as explained in greater detail in Note 8 to these financial statements. Readers should be aware that the reported earnings for the nine months ended March 29, 2003, include a one-time benefit for reversal of previously recorded litigation expense.

1. NEW ACCOUNTING PRONOUNCEMENTS

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Standard requires that certain freestanding financial instruments be classified as liabilities, including mandatorily redeemable financial instruments, obligations to repurchase the issuer’s equity shares by transferring assets and certain obligations to issue a variable number of shares. The Company adopted SFAS No. 150 on July 1, 2003. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

2. INVENTORIES

3. LONG-TERM OBLIGATIONS

The Company entered into a financing agreement with CIT Group/Business Credit, Inc. in August of 2001. The financing agreement was for a revolving line of credit for up to $25 million; however, the Company requested that the maximum available line of credit be reduced to $20 million as one of the terms of the Fifth Amendment to the financing agreement executed in September of 2003. The Company requested this decrease because the original credit facility was more than the Company believed it could utilize, and the reduction to $20 million resulted in a decrease in the Company’s annual fees associated with the line of credit.

The financing agreement specifies four different levels of margin to be added to the JP Morgan Chase prime rate between 0.25% and 1.00% depending on certain financial covenants calculated by the Company. The margin applicable at April 3, 2004 was 0.50%. The full rate of interest as of April 3, 2004 was 4.5%.

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There have been six amendments to the financing agreement. The most recent amendment is dated February 12, 2004, and its purpose was to change the concentration reserves for some of the Company’s larger customers in anticipation of expected sales volumes over the next several months. The fifth amendment to the agreement, which was signed on September 30, 2003, permitted the Company to borrow against the receivables from one of its foreign customers and to include a portion of its finished goods inventory as borrowing collateral. This amendment also changed some of the financial covenants applicable to the Company and extended the term of the agreement from four years to five years. The financing agreement with CIT will mature on August 23, 2006. Earlier amendments to the financing agreement were primarily to change definitions of eligible accounts and modify loan covenants. The Company must currently maintain covenants for total equity, maximum capital expenditures, minimum earnings before interest, taxes, depreciation and amortization (EBITDA), and it must also maintain a rolling minimum fixed charge ratio.

As of April 3, 2004, the Company was in compliance with all loan covenants, and the outstanding revolving credit balance was approximately $9.5 million compared to approximately $9.9 million outstanding at fiscal year end June 28, 2003.

4. SUPPLEMENTAL CASH FLOW INFORMATION

As of April 3, 2004, and June 28, 2003, the Company’s cash balances included restricted cash of $937,000 and $1,142,000, respectively. The $937,000 includes two amounts; $506,000 is a deposit required by the state of Washington for self-insurers that would cover the Company’s maximum calculated workers’ compensation liability in the event of default by the Company. The remaining $431,000 is the amount of uncollected funds in the Company’s depository account as of April 3, 2004. Such funds are considered restricted, because they cannot be used for any purpose other than to decrease the Company’s revolving debt.

5. INCOME TAXES

The income tax provision for the third quarter of fiscal year 2004 was $238,000 versus an income tax provision of $14,000 for the third fiscal quarter of the prior year. The provisions for the first nine months of fiscal years 2004 and 2003 were $522,000 and $368,000, respectively. The provisions for the third quarters and first nine months of fiscal years 2004 and 2003 were attributable primarily to the taxable earnings of foreign subsidiaries. During the third quarter of fiscal year 2004, one of the Company’s Mexican subsidiaries recorded an adjustment to its provision for income tax related to a statutory income adjustment for calendar year 2003, which was partially offset by reduced Mexican tax rates applicable to foreign income. The provisions for fiscal year 2003 were net of several tax benefits recorded in the third quarter. The Company has tax loss carryforwards of approximately $54 million, which expire in varying amounts in the years 2006 through 2022. Management has determined that a valuation allowance equal to any deferred tax asset is appropriate.

6. EARNINGS PER SHARE (EPS)

Basic EPS is computed by dividing net income (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Diluted EPS is computed by dividing net income by the weighted-average number of common shares and common share equivalents outstanding during the period (in thousands, except per share info. and shares outstanding):

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During the nine months ended March 29, 2003, there were no dilutive shares as the option prices were higher than the average market price. During the nine months ended April 3, 2004, there were 103,740 options excluded from the diluted earnings per share as they were anti-dilutive due to the loss incurred.

7. STOCK OPTIONS

As allowed by SFAS No. 123, “Accounting for Stock Based Compensation”, the Company accounts for its employee stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, and FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation (FIN No. 44). Accordingly, no compensation is recognized for employee or director stock options granted with exercise prices greater than or equal to the fair value of the underlying common stock at date of grant. If the exercise price is less than the market value at the date of grant, the difference is recognized as deferred compensation expense, which is amortized over the vesting period of the options. The Company accounts for stock options issued to non-employees in accordance with the provisions of SFAS No. 123 under the fair value based method.

For purposes of disclosure under SFAS No. 123 and No. 148, the following is the pro forma effect of the options had they been recorded under the fair value based method (in thousands, except per share info):

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The fair value of each option grant is estimated on the date of grant using the following assumptions: 0% dividend yield, 5-year life, stock price volatility of 81.2% to 81.3% and risk free interest rates of 4.6% to 6.1%.

8. COMMITMENTS AND CONTINGENCIES

The amount of firm commitments to contractors and suppliers for capital expenditures was approximately $.7 million at April 3, 2004.

The Company leases some of its facilities, certain equipment, and automobiles under non-cancelable lease agreements. These agreements expire on various dates during the next nine years.

The Company provides warranties on certain product sales, and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under warranty. We currently establish warranty reserves based on historical warranty costs for each product line combined with liability estimates based on the prior twelve months’ sales activities. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to recognize additional cost of sales may be required in future periods.

Components of the reserve for warranty costs during the nine months ended April 3, 2004:

Litigation Settlement: On December 20, 2001, a jury in Seattle federal court rendered a verdict in the case of F&G Scrolling Mouse, LLC, Fernando Falcon and Federico Gilligan v. Microsoft Corporation, Honeywell, Inc., and Key Tronic Corporation, United States District Court for the Western District of Washington, Case No. C99-995C (the “litigation”) finding that Key Tronic misappropriated trade secrets and breached a confidentiality agreement with Plaintiffs. The jury awarded damages to the Plaintiffs in the amount of $16.5 million. The judgment against the Company was subsequently increased to approximately $19.2 million through an award of pre-judgment interest. On October 24, 2002, the Company reached a settlement of the litigation with the Plaintiffs (hereafter called “F&G”). Under the terms of the settlement, the Company has agreed to pay F&G a total of $7.0 million. The Company was required to make an initial payment to F&G of $2.5 million, as well as make quarterly payments to F&G of $200,000 or 50% of Key Tronic’s operating income, whichever is greater, until the total payment of $7.0 million has been made, provided the total payment is completed by December 15, 2005. As of April 3, 2004, the Company has made payments to F&G totaling approximately $ 4.2 million.

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If the total of $7.0 million is not paid by 12/15/2005, the total settlement amount increases on 12/15/2005 to $7.6 million. If payment of $7.6 million is not completed by 12/15/2006 the total settlement amount increases to $8.2 million. If payment of $8.2 million is not completed by 12/15/2007 the total settlement amount increases to $8.8 million. If payment of $8.8 million is not completed by 12/15/2008 the total settlement amount increases to $9.7 million. If payment of $9.7 million is not completed by 12/15/2009 the total settlement amount increases to $10.6 million. If payment of $10.6 million is not made by 12/15/2010 the total settlement amount increases to $11.5 million. Any unpaid balance remaining at 12/15/2011 will accrue interest thereafter at prime plus 1 ¹/2% per annum until paid. If the Company fails to make any minimum quarterly payment when due, Plaintiffs have the right to accelerate all remaining payments in the amount of $11.5 million less any amounts previously paid.

Reported earnings for the nine months ended March 29, 2003, include a one-time benefit of $12.2 million ($1.26 per share) for reversal of previously recorded litigation expense.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

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

OVERVIEW

Key Tronic Corporation is an independent provider of electronic manufacturing services (EMS) for original equipment manufacturers (OEMs). The Company’s core strengths include innovative design and engineering expertise in electronics, mechanical engineering, and precision molding and tooling combined with high-quality, low-cost production and assembly on a global basis. This global production capability provides customers with benefits of improved supply-chain management, reduced inventories, lower transportation costs, and reduced product fulfillment time.

The EMS industry has historically experienced growth over the long-term as more OEMs shift to outsourced manufacturing, and industry trends continue to be very positive. The Company believes that it is positioned in the EMS industry to expand its customer base and continue business growth.

The number of Key Tronic EMS customers have continued to increase during the third quarter of fiscal 2004. Some of these customers have programs that represent small annual revenue streams and some have multi-million-dollar potential. The Company’s new customer relationships involve a variety of products, including consumer electronics and plastics, household products, gaming devices, educational toys, exercise equipment, specialty printers and computer accessories.

The EMS industry is intensely competitive, and Key Tronic, at this time, has under 1% of the potential market. The Company is planning for growth in coming quarters by expanding its worldwide manufacturing capacity and continuing to improve its manufacturing processes. The Company believes that it can win new business, particularly those programs that may be initially too small for larger contract manufacturers. Current challenges facing the Company include the following:

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The Company maintains a strong balance sheet with a current ratio of 1.9 to 1 and a long-term debt to equity ratio of .5 to 1. The Company maintains a good working relationship with its asset-based lender, and it believes that internally generated funds and its revolving line of credit should provide adequate capital for its planned growth.

CRITICAL ACCOUNTING POLICIES

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

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

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

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

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

Income Taxes: The Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax liability together with evaluating temporary differences in recognition of income

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(loss) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s balance sheet. A valuation allowance against deferred tax assets is required whenever the recovery of the assets from future earnings is considered doubtful. As of April 3, 2004, the Company had approximately $54 million in tax loss carryforwards, which will begin expiring in 2006. In fiscal 2002, the Company wrote off its net deferred tax assets totaling approximately $5 million by recording additional income tax expense and increasing the valuation allowance for the deferred tax assets. The Company’s management made this decision as a result of the large financial loss recorded in that fiscal year and uncertainty due to a verdict rendered in the F&G Scrolling Mouse LLC litigation (see Note #8 on pages 10-11).

Although the Company has a history of operating losses, it is possible that future earnings may require the reinstatement of all or a portion of the deferred tax assets. If this should occur, an income tax benefit would be recorded, and this would have a favorable effect on reported earnings per share in the period of the adjustment.

CAPITAL RESOURCES AND LIQUIDITY

Operating Cash Flow

Operating activities provided $1.2 million of cash during the first nine months of fiscal year 2004 versus $.1 million of cash provided by operating activities during the same period of the prior year. The increase in cash provided by operating activities was due primarily to an increase in accounts payable offset by decreases in accrued compensation and vacation, litigation payments, and other liabilities. The increase in accounts payable from the fiscal year end was due primarily to extended payment terms from some of the Company’s largest suppliers. The decrease in litigation payments during the current year was due to the initial $2.5 million settlement payment that was made in the second quarter of fiscal 2003. The decrease in accrued compensation and vacation was the result of the payment of incentive compensation bonuses that were previously accrued at the 2003 fiscal year end. The decrease in other liabilities was primarily due to decreased accruals for certain sales and marketing promotional programs and a decrease in deferred revenue associated with one of the Company’s keyboard distribution customers.

Capital Expenditures

During the first nine months of fiscal year 2004, the Company spent $.6 million versus $1.4 million for capital additions in the same period in the previous fiscal year. The Company’s capital expenditures for the first nine months ended April 3, 2004 primarily consisted of purchases of manufacturing and computer equipment to support its worldwide operations. The $1.4 million in capital expenditures during the first nine months of fiscal year 2003 was primarily for production equipment purchased for the Company’s Las Cruces facility. The Company anticipates capital expenditures of approximately $.6 million through the remainder of the current fiscal year ending July 3, 2004. Actual capital expenditures may vary from anticipated expenditures depending upon future results of operations. See RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS, pages 16-17. Capital expenditures are expected to be financed with internally generated funds. Leases are often utilized when technical obsolescence and funding requirement advantages outweigh the benefits of equipment ownership.

Financing Cash Flow

The Company continues to finance its operations through the CIT Group using a revolving credit facility. The revolving loan is secured by substantially all the assets of the Company. Interest applicable on this loan is based on a predetermined margin rate (see Note 3) plus the JP Morgan stated prime rate. The Company was paying total interest of 4.5% on the amount outstanding at April 3, 2004. The amount outstanding on the revolving loan on April 3, 2004 was $9.5 million. The Company has the ability to borrow up to $20 million under this credit facility with approximately $4.3 million available at April 3, 2004 based on collateral held at that time. Cash requirements of the Company are affected by the level of current operations and new EMS programs. The Company utilizes cash to fund these requirements and believes it has positioned itself to grow and expand its business.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Payments Due by Period

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In addition to the cash requirements presented in tabular format, the Company also owes its suppliers approximately $18.4 million for accounts payable and shipments in transit at the end of the quarter. The Company generally pays its suppliers in a range from 30 to 120 days depending on terms offered. Quarterly payments to suppliers normally average between $15 and $21 million. These payments are financed by the Company’s revolving line of credit.

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

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RESULTS OF OPERATIONS

NET SALES

Net Sales

One of the Company’s major customers decreased orders during the third quarter and nine months ended April 3, 2004. This was more than offset by increased sales to other customers.

Gross Margins

Gross margins decreased in both the third quarter and nine months ended April 3, 2004. Even though sales increased in both periods, the overall sales mix of revenues changed. One of the Company’s major customers decreased orders significantly. These decreased orders were offset by increased orders from some of the Company’s other customers. The margins on offsetting sales are not as favorable as the margins on the decreased business.

Research, Development and Engineering

(% are stated as of sales)

Research, development and engineering (R,D&E) expenses decreased for both the quarter and nine months ended April 3, 2004 primarily due to a reduction in payroll expense.

Selling

(% are stated as of sales)

The decrease in selling expenses for the quarter and nine months ended April 3, 2004 is primarily due to decreased commission expenses and decreased sales and marketing promotional programs.

General and Administrative

(% are stated as of sales)

The decrease in overall general and administrative (G&A) expenses for the quarter and nine months ended April 3, 2004 is primarily due to a reduction in payroll expense.

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INTEREST

Interest

Interest expense has not fluctuated significantly because borrowing amounts and interest rates have been relatively stable.

INCOME TAXES

Income Taxes

The income tax provision for the third quarter of fiscal year 2004 was $238,000 versus an income tax provision of $14,000 for the third fiscal quarter of the prior year. The provisions for the first nine months of fiscal years 2004 and 2003 were $522,000 and $368,000, respectively. The provisions for the third quarters and first nine months of fiscal years 2004 and 2003 were attributable primarily to the taxable earnings of foreign subsidiaries. During the third quarter of fiscal year 2004, one of the Company’s Mexican subsidiaries recorded an adjustment to its provision for income tax related to a statutory income adjustment for calendar year 2003, which was partially offset by reduced Mexican tax rates applicable to foreign income. The provisions for fiscal year 2003 were net of several tax benefits recorded in the third quarter. The Company has tax loss carryforwards of approximately $54 million, which expire in varying amounts in the years 2006 through 2022. Management has determined that a valuation allowance equal to any deferred tax asset is appropriate.

BACKLOG

Backlog

As of June 28, 2003, the Company had an order backlog of approximately $35.6 million. Order backlog consists of purchase orders received for products expected to be shipped within the next 12 months although shipment dates are subject to change due to design modifications or other customer requirements. Order backlog should not be considered an accurate measure of future sales.

RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS

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

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

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

Concentration of Major Customers The concentration of the Company’s customers can change significantly on a quarterly basis. As an example, at the quarter ended April 3, 2004, the Company’s third largest customer year to date represented approximately 16% of sales, which made them our second largest customer for the quarter. Because of these fluctuations on a quarterly basis as well as for comparative purposes from year to year, the Company reports its customer concentration percentages as of its fiscal year end.

The Company’s largest EMS customer accounted for 31% of net sales in fiscal year 2003. This same customer accounted for 39% of sales in 2002. Three of the Company’s EMS customers accounted for 9%, 8%, and 8% of net sales during fiscal year 2003. These same customers accounted for 10%, 13%, and 10% of net sales in fiscal year 2002. There can be no assurance that the Company’s principal customers will continue to purchase products from the Company at current levels. Moreover, the Company typically does not enter into long-term volume purchase contracts with its customers, and the Company’s customers have certain rights to extend or delay the shipment of their orders. The loss of one or more of the Company’s major customers, or the reduction, delay or cancellation of orders from such customers, could materially and adversely affect the Company’s business, operating results and financial condition.

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

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

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

Technological Change and New Product Risk The markets for the Company’s customers’ products is characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and relatively short product life cycles. The introduction of products embodying new technologies or the emergence of new industry standards can render existing products obsolete or unmarketable. The Company’s success will depend upon its customers’ ability to enhance existing products and to develop and introduce, on a timely and cost-effective basis, new products that keep pace with technological developments and emerging industry standards and address evolving and increasingly sophisticated customer requirements. Failure of the Company’s customers to do so could substantially harm the Company’s customers’ competitive positions. There can be no assurance that the Company’s customers will be successful in identifying, developing and marketing products that respond to technological change, emerging industry standards or evolving customer requirements.

Stock and Dilution Price Volatility As of April 3, 2004, there were outstanding options for the purchase of approximately 2,082,000 shares of common stock of the Company (Common Stock), of which options for approximately 1,916,000 shares were vested and exercisable. Of the outstanding options, 26% have exercise prices more than twice the closing price on April 3, 2004. Holders of the Common Stock will suffer immediate and substantial dilution to the extent outstanding options to purchase the Common Stock are exercised. The stock price of the Company may be subject to wide fluctuations and possible rapid increases or declines over a short time period. These fluctuations may be due to factors specific to the Company such as variations in quarterly operating results or to factors relating to the EMS and computer industries or to the securities markets in general, which, in recent years, have experienced significant price fluctuations. These fluctuations often have been unrelated to the operating performance of the specific companies whose stocks are traded.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to the risk of fluctuating interest rates in the normal course of business. The Company’s major market risk relates to its secured debt. The term and revolving debt is secured substantially by all of the Company’s assets. The interest rates applicable to the Company’s revolving loan fluctuate with the JP Morgan Chase Bank prime rate. As of May 1, 2004, the JP Morgan Chase Bank prime rate was 4.00%.

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

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

Item 4. Controls and Procedures

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PART II. OTHER INFORMATION:

Item 1. Legal Proceedings

On March 31, 2004, a former employee of the Company filed a compliant against the Company in the Superior Court of the State of Washington, Spokane County. Anthony DeStefano, Jr. v Key Tronic Corporation, Case No. 04201480-2. The complaint asserts claims for breach of contract, wrongful withholding of wages and wrongful discharge and seeks an unspecified amount of damages. Management believes that the plaintiff’s claims are without merit and intends to vigorously defend this lawsuit.

Item 6. Exhibits and Reports on Form 8-K

(1) Current Report, January 27, 2004

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SIGNATURES

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

KEY TRONIC CORPORATION

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