KEY TRONIC CORP (Form: 10-K, Received: 09/13/2010 17:17:03)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 July 3, 2010

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

For the transition period from to

Commission File Number 0-11559

KEY TRONIC CORPORATION

(Exact name of registrant as specified in its charter)


Washington		91-0849125
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

N. 4424 Sullivan Road, Spokane Valley, Washington		99216
(Address of principal executive offices)		(Zip Code)

(509) 928-8000

(Registrant’s telephone number, including area code)

N/A

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

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


Title of each class		Name of each exchange on which registered
Common stock, no par value		The NASDAQ Stock Market LLC

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):

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

State the aggregate market value of the voting and non-voting common equity held by non affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

As of December 26, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $34.9 million based on the closing price as reported on the NASDAQ.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,326,855 shares of common stock were outstanding as of September 2, 2010.

Documents Incorporated by Reference:

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


Document Description		Part of Form 10-K
Proxy Statement dated September 17, 2010		Part III

KEY TRONIC CORPORATION

2010 FORM 10-K

TABLE OF CONTENTS


		Page

	Part I

Item 1.	Business	4 – 9
Item 1A.	Risk Factors	9 – 12
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	12 – 13
Item 3.	Legal Proceedings	13
Item 4.	Reserved	13

	Part II

Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	13 – 15
Item 6.	Selected Financial Data	15 – 16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17 – 25
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	25 – 26
Item 8.	Financial Statements and Supplementary Data	26 – 46
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	46
Item 9A(T).	Controls and Procedures	46 – 47
Item 9B.	Other Information	47

	Part III

Item 10.	Directors, Executive Officers and Corporate Governance	47 – 48
Item 11.	Executive Compensation	48
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	48
Item 13.	Certain Relationships and Related Transactions, and Director Independence	49
Item 14.	Principal Accounting Fees and Services	49

	Part IV

Item 15.	Exhibits and Financial Statement Schedule	49 – 53
	Signatures	54 – 55

FORWARD-LOOKING STATEMENTS

References in this report to “the Company”, “Key Tronic”, “we”, “our”, or “us” mean Key Tronic Corporation together with its subsidiaries, except where the context otherwise requires.

This Annual Report on Form 10-K 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 update forward-looking statements to reflect developments or information obtained after the date hereof and disclaims any obligation to do so. Readers should carefully review the

risk factors described in periodic reports the Company files from time to time with the Securities and Exchange Commission, including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

PART I

Item 1.

BUSINESS

Background

Key Tronic Corporation (dba: KeyTronicEMS Co.), was organized in 1969 as a Washington corporation that locally manufactured computer keyboards. The ability to design, build and deliver a quality product led to a reputation in the industry, allowing us to be a leading independent manufacturer of keyboards for computers in the United States. Our fully integrated design, tooling, and automated manufacturing capabilities enabled us to rapidly respond to customers’ needs for keyboards in production quantities worldwide. We supported our sales growth through the development and purchase of international manufacturing facilities. As the computer keyboard market matured with increasing competition from other international providers, we determined that our business could no longer solely rely on keyboard sales. After assessing market conditions and our strengths and capabilities, we shifted focus from keyboard manufacturing to contract manufacturing for a wide range of products. This strategy was based on our core strengths of innovative design and engineering expertise in electronics, mechanical engineering, and precision plastics combined with high-quality, low cost production, and assembly on an international basis. These strengths have made our company a strong competitor in the electronic manufacturing services (EMS) market.

Our Industry and Strategy

The expansion of the EMS industry during the last decade allowed us to continue to expand our customer base and the industries that we serve. The recent challenging global macroeconomic environment has had a negative impact on previously held customer programs. However, we successfully confronted the challenging global macroeconomic environment by reducing our costs while winning new customer programs, which allowed us to increase our profitability and strengthen our balance sheet during the global economic downturn. The increase in new programs represents a growing portion of our revenue and a promising foundation for our future. In keeping with our long-term strategic objectives, we have been successfully building a more diversified customer portfolio and a less concentrated revenue base, spanning a wider range of industries. We currently offer our customers the following services: integrated electronic and mechanical engineering, precision plastic molding, assembly, component selection, sourcing and procurement, worldwide logistics, and new product testing and production all at competitive pricing due to our global footprint.

We believe that we are well positioned in the EMS industry to continue the expansion of our customer base and achieve long term growth. Our core strengths continue to support our growth and our customers’ needs. We continue to focus on controlling operating expenses and leveraging the synergistic capabilities of our world-class facilities in the United States, Mexico, and China. This international production capability provides our customers with the benefits of improved supply-chain management, reduced inventory, lower labor costs, lower transportation costs, and reduced product fulfillment time. Given our competitive advantages and the growing need for some potential customers to move forward with their outsourcing strategies, we are strongly positioned to win new business in coming periods and grow our revenue and profits.

The EMS industry is intensely competitive. Although our customer base is growing we still have less than 1% of the potential global market and our revenue can fluctuate significantly due to reliance on a concentrated base of customers. We are planning for new customer growth in the coming quarters by securing new programs, increasing our worldwide manufacturing capacity, and continuing to improve our manufacturing and procurement processes. Ongoing challenges that we face include the following: Continuing to win programs from new and existing customers, balancing production capacity and key personnel in support of new customer programs, improving operating efficiencies, controlling costs while

developing competitive pricing strategies, successfully transitioning new program wins to full production and successfully addressing industry-wide shortages in the global supply chain.

Customers and Marketing

We provide a mix of manufacturing services for outsourced Original Equipment Manufacturing (OEM) products. We provide the following EMS services: Product design, surface mount technologies (SMT) and pin through hole capability for printed circuit board assembly, tool making, precision plastic molding, liquid injection molding, automated tape winding, prototype design and full product builds.

Sales of the majority of our products have historically not been seasonal in nature, but may be seasonal in the future if there are changes in the types of products manufactured. Sales can, however, fluctuate significantly between quarters from changes in customers and customer demand due to our concentrated customer base.

For the fiscal years ended July 3, 2010, June 27, 2009, and June 28, 2008, the five largest customers in each year accounted for 57%, 52%, and 68% of total sales, respectively. The following customers represented 10% or more of total net sales over the last three fiscal years: KAZ Inc. (18%, less than 10%, less than 10%) International Game Technology, Inc. (12%, 13%, 18%), and Lexmark International, Inc. (less than 10%, 14%, 15%). It is anticipated that our new customer program wins will dilute our concentration of revenue in the future.

Although keyboard manufacturing is still included in our product offerings, we do not expect annual keyboard sales to be a material component of our business. We realized revenues of approximately $4.5 million, $4.2 million, and $5.8 million in fiscal years 2010, 2009, and 2008, respectively, from the sale of keyboards. In order to accommodate the demand for standard keyboard layouts, we maintain a purchase-from-stock program. The more popular standard layouts are built and stocked for immediate availability. Although we are recognized as a reputable contract manufacturer we still market our products and services primarily through our direct sales department aided by strategically located field sales people and distributors. Although we maintain relationships with several independent sales organizations to assist in marketing our EMS product lines, commissions earned and paid are not material to the consolidated financial statements.

Manufacturing

We have continually made investments in developing and expanding a capital equipment base to achieve vertical integration and efficiencies in our manufacturing processes. We have invested significant capital into SMT for volume manufacturing of complex printed circuit board assemblies. We also design and develop tooling for injection molding and manufacture the majority of plastic parts used in the products we manufacture. Additionally, we have equipment to maintain a controlled clean environment for manufacturing processes that require a high level of precise control.

We use a variety of manual and automated assembly processes in our facilities, depending upon product complexity and degree of customization. Some examples of automated processes include component insertion, SMT, flexible robotic assembly, automated storage tape winding, computerized vision system quality inspection, automated switch and key top installation, and automated functional testing.

Our engineering expertise and automated manufacturing processes enable us to work closely with our customers during the design and prototype stages of production and to jointly increase productivity and reduce response time to the marketplace. We use computer-aided design techniques and software to assist in preparation of the tool design layout and component placement, to reduce tooling and production costs, improve component and product quality, and enhance turnaround time during product development.

We purchase materials and components for our products from many different suppliers, including both domestic and international sources. We develop close working relationships with our suppliers, many of whom have been supplying products to us for several years.

Research, Development, and Engineering

Research, development, and engineering (RD&E) expenses consist principally of employee related costs, third party development costs, program materials costs, depreciation, and allocated information technology and facilities costs. Our RD&E expenses were $2.8 million, $2.3 million, and $2.7 million in fiscal years 2010, 2009, and 2008 respectively. In each of these years, we focused most of our RD&E efforts on current customer EMS programs. The increase in RD&E in fiscal year 2010 compared to fiscal year 2009 is primarily the result of higher incentive compensation and increased headcount. The decrease in RD&E in fiscal year 2009 compared to fiscal year 2008 is the result of cost reduction efforts and lower incentive and bonus expenses.

Competition

The market for the products and services we provide is highly competitive. There are numerous competitors in the EMS industry, many of which have substantially more resources and are more geographically diverse than we are. Some of our competitors have similar international production capabilities, large financial resources and some have substantially greater manufacturing, research and development, and marketing resources. There is also competition from the manufacturing operations of our current and potential customers, who are continually evaluating the merits of manufacturing their products internally versus the advantages of outsourcing. We believe that we can currently compete favorably to these factors primarily on the basis of our international footprint, responsiveness, creativity, vertical production capability, quality, and cost.

Trademarks and Patents

Our name and logo are federally registered trademarks, and we believe they are valuable assets of our business. During 2001, we began operating under the trade name “KeyTronicEMS Co.” to better identify our primary business concentration. We also own several keyboard patents; however, since our focus is EMS, management believes that these patents will not have a significant impact on future revenues.

Employees

We consider our employees to be our primary strength and we make considerable efforts to maintain a well-qualified workforce. Our employee benefits include bonus programs involving periodic payments to all employees based on meeting quarterly or fiscal year performance targets. We regularly provide transportation, medical services, and meals to all of our employees in foreign locations. We maintain a 401(k) plan for U.S. employees, which provides a discretionary matching company contribution of up to 4% of an employee’s salary. We provide group health, life, and disability insurance plans. We also maintain stock option plans and other long term incentive plans for certain employees and outside directors. As of July 3, 2010 we had 2,036 employees compared to 1,963 on June 27, 2009, and 2,502 on June 28, 2008. Since we can have significant fluctuations in product demand, we seek to maintain flexibility in our workforce by utilizing skilled temporary and short-term contract labor in our manufacturing facilities in addition to full-time employees. Our employees in Reynosa, Mexico, are represented by a local union. We have no history of any material interruption of production due to labor disputes. We anticipate that this particular subsidiary will cease its operations during fiscal year 2011. As a result, we will no longer retain employees in Reynosa, Mexico.

Backlog

On July 31, 2010 our order backlog was valued at approximately $56.9 million, compared to approximately $29.9 million on July 25, 2009, which reflects an increase in expected revenue during fiscal year 2011. Even though our order backlog is comprised of firm purchase orders, the amount of backlog is not necessarily indicative of future sales but can be indicative of trends in expected future sales revenue. Due to the relationships with our customers, we will occasionally allow orders to be canceled or rescheduled and as a result is not a meaningful indicator of future financial results. If there are canceled or rescheduled orders, we will attempt to negotiate fees to cover the costs we have incurred. Order backlog consists of

purchase orders received for products expected to be shipped approximately within the next twelve months, although shipment dates are subject to change due to design modifications, customer forecast changes, or other customer requirements.

Foreign Markets

Information concerning net sales and long-lived assets (property, plant, and equipment) by geographic areas is set forth in footnote 12 of the consolidated financial statements of this Annual Report on Form 10-K, under the caption “Enterprise-Wide Disclosures”, and that information is incorporated herein.

Executive Officers of the Registrant

The table below sets forth the name, current age and current position of our executive officers and other significant employees as of July 3, 2010:


Name	Age	Positions Held
*Executive Officers*
Craig D. Gates	51	President and Chief Executive Officer
Ronald F. Klawitter	58	Executive Vice President of Administration, Chief Financial Officer and Treasurer
Douglas G. Burkhardt	52	Executive Vice President of Worldwide Operations
Lawrence J. Bostwick	58	Vice President of Engineering and Quality
Phil Hochberg	48	Vice President of Business Development
Brett R. Larsen	37	Vice President of Finance, and Controller
Don Sinclair*	57	Vice President of Materials

*	Subsequent to July 3, 2010, Mr. Sinclair announced his resignation with the Company effective August 31, 2010.

Executive Officers

CRAIG D. GATES – President and Chief Executive Officer

Mr. Gates, age 51, has been President and Chief Executive officer of the Company since April 2009. Previously he was Executive Vice President and General Manager from August 2002 to April 2009. He served as Executive Vice President of Marketing, Engineering and Sales from July 1997 to August 2002 and served as Vice President and General Manager of New Business Development from October 1995 to July 1997. He joined the Company as Vice President of Engineering in October of 1994. From 1982 he held various engineering and management positions within the Microswitch Division of Honeywell, Inc., in Freeport, Illinois, and from 1991 to October 1994 he served as Director of Operations, Electronics for Microswitch. Mr. Gates has a Bachelor of Science Degree in Mechanical Engineering and a Masters in Business Administration from the University of Illinois, Urbana.

RONALD F. KLAWITTER – Executive Vice President of Administration, Chief Financial Officer, and Treasurer

Mr. Klawitter, age 58, has been Executive Vice President of Administration, CFO, and Treasurer since July 1997. Previously he was Vice President of Finance, Secretary, and Treasurer of the Company from October 1995 to July 1997. He was Acting Secretary from November 1994 to October 1995 and Vice President of Finance and Treasurer from 1992 to October 1995. From 1987 to 1992, Mr. Klawitter was Vice President of Finance at Baker Hughes Tubular Service, a subsidiary of Baker Hughes, Inc. Mr. Klawitter has a BA degree from Wittenberg University and is a Certified Public Accountant.

DOUGLAS G. BURKHARDT – Executive Vice President of Worldwide Operations

Mr. Burkhardt, age 52, has been Executive Vice President of Worldwide Operations of the company since July 22, 2010. Previously Mr. Burkhardt was Vice President of Worldwide Operations from July 2008 to July 2010 and Director of China Operations and Program Management from January 2006 to July 2008. Mr. Burkhardt also served as Director of Northwest and China Operations from November of 1998 to January of 2006. Mr. Burkhardt also served as Director of Customer Satisfaction from March 1997 to November 1998 and Director of Molding from September of 1995 to March of 1997. Prior to this, Mr. Burkhardt served in other various senior management positions within the company. Mr. Burkhardt has been with the company since May of 1989. Prior to joining Key Tronic, Mr. Burkhardt worked for House of Aluminum and Glass for 12 years where he was the plant manager.

LAWRENCE J. BOSTWICK – Vice President of Engineering and Quality

Mr. Bostwick, age 58, has been Vice President of Engineering and Quality since July 2008. Previously he was Director of Engineering and Quality from February 2007 to July 2008 and served as Corporate Director of Quality from February 2006 to February 2007. From 2003 to 2006 he was Director of Supply Chain Management and Quality for the Lancer Corporation and from 1998 to 2003 he was Vice President of Operations for Thermacore International. He is a graduate of the Westinghouse and General Electric – Engineering and Manufacturing Professional Development Programs. He is certified in both Quality and Industrial Engineering and is a Lean – Six Sigma Master Black Belt. Mr. Bostwick has a combined B.S. degree in Production and Operation and Industrial Engineering from Bowling Green State University and a Masters degree in Industrial Engineering and Business Administration from Syracuse University.

PHIL HOCHBERG – Vice President of Business Development

Mr. Hochberg, age 48, has been Vice President of Business Development since October 2009. Previously he was Director of Business Development and Program Management from July 2008 to October 2009. Mr. Hochberg served as Director of Business Development from October 2004 to July 2008 and as Director of EMS Sales and Marketing from July 2000 to October 2004. Prior to joining Key Tronic, Mr. Hochberg worked for Quinton Instrument Company as their Director of Marketing and Product Management from 1992 to 2000. From 1988 to 1992, he was employed by SpaceLabs Medical as their Business Development Marketing Manager. Mr. Hochberg has an MBA from the University of British Columbia, a BA Psychology, with a minor in Business from Washington University in St. Louis.

BRETT R. LARSEN – Vice President of Finance, and Controller

Mr. Larsen, age 37, has served as Vice President of Finance and Controller since February 2010. He was Chief Financial Officer of FLSmidth Spokane, Inc. from December 2008 to February 22, 2010. From October 2005 through November 2008, Mr. Larsen served as Controller of Key Tronic Corporation. From May 2004 to October 2005, Mr. Larsen served as Manager of Financial Reporting of Key Tronic Corporation. From 2002 to May 2004, Mr. Larsen was an audit manager for the public accounting firm BDO Seidman, LLP. He also held various auditing and supervisory positions with Grant Thornton LLP from 1997 to 2002. Mr. Larsen has a Bachelor of Science degree in Accounting and a Masters degree in Accounting from Brigham Young University and is a Certified Public Accountant.

DON SINCLAIR – Vice President of Material

Mr. Sinclair, age 57, has served as the Vice President of Materials since January 2010. Prior to joining Key Tronic, Mr. Sinclair was employed by Advanced Input Systems Division of Esterline Corporation, where he held various positions such as: Director of Materials, Managing Director – Offshore Operations, and Vice President of Business Development from 1998 to 2009. Prior to 1998, Mr. Sinclair held management positions at companies including Intermec Technologies, Honeywell and Westinghouse. Mr. Sinclair has a Bachelor of Science Degree in Business from Washington State University.

Available Information

Our principal executive offices are located at N. 4424 Sullivan Road, Spokane Valley, Washington 99216, and our telephone number is (509) 928-8000. Our website is located at http://www.keytronicems.com where filings of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q or current reports on Form 8-K are available after they have been filed with the Securities and Exchange Commission. The information presented on our website currently and in the future is not considered to be part of this document or any document incorporated by reference in this document.

Item 1A.

RISK FACTORS

There are risks and uncertainties that could affect our business. These risks and uncertainties include but are not limited to, the risk factors described below, in Item 7A: “Quantitative and Qualitative Disclosures about Market Risk” and elsewhere in this Form 10-K.

RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE RESULTS

The following risks and uncertainties could affect our actual results and could cause results to differ materially from past results or those contemplated by our 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

Our quarterly operating results have varied in the past and may vary in the future due to a variety of factors, including adverse changes in the U.S. and global macroeconomic environment, volatility in overall demand for our customers’ products, success of customers’ programs, timing of new programs, new product introductions or technological advances by us, our customers and our competitors, and changes in pricing policies by us, our customers, our suppliers, and our competitors. Our customer base is diverse in the markets they serve, however, decreases in demand, particularly from customers that supply the banking, consumer products, and gambling industries, could affect future quarterly results. Additionally, our customers could be impacted by the illiquidity of the credit markets which could directly impact our operating results.

Component procurement, production schedules, personnel and other resource requirements are based on estimates of customer requirements. Occasionally, our customers may request accelerated production that can stress resources and reduce operating margins. In addition, because many of our operating expenses are relatively fixed, a reduction in customer demand can harm our gross profit and operating results. The products which we manufacture for our customers have relatively short product lifecycles. Therefore, our business, operating results and financial condition are dependent in significant way on our ability to obtain orders from new customers and new product programs from existing customers.

Operating results can also fluctuate if changes are made to significant estimates and assumptions. Significant estimates and assumptions include the allowance for doubtful receivables, provision for obsolete and non-saleable inventory, the valuation allowance on deferred tax assets, impairment of long-lived assets, long-term incentive compensation accrual, and the provision for warranty costs.

Economic Conditions

Recently there have been adverse conditions and uncertainty in the global economy as the result of unstable global financial and credit markets, inflation, and recession. These unfavorable economic conditions and the weakness of the credit market could affect the demand for our customers’ products. The current global macroeconomic environment may affect some of our customers that could reduce orders and change forecasts which could adversely affect our sales in future periods. Additionally, the financial strength of our customers and suppliers and their ability to obtain and rely on credit financing may affect their ability to fulfill their obligations to us and have an adverse affect on our financial results.

Credit Markets

The current illiquidity and financial instability in the credit markets could adversely impact lenders and potentially limit the ability of our suppliers and customers to borrow. This may affect their ability to fulfill their obligations to us and have an adverse effect on our financial results.

Dependence on Suppliers

We are dependent on many suppliers, including sole source suppliers, to provide key components and raw materials used in manufacturing customers’ products. Over the past few quarters we have seen supply shortages in certain electronic components. This has resulted in longer lead times and the inability to meet our customers request for flexible production and we have missed or extended shipment dates. If demand for these components continues to outpace supply capacity these delays could further affect future operations. 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 our operating results and damage customer relationships.

Concentration of Credit Risk

Cash and cash equivalents are exposed to concentrations of credit risk. We place our cash with high credit quality institutions. At times, such balances may be in excess of the federal depository insurance limit or may be on deposit at institutions which are not covered by insurance. If such institutions were to become insolvent during which time it held our cash and cash equivalents in excess of the insurance limit, it could be necessary to obtain other credit financing to operate our facilities.

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 our business, operating results, and financial condition. If we were unable to provide comparable or better manufacturing services at a lower cost than our competitors, it could cause sales to decline. In addition, competitors can copy our non-proprietary designs after we have invested in development of products for customers, thereby enabling such competitors to offer lower prices on such products due to savings in development costs.

Concentration of Major Customers

At present, our customer base is highly concentrated and could become more or less concentrated. Our largest EMS customer accounted for 18% of net sales in fiscal year 2010. This same customer accounted for 6% of sales in 2009 and 0% in 2008. For the fiscal years ended 2010, 2009, and 2008, the five largest customers accounted for 57%, 52%, and 68% of total sales, respectively. There can be no assurance that our principal customers will continue to purchase products from us at current levels. Moreover, we typically do not enter into long-term volume purchase contracts with our customers, and our customers have certain rights to extend or delay the shipment of their orders. We, however, require that our customers contractually agree to buy back inventory purchased within specified lead times to build their products if not used.

The loss of one or more of our major customers, or the reduction, delay or cancellation of orders from such customers, due to economic conditions or other forces, could materially and adversely affect our business, operating results and financial condition. Specifically, some of our major customers provide products to the banking and gambling industries which have been adversely affected by the unfavorable economic environment. The contraction in demand from our customers in these industries could continue to impact our customer orders and continue to have a negative impact on our operations over the next several fiscal quarters. Additionally, if one or more of our customers were to become insolvent or otherwise unable to pay for the manufacturing services provided by us, our operating results and financial condition would be adversely affected.

Foreign Manufacturing Operations

Most of the products manufactured by us are produced at our facilities located in Mexico and China. These international operations may be subject to a number of risks, including:

•

difficulties in staffing and managing foreign operations;

•

political and economic instability (including acts of terrorism, civil unrest, forms of violence and outbreaks of war), which could impact our ability to ship and/or receive product;

•

unexpected changes in regulatory requirements and laws;

•

longer customer payment cycles and difficulty collecting accounts receivable;

•

export duties, import controls and trade barriers (including quotas);

•

governmental restrictions on the transfer of funds;

•

burdens of complying with a wide variety of foreign laws and labor practices;

•

fluctuations in currency exchange rates, which could affect component costs, local payroll, utility and other expenses; and

•

inability to utilize net operating losses incurred by our foreign operations to reduce our U.S. income taxes;

•

our foreign locations may be impacted by hurricanes, earthquakes, water shortages, tsunamis, floods, typhoons, fires, extreme weather conditions and other natural or manmade disasters.

Our operations in certain foreign locations receive favorable income tax treatment in the form of tax credits or other incentives. In the event that such tax holidays or other incentives are not extended, are repealed, or we no longer qualify for such programs, our taxes may increase, which would reduce our net income.

Additionally, certain foreign jurisdictions restrict the amount of cash that can be transferred to the U.S or impose taxes and penalties on such transfers of cash. To the extent we have excess cash in foreign locations that could be used in, or is needed by, our operations in the United States, we may incur significant penalties and/or taxes to repatriate these funds.

Dependence on Key Personnel

Our future success depends in large part on the continued service of our key technical, marketing and management personnel and on our ability to continue to attract and retain qualified employees. There can be no assurance that we will be successful in attracting and retaining such personnel. The loss of key employees could have a material adverse effect on our business, operating results and financial condition.

Technological Change and New Product Risk

The markets for our 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. Our success will depend upon our 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 our customers to do so could substantially harm our customers’ competitive positions. There can be no assurance that our customers will be successful in identifying, developing and marketing products that respond to technological change, emerging industry standards or evolving customer requirements.

Interest Rate Risk

We are exposed to interest rate risk under our revolving credit facility with interest rates based on various levels of margin added to published prime rate and LIBOR rates depending on the calculation of a certain financial covenant.

Compliance with Current and Future Environmental Regulation

We are subject to a variety of domestic and foreign environmental regulations relating to the use, storage, and disposal of materials used in our manufacturing processes. If we fail to comply with any present or future regulations, we could be subject to future liabilities or the suspension of current manufacturing operations. In addition, such regulations could restrict our ability to expand our operations or could require us to acquire costly equipment, substitute materials, or incur other significant expenses to comply with government regulations.

Foreign Currency Fluctuations

A significant portion of our operations are in foreign locations. As a result, transactions occur in currencies other than the U.S. dollar. Exchange rate fluctuations among other currencies used by us could directly or indirectly affect our financial results. Future currency fluctuations are dependent upon a number of factors and cannot be easily predicted. We currently use Mexican peso forward contracts to hedge foreign currency fluctuations for a portion of our Mexican peso denominated expenses. However, unexpected expenses could occur from future fluctuations in exchange rates.

Dilution and Stock Price Volatility

Holders of the common stock will suffer immediate dilution to the extent outstanding options to purchase the common stock are exercised. Our stock price 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 us such as variations in quarterly operating results or changes in earnings estimates, or to factors relating to the EMS industry 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.

Disclosure and Internal Controls

Management does not expect that our disclosure controls and internal controls and procedures will prevent all errors or fraud. A control system is designed to give reasonable, but not absolute, assurance that the objectives of the control system are met. In addition, any control system reflects resource constraints and the benefits of controls must be considered relative to their costs. Inherent limitations of a control system may include: judgments in decision making may be faulty, breakdowns can occur simply because of error or mistake and controls can be circumvented by collusion or management override. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

Item 1B.

UNRESOLVED STAFF COMMENTS

None

Item 2.

PROPERTIES

We have manufacturing and sales operations located in the United States, Mexico, and China. The table below lists the locations and square footage of our operating facilities:


Location	Approx. Sq. Ft.	Type of Interest (Leased/Owned)	Description of Use
Spokane Valley, Washington ⁽¹⁾	61,000	Leased	Sales, research, administration and manufacturing

Spokane Valley, Washington	36,000	Leased	Manufacturing
El Paso, Texas	80,000	Leased	Shipping and warehouse

Total USA	177,000

Juarez, Mexico	174,000	Owned	Manufacturing

Juarez, Mexico	60,000	Owned	Manufacturing and warehouse

Juarez, Mexico	66,000	Owned	Manufacturing and warehouse

Juarez, Mexico ⁽²⁾	115,000	Owned	Manufacturing and warehouse

Juarez, Mexico ⁽³⁾	72,000	Leased	Manufacturing and warehouse

Reynosa, Mexico ⁽⁴⁾	140,000	Leased	Manufacturing

Reynosa, Mexico ⁽⁴⁾	100,000	Leased	Warehouse



Total Mexico	727,000

Shanghai, China ⁽⁵⁾	83,000	Leased	Manufacturing

Total China	83,000

Grand Total	987,000

⁽¹⁾	On June 15, 2010, the company amended its lease with Royal Hills Associates (RHA) to extend the lease for an additional ten years, which we continue to occupy as our headquarters (see Note 3 to Consolidated Financial Statements)

⁽²⁾	During fiscal year 2010, we purchased a 115, 000 square foot manufacturing facility in Juarez, Mexico for additional assembly space. In addition, as part of the purchase transaction we obtained an option to purchase an additional adjacent manufacturing facility.

⁽³⁾	In fiscal year 2009, we leased a new facility in Juarez, Mexico for more storage capacity and additional assembly space.

⁽ ⁴ ⁾

These facilities are used exclusively to manufacture products for one EMS customer. We anticipate that this particular subsidiary will cease its operations during fiscal year 2011.

⁽ ⁵ ⁾

In fiscal year 2010, we increased our leased space in China to 83,000 sq. ft. to accommodate an additional SMT line and for additional assembly space. Subsequent to fiscal year 2010, we entered into an agreement to lease an additional 36,000 square feet of manufacturing space.

The geographic diversity of these locations allows us to offer services near certain of our customers and major electronics markets with the additional benefit of reduced labor costs. We consider the productive capacity of our current facilities sufficient to carry on our current business. In addition, in Juarez, Mexico one of our buildings includes adjacent vacant land that could be developed into additional manufacturing and warehouse space and we have a purchase option on another facility. All of our facilities are ISO certified to ISO 9001:2008 standards, ISO-14001 environmental standards, and ISO-13485:2003 medical devices standards. The Spokane, Washington facilities are additionally registered to AS9100B, ITAR and ISO/TS 16949. Our China facilities are also registered to AS9100B and ISO/TS.

Item 3.

LEGAL PROCEEDINGS

We are a party to certain lawsuits or claims in the ordinary course of business. We do not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flow.

Item 4.

RESERVED

PART II

Item 5:

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded on the NASDAQ Global Market, formerly the NASDAQ National Market System under the symbol “KTCC”. Quarterly high and low closing sales prices for our common stock for fiscal years 2010 and 2009 were as follows:


	2010				2009
	High		Low		High		Low
First Quarter	$	2.40	$	1.60	$	3.84	$	2.47
Second Quarter		3.60		2.26		2.56		0.97
Third Quarter		6.02		3.69		1.22		0.86
Fourth Quarter		6.61		4.88		1.94		0.91

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

Holders and Dividends

As of July 3, 2010, we had 804 shareholders of common stock on record. As a result of our credit agreement with Wells Fargo, N.A. we are restricted from declaring or paying dividends in cash and stock. We have not paid a cash dividend and do not anticipate payment of dividends in the foreseeable future.

Equity Compensation Plan Information

Information concerning securities authorized for issuance under our equity compensation plans is set forth in Part III, Item 12 of this Annual Report, under the caption “Securities Authorized for Issuance under Equity Compensation Plans”, and that information is incorporated herein by reference.

Performance Graph

Set forth below is a line graph comparing the cumulative total shareholder return on our common stock with the cumulative total return of the NASDAQ Stock Market (U.S. & Foreign) Index and the NASDAQ Electronic Components Index in fiscal 2010.

LOGO


	7/2/05	6/30/06	6/30/07	6/28/08	6/27/09	7/3/10
Key Tronic Corporation	100.00	113.66	147.97	102.91	47.97	141.86
NASDAQ Composite	100.00	107.08	130.99	114.02	90.79	105.54
NASDAQ Electronic Components	100.00	94.09	110.15	100.35	72.87	88.63

Item 6:

SELECTED FINANCIAL DATA

The following selected data is derived from our audited consolidated financial statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements and related notes, and other information included in this report.

Financial Highlights

(In thousands, except for Supplemental Data and Book Value per Share)


	Fiscal Years
	July 3, 2010			June 27, 2009			June 28, 2008			June 30, 2007			July 1, 2006
Consolidated Statements of Operations Data :
Net sales	$	199,620		$	184,924		$	204,122		$	201,712		$	187,699
Gross profit		19,250			13,180			16,820			17,670			17,304
Gross margin percentage		9.6	%		7.1	%		8.2	%		8.8	%		9.2	%
Operating income		7,388			1,783			6,834			6,810			5,861
Operating margin percentage		3.7	%		1.0	%		3.3	%		3.4	%		3.1	%
Net income		8,690			1,063			5,584			5,230			9,753
Earnings per share – diluted		0.85			0.11			0.54			0.51			0.97

Consolidated Cash Flow Data :
Cash flows provided by (used in) operations		3,697			10,038			(718	)		(1,857	)		(34	)
Capital expenditures		3,378			1,891			1,180			3,137			1,638

Consolidated Balance Sheet Data :
Net working capital ⁽¹⁾		44,708			37,444			45,695			41,222			31,703
Total assets		101,642			77,755			98,344			89,388			88,695
Long-term liabilities		4,236			3,030			13,241			14,719			11,665

Shareholders’ equity		59,417			51,114			49,081			43,244			37,548
Book value per share ⁽²⁾		5.79			5.08			4.90			4.36			3.85

Supplemental Data :
Number of shares outstanding at year-end		10,264,390			10,065,974			10,024,308			9,921,045			9,750,413
Number of employees at year-end		2,036			1,963			2,502			2,227			2,840
Approximate square footage of operational facilities		987,000			849,000			777,000			784,000			723,000

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

⁽²⁾	Book value per share is defined as total shareholders’ equity divided by the number of shares outstanding at the end of the fiscal year.

Item 7:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

KeyTronicEMS is a leader in electronic manufacturing services and solutions to original equipment manufacturers of a broad range of products. We provide engineering services, worldwide procurement and distribution, materials management, world-class manufacturing and assembly services, in-house testing, and unparalleled customer service. Our international production capability provides our customers with benefits of improved supply-chain management, reduced inventories, lower transportation costs, and reduced product fulfillment time. We continue to make investments in all of our operating facilities to give us the production capacity and logistical advantages to continue to win new business. The following information should be read in conjunction with the consolidated financial statements included herein and with Item 1A, Risk Factors.

Our mission is to provide our customers with superior manufacturing and engineering services at the lowest total cost for the highest quality products, and create long-term mutually beneficial business relationships.

Executive Summary

Our sales of $199.6 million in fiscal year 2010 increased by 8.0% as compared to sales of $184.9 million in fiscal year 2009. This increase in sales was primarily driven by new customer programs for both longstanding and new customers, partially offset by a continuance of an unfavorable macroeconomic environment and industry-wide shortages in the global supply chain. Sales for the first quarter of fiscal year 2011 are expected to be within the range of $58 million to $61 million. Results will depend on actual levels of customers’ orders and the timing of the start up of production of new product programs. We believe that we are well positioned in the EMS industry to win new business in coming periods and profitably grow our revenue as the economy recovers.

The concentration of our largest customers increased during fiscal year 2010 with the top five customers’ sales increasing to 57% of total sales in 2010 from 52% in 2009, and 68% in 2008. Our current customer relationships involve a variety of products, including consumer electronics, electronic storage devices, plastics, household products, gaming devices, specialty printers, telecommunications, industrial equipment, and computer accessories. The total number of our customers continued to increase during fiscal year 2010. These new customers have programs that represent small annual sales while others have multi-million-dollar potential.

Gross profit as a percent of sales was 9.6% in fiscal year 2010 compared to 7.1% for the prior fiscal year. The increase in gross profit as a percentage of net sales was primarily due to higher sales, increased leverage of fixed costs, a decrease in manufacturing facility costs due to favorable foreign exchange changes, a decrease in headcount of overhead employees and severance costs incurred in fiscal year 2009 that did not recur in fiscal year 2010.

Operating income as a percentage of sales for fiscal year 2010 was 3.7% compared to 1.0% for fiscal year 2009. The increase in operating income as a percentage of sales was due to an improved gross margin, combined with our continued success in controlling operating expenses and improving efficiencies during fiscal year 2010.

Net income for fiscal year 2010 was $8.7 million or $0.85 per diluted share, up from $1.1 million or $0.11 per diluted share for fiscal year 2009. The increase in net income for fiscal year 2010 as compared to fiscal year 2009 was primarily due to an approximate 2.5% improvement in our gross margin. Also, our fiscal year 2010 results include an income tax benefit of $1.4 million, resulting in part from the release of our valuation allowance on deferred tax assets related to our domestic net operating loss carryforwards that occurred in the third quarter of fiscal 2010.

We maintain a strong balance sheet with a current ratio of 2.18 and a long-term debt to equity ratio of .03. Total cash provided by operating activities as defined on our cash flow statement was $3.7 million during fiscal year 2010. We maintain sufficient liquidity for our expected future operations and had $1.6 million in borrowings on our revolving line of credit with Wells Fargo, N.A. of which $18.4 million remained available at July 3, 2010. We believe cash flow generated from operations, our borrowing capacity, and equipment lease financing should provide adequate capital for planned growth over the long term.

Results of Operations

The following table sets forth for the periods indicated certain items of the consolidated statements of income expressed as a percentage of net sales. The financial information and discussion below should be read in conjunction with the consolidated financial statements and notes contained in this Annual Report.


	Years Ended
	July 3, 2010		June 27, 2009		June 28, 2008
Net sales	100.0	%	100.0	%	100.0	%
Cost of sales	90.4		92.9		91.8

Gross profit	9.6		7.1		8.2

Operating expenses (income)
Research, development and engineering	1.4		1.2		1.3
Selling, general and administrative	4.5		4.5		4.0
Goodwill impairment	—		0.4		—
Gain on sale of real estate held for sale	—		—		(0.4	)

Total operating expenses	5.9		6.1		4.9

Operating income	3.7		1.0		3.3

Interest expense	—		0.3		0.5

Income before income taxes	3.7		0.7		2.8

Income tax provision (benefit)	(0.7	)	0.1		0.1

Net income	4.4	%	0.6	%	2.7	%

Net Sales

Net sales were $199.6 million, $184.9 million, and $204.1 million in fiscal years 2010, 2009, and 2008, respectively.

Net sales increased $14.7 million during fiscal year 2010 as compared with fiscal year 2009. This increase in sales was primarily driven by new customer programs for both longstanding and new customers, partially offset by a continuance of an unfavorable macroeconomic environment and industry-wide shortages in the global supply chain. The $19.2 million decrease in net sales during fiscal year 2009 reflects the expected lower demand from established customers due to the unfavorable global macroeconomic environment. We anticipate that several more new customer programs will enter production in fiscal year 2011 and begin contributing to revenue.

The table below shows the revenue by industry sectors as a percentage of revenue for the following fiscal years:


	Years Ended
	July 3, 2010		June 27, 2009		June 28, 2008
Commercial Printer	9	%	15	%	16	%
Communication	5	%	10	%	9	%
Computer and Peripheral	15	%	17	%	8	%
Consumer	32	%	19	%	9	%
Gaming	13	%	13	%	19	%
Industrial	4	%	4	%	3	%
Transaction Printer	22	%	22	%	36	%

Total	100	%	100	%	100	%

We provide services to customers in a number of industries and produce a variety of products for our customers in each industry. As we continue to diversify our customer base and win new customers we may continue to see a change in the industry concentrations of our revenue.

Sales to foreign locations represented 17.9%, 11.3%, and 5.6% of our total net sales in fiscal years 2010, 2009, and 2008, respectively.

Cost of Sales

Total cost of sales as a percentage of net sales was 90.4%, 92.9%, and 91.8% in fiscal years 2010, 2009, and 2008, respectively.

Total cost of materials as a percentage of net sales was approximately 68.6%, 69.2%, and 66.9% in fiscal years 2010, 2009, and 2008, respectively. The change from year-to-year is directly related to changes in product mix.

Production and support costs as a percentage of net sales were 21.8%, 23.7%, and 24.9% in fiscal years 2010, 2009, and 2008, respectively. The decrease in fiscal year 2010 as compared to fiscal year 2009 is related to higher fixed cost absorption due to a $14.7 million increase in net sales, while production and support costs decreased $0.3 million due to favorable foreign exchange rates and a reduction of manufacturing facility payroll. These savings were partially offset by an increase in the provision for obsolete inventory. The decrease in fiscal year 2009 as compared to fiscal year 2008 was due to a $6.9 million decrease in production and support costs related to headcount reductions, favorable foreign exchange rates and cost saving initiatives. This was partially offset by a $19.2 million decrease in net sales.

We provide for obsolete and non-saleable inventories based on specific identification of inventory against current demand and recent usage. The amounts charged to expense for these inventories were approximately $2.2 million, $0.3 million, and $0.2 million in fiscal years 2010, 2009, and 2008, respectively. The increased provision in fiscal year 2010 was primarily due to no longer manufacturing for certain customers that were no longer viable.

We provide warranties on certain products we sell and estimate warranty costs based on historical experience and anticipated product returns. The amounts charged to expense are determined based on an estimate of warranty exposure. The net warranty expense (recovery) was approximately $45,000, $(93,000), and $196,000 in fiscal years 2010, 2009, and 2008, respectively. Warranty expense for fiscal year 2010 is related to workmanship claims on keyboards and EMS products. The recovery in fiscal year 2009 was related to the release of a warranty claim for a specific product that was identified in fiscal year 2008. Warranty expense for fiscal year 2008 was primarily related to workmanship claims on a specific EMS product.

Gross Profit

Gross profit as a percentage of net sales was 9.6%, 7.1%, and 8.2% in fiscal years 2010, 2009, and 2008, respectively.

The 2.5 percentage point increase in gross profit as a percentage of net sales from fiscal year 2009 to 2010 was primarily the result of a $14.7 million increase in net sales, while production and support cost

decreased by $0.3 million due to favorable foreign exchange changes, a decrease in headcount of overhead employees and severance costs incurred in fiscal year 2009 that did not recur in fiscal year 2010. This was partially offset by a $8.9 million increase in material costs. The 1.1 percentage point decrease in gross profit as a percentage of net sales from fiscal year 2008 to 2009 was the result of lower fixed cost absorption due to net sales decreasing $19.2 million. Additionally we incurred charges of approximately $1.3 million for severance charges related to cost reduction efforts during fiscal year 2009.

We took early pay discounts to suppliers that totaled approximately $364,000, $142,000, and $51,000 in fiscal years 2010, 2009, and 2008, respectively. Early pay discounts will fluctuate based on our liquidity and changes in the discounts and terms offered by our suppliers.

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

Research, Development and Engineering

Research, development and engineering expenses (RD&E) consists principally of employee related costs, third party development costs, program materials, depreciation and allocated information technology and facilities costs. Total RD&E was $2.8 million, $2.3 million, and $2.7 million in fiscal years 2010, 2009, and 2008, respectively. As a percentage of net sales, RD&E was 1.4%, 1.2% and 1.3% in fiscal years 2010, 2009 and 2008, respectively.

The increase in RD&E expenses in fiscal year 2010 compared to fiscal year 2009 is primarily the result of higher incentive compensation expense and increased headcount. The decrease in RD&E expenses in fiscal year 2009 compared to fiscal year 2008 is the result of reduced headcount and lower incentive and bonus expenses.

Selling, General and Administrative

Selling, general and administrative expenses (SG&A) consist principally of salaries and benefits, advertising and marketing programs, sales commissions, travel expenses, provision for doubtful accounts, facilities costs, and professional services. Total SG&A expenses were $9.1 million, $8.4 million, and $8.3 million in fiscal years 2010, 2009, and 2008, respectively. As a percentage of net sales SG&A was 4.5%, 4.5%, and 4.0% in fiscal years 2010, 2009, and 2008, respectively. Approximately half of our SG&A expenses relates to salary costs of our employees.

The $0.7 million increase in SG&A expenses in fiscal year 2010 as compared to fiscal year 2009 is primarily due to a $1.6 million increase in incentive compensation expense. This was partially offset by an approximate $0.3 million decrease in salaries in addition to an approximate $0.6 million decrease in expense related to the write off of a receivable in the prior year. The increase in SG&A expenses in fiscal year 2009 compared to fiscal year 2008 is mainly attributable to foreign exchange losses on Mexican peso denominated financial assets and the addition of a sales representative which were partially offset by cost reduction efforts. Additionally, in fiscal year 2009 there was a charge of $0.6 million to provide for doubtful collection of receivables, of which $0.5 million was related to the write off of a foreign receivable.

Goodwill Impairment

We recorded an impairment charge of $765,000 during fiscal year 2009. We did not record an impairment charge during fiscal year 2010. As of July 3, 2010 and June 27, 2009, there was no goodwill recorded in the Company’s Consolidated Balance Sheet.

Interest Expense

We had net interest expense of $0.1 million, $0.6 million and $1.0 million in fiscal years 2010, 2009, and 2008, respectively. Interest expense decreased in fiscal year 2010 when compared to fiscal years 2009 and 2008 as the average balance of the revolving line of credit was lower along with a decrease in variable

interest rates. We do not currently use derivatives to hedge interest rate risk. We often utilize short-term fixed LIBOR rates on portions of our revolving line of credit to limit the affect of interest rate volatilities.

Income Tax Provision

We had an income tax benefit of $1.4 million during fiscal year 2010 as compared to $130,000 and $261,000 tax expense in fiscal years 2009, and 2008, respectively. The income tax benefit of fiscal year 2010 is primarily related the release of the valuation allowance on our deferred tax assets related to domestic tax net operating loss carryforwards (NOLs) and foreign tax credits, partially offset by the recognition of domestic deferred tax liabilities for an unremitted portion of foreign and the change of applicable tax regimes in Mexico.

Due to increased profitability, revenue growth, and new customer programs, we have determined that a valuation allowance against our domestic NOLs is not longer required. We anticipate that we will fully utilize our domestic NOLs prior to their expiration. In addition, we reviewed our requirements for liquidity domestically to fund our revenue growth and to look for potential future acquisitions. We have changed our previous assessments of being indefinitely reinvested and now anticipate repatriating a portion of our unremitted foreign earnings. The associated taxes and potential foreign tax credits are included in the income tax benefit that was realized during fiscal year 2010. The tax provision in fiscal years 2009 and 2008 is primarily related to income taxes in China and Mexico. For further information on taxes please review footnote 7 of the “Notes to Consolidated Financial Statements”.

International Subsidiaries

We offer customers a complete global manufacturing solution. Our facilities provide our customers the opportunity to have their products manufactured in the facility that best serves specific cost, product manufacturing, and distribution needs. The locations of active foreign subsidiaries are as follows:

•

Key Tronic Juarez, SA de CV owns an SMT, assembly and molding facility, and three assembly and storage facilities in Juarez, Mexico. This subsidiary is primarily used to support our U.S. operations.

•

Key Tronic Reynosa, SA de CV leases manufacturing and warehouse facilities in Reynosa, Mexico. This subsidiary is used exclusively to manufacture products for one EMS customer. We anticipate that this particular subsidiary will cease its operations during fiscal year 2011, as its one EMS customer will no longer be needing manufacturing services.

•

Key Tronic Computer Peripherals (Shanghai) Co., Ltd. leases a facility with SMT and assembly capabilities in Shanghai, China, which began operations in 1999. Its primary function is to provide EMS services for export; however, it is also currently manufacturing certain electronic keyboards.

Foreign sales (based on shipping instructions) from our worldwide operations, including domestic exports, were $35.7 million, $20.9 million, and $11.4 million in fiscal years 2010, 2009, and 2008, respectively. Products and manufacturing services provided by our subsidiary operations are sold to customers directly by the parent company. Key Tronic Computer Peripherals (Shanghai) Co., Ltd., our subsidiary in Shanghai, China, had only minimal sales to customers in China during the past three fiscal years.

Capital Resources and Liquidity

Cash flows provided by operating activities were $3.7 million in fiscal year 2010 as compared to $10.0 million provided by operating activities in fiscal year 2009 and $(0.7) million used in fiscal year 2008.

The $6.3 million decrease in cash provided by operating activities in fiscal year 2010 as compared with fiscal year 2009 was primarily due to an increase in trade receivables and inventory, partially offset by an increase in accounts payable. Trade receivables increased by $10.1 million as a result of the increase in sales that occurred during the fourth quarter of fiscal year 2010. The $7.5 million increase in inventory was attributable to new customer programs and increasing lead times on certain components which led to some scheduled shipments not being shipped by the end of the fiscal year. We purchase inventory based on customer forecasts and orders and expected lead times, and when those forecasts cannot be met or changes are made to lead times, inventory can increase. The $10.5 million increase in accounts payable was primarily driven by the increase in inventory and extending payment terms during fiscal year 2010.

Accounts payable fluctuates with changes in inventory levels, volume of purchases, and negotiated supplier terms.

The $10.7 million increase in cash provided by operating activities in fiscal year 2009 as compared to fiscal year 2008 was primarily due to a decrease in trade receivables and inventory. Trade receivables and inventory decreased by $10.5 million and $5.3 million, respectively, during fiscal year 2009, partially offset by a $10.8 million decrease in accounts payable. These decreases are the result of lower sales in the fourth quarter of fiscal year 2009 as compared to fiscal year 2008 and a concerted effort to reduce our inventory and align it with our current level of business.

Cash used in investing activities includes capital expenditures and proceeds from the sale of property and equipment. Capital expenditures were $3.4 million, $1.9 million, and $1.2 million in fiscal years 2010, 2009, and 2008, respectively. Our capital expenditures are primarily for purchases of manufacturing assets to support our operations in Spokane Valley, Washington, Mexico and China. The increase in capital expenditures for fiscal year 2010 as compared to fiscal year 2009 was primarily related to the purchase of a manufacturing facility and to a lesser extent the increased investment in manufacturing equipment to support the requirements of our growing customer base and sales. Capital expenditures increased for fiscal year 2009 as compared to fiscal year 2008 as we invested in manufacturing equipment to support the requirements of new customers.

Our primary financing activity in fiscal years 2010, 2009, and 2008 was borrowing and repayment under our revolving line of our credit facility. Our credit agreement with Wells Fargo Bank N.A. provides a revolving line of credit facility of up to $20 million, subject to availability. The agreement specifies that the proceeds of the revolving line of credit be used primarily for working capital and general corporate purposes of the Company and its subsidiaries. The outstanding balance under the credit facility was $1.6 million as of July 3, 2010. We had availability to borrow an additional $18.4 million under the Wells Fargo line of credit and we were in compliance with our loan covenants.

Our cash requirements are affected by the level of current operations and new EMS programs. We believe that projected cash from operations, funds available under the revolving credit facility and leasing capabilities will be sufficient to meet our working and fixed capital requirements for the foreseeable future.

Contractual Obligations and Commitments

In the normal course of business, we enter into contracts which obligate us to make payments in the future.

The table below sets forth our significant future obligations by fiscal year:

Payments Due by Fiscal Year (in thousands)


	Total		2011		2012		2013		2014		2015		Thereafter
Wells Fargo Bank N.A. revolving loan ⁽¹⁾	$	1,554	$	1,554	$	—	$	—	$	—	$	—	$	—
Operating leases ⁽²⁾		9,831		2,819		1,251		772		763		762		3,464
Short-term note ⁽³⁾		671		671
Purchase orders ⁽⁴⁾

⁽¹⁾

The terms of the Wells Fargo Bank N.A. revolving loan are discussed in the consolidated financial statements at Note 4, “Long-Term Debt”. As of July 3, 2010 we were in compliance with our loan covenants. Breaching these covenants could have resulted in a material impact on our operations or financial condition.

⁽²⁾

We maintain vertically integrated manufacturing operations in Mexico and Shanghai, China. Such operations are heavily dependent upon technically superior manufacturing equipment including molding machines in various tonnages, SMT lines, clean rooms, and automated insertion, and test equipment for the various products we are capable of producing. In addition,

we lease some of our administrative and manufacturing facilities. A complete discussion of properties can be found in Part 1, Item 2 at “Properties”. Leases have proven to be an acceptable method for us to acquire new or replacement equipment and to maintain facilities with a minimum impact on our short term cash flows for operations. Amounts presented above include interest and principal, if applicable.

⁽³⁾	See Note 3 to Consolidated Financial Statements for additional discussion related to building and land purchase during the fourth quarter of fiscal year 2010.

⁽⁴⁾

As of July 3, 2010, we had open purchase order commitments for materials and other supplies of approximately $86.5 million. Included in the open purchase orders are various blanket orders for annual requirements. Actual needs under these blanket purchase orders fluctuate with our manufacturing levels. In addition, we have contracts with our customers that minimize our exposure to losses for material purchased within lead-times necessary to meet customer forecasts. Purchase orders generally can be cancelled without penalty within specified ranges that are determined in negotiations with our suppliers. These agreements depend in part on the type of materials purchased as well as the circumstances surrounding any requested cancellations.

In addition to the cash requirements presented above, we have various other accruals which are not included in the table above. We owe our suppliers approximately $24.1 million for accounts payable and shipments in transit at the end of the fiscal year. We generally pay our suppliers in a range from 30 to 120 days depending on terms offered. These payments are financed by operating cash flows and our revolving line of credit.

We believe that cash flows generated from operations, leasing facilities, and funds available under the revolving credit facility will satisfy cash requirements for a period in excess of 12 months and into the foreseeable future.

Critical Accounting Policies and Estimates

Preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. Note 1 to our consolidated financial statements describes the significant accounting policies used in the preparation of our consolidated financial statements. Management believes the most complex and sensitive judgments, because of their significance to our consolidated financial statements, result primarily from the need to make estimates about effects of matters that are inherently uncertain. The most significant areas involving management judgments are described below. Actual results in these areas could differ from management’s estimates.

Inactive, Obsolete, and Surplus Inventory Reserve

We reserve for inventories that we deem inactive, obsolete or surplus. This reserve is calculated based upon the demand for the products that we produce. Demand is determined by expected sales or customer forecasts. If expected sales do not materialize, then we would have inventory in excess of our reserves and would have to charge the excess against future earnings. In the case where we have purchased material based upon a customer’s forecast, we are usually covered by lead-time assurance agreements with each customer. These contracts state that the financial liability for material purchased within agreed upon lead-time and based upon the customer’s forecasts, lies with the customer. If we purchase material outside the lead-time assurance agreement and the customer’s forecasts do not materialize or if we have no lead-time assurance agreement for a specific program, we would have the financial liability and may have to charge inactive, obsolete or surplus inventory against earnings.

Allowance for Doubtful Accounts

We value our accounts receivable net of an allowance for doubtful accounts of $111,000 at July 3, 2010 and June 27, 2009. This allowance is based on estimates of the portion of accounts receivable that may not be collected in the future. The estimates used are based primarily on specific identification of potentially uncollectible accounts. Such accounts are identified using publicly available information in

conjunction with evaluations of current payment activity. However, if any of our customers were to develop unexpected and immediate financial problems that would prevent payment of open invoices, we 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. We review the adequacy of this accrual quarterly based on historical analysis and anticipated product returns and rework costs. As we have made the transition from manufacturing primarily keyboards to primarily EMS products, our exposure to warranty claims has declined significantly. Our warranty period for keyboards is generally longer than that for EMS products. We only warrant materials and workmanship on EMS products, and we do not warrant design defects for EMS customers.

Income Taxes

The Company had domestic income tax loss carryforwards (NOLs) of approximately $25.1 million at July 3, 2010. In accordance with ASC 740, Income Taxes, a valuation allowance is required if it is more likely than not that some or all of the deferred tax assets will not be realized in the future. Based on recent sustained profitability, revenue growth, new customer programs and updated forecasting that occurred during fiscal year 2010; management determined that an allowance was no longer necessary on the domestic income tax loss carryforwards.

The Company also changed its estimates of future repatriation of its undistributed earnings of its foreign subsidiaries during fiscal year 2010. Management expects to repatriate approximately $14.5 million based on increased sales growth driving additional capital requirements domestically, cash requirements for potential acquisitions and to implement certain tax strategies. As such earnings are recognized in the United States, the Company would be subject to U.S. federal and state income taxes and potential withholding taxes in foreign jurisdictions. A corresponding foreign tax credit for taxes paid on the repatriated amount can be used domestically to reduce the federal tax liability. The domestic tax, foreign tax credits and estimated withholding tax have been accrued as part of deferred taxes as of July 3, 2010.

Stock-Based Compensation

Stock-based compensation is accounted for according to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718, Compensation—Stock Compensation . ASC 718 requires us to expense the fair value of employee stock options, stock appreciation rights and other forms of stock-based compensation. Under the fair value recognition provisions of ASC 718, share-based compensation cost is estimated at the grant date based upon the value of the stock option and at each reporting period for stock appreciation rights classified as liability awards and is recognized as expense ratably over the requisite service period of the award (generally the vesting). Determining the appropriate fair value model and calculating the fair value of share-based awards requires judgment, including estimating the expected life of the share-based award, the expected stock price volatility over the expected life of the share-based award and forfeitures.

To determine the fair value of stock options on the date of grant and at each reporting period for stock appreciation rights classified as liability awards, we use the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock price volatility, option life, risk-free interest rate and dividend yield. The risk-free interest rate is a less-subjective assumption as it is based on factual data derived from public sources. We use a dividend yield of zero as we have never paid cash dividends and have no intention to pay cash dividends in the foreseeable future. The expected stock price volatility and option life assumptions require a greater level of judgment. Our expected stock-price volatility assumption is based upon the historical volatility of our stock which is obtained from public data sources. The expected life represents either the weighted average period of time that share-based awards are expected to be outstanding (stock options), giving consideration to vesting schedules and historical exercise patterns or using the simplified method by utilizing the midpoint between the remaining vesting period and the remaining contractual life (SARs). We determine the expected life assumption based upon the exercise and post-vesting behavior that has been exhibited historically, adjusted for specific factors that may influence future exercise patterns. If expected volatility or expected life were to increase, that would result in an increase in the fair value of our stock options which would result in higher compensation charges, while a

decrease in volatility or the expected life would result in a lower fair value of our stock option awards resulting in lower compensation charges.

We estimate forfeitures for all of our awards based upon historical experience of stock-based pre-vesting forfeitures. We believe that our estimates are based upon outcomes that are reasonably likely to occur. If actual forfeitures are higher than our estimates it would result in lower compensation expense and to the extent the actual forfeitures are lower than our estimate we would record higher compensation expense.

Impairment of Long-Lived Assets

Long-lived assets, such as property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge would be recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.

In accordance with ASC 350, Intangibles – Goodwill and Other , goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss would be recognized to the extent that the carrying amount exceeds the asset’s fair value.

Upon the completion of the Company’s annual impairment test during fiscal year 2009 and as a result of the deteriorating global economy adversely affecting the Company’s common stock price. The Company concluded that 100% of the goodwill was impaired due to the significant and sustained decline in the Company’s market capitalization to below the book value. The Company recorded an impairment charge of $765,000 during the second quarter of fiscal year 2009. As of July 3, 2010 and June 27, 2009, respectively, there was no goodwill recorded in the Company’s Consolidated Balance Sheet.

Derivatives and Hedging Activity

Derivatives are recognized on the balance sheet at their estimated fair value. On the date a derivative contract is entered into, the Company designates the derivative as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (a “cash flow” hedge). The Company does not enter into derivatives for speculative purposes. Changes in the fair value of a derivative that qualifies as a cash flow hedge are recorded in “Accumulated other comprehensive income”, until earnings are affected by the variability of cash flows. See Note 11 of the Company’s consolidated financial statements for additional information.

Accounting Pronouncements

See Note 1 to our consolidated financial statements.

Item 7A:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are subject to the risk of fluctuating interest rates in the normal course of business. Our major market risk relates to our secured debt. Our revolving credit facility is secured by substantially all of our assets. The interest rates applicable to our revolving credit facility fluctuate with the JP Morgan Chase Bank prime rate and LIBOR rates. There was outstanding $1.6 million in borrowings under our revolving credit facility as of July 3, 2010, and the rate of interest being paid on the outstanding balance was 3.25%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity” and Note 4 – “Long-Term Debt” to the Consolidated Financial Statements for additional information regarding our revolving credit facility.

Foreign Currency Exchange Risk

A significant portion of our operations are in foreign locations. As a result, transactions occur in currencies other than the U.S. dollar. Exchange rate fluctuations among other currencies used by us would directly or indirectly affect our financial results. We currently use Mexican peso forward contracts to hedge foreign currency fluctuations for a portion of our Mexican peso denominated expenses. There was $30.9 million of foreign currency forward contracts outstanding as of July 3, 2010. The fair value of these contracts was approximately $(361,000). See Note 11 – “Derivative Financial Instruments” to the Consolidated Financial Statements for additional information regarding our derivative instruments.

Item 8:

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Key Tronic Corporation

Spokane Valley, Washington

We have audited the accompanying consolidated balance sheets of Key Tronic Corporation (the Company) as of July 3, 2010 and June 27, 2009 and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended July 3, 2010. These financial statements are the responsibility of the Company’s management. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Key Tronic Corporation at July 3, 2010 and June 27, 2009, and the results of its operations and its cash flows for each of the three years in the period ended July 3, 2010, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ BDO USA, LLP

Spokane, Washington

September 13, 2010

KEY TRONIC CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)


	July 3, 2010			June 27, 2009
ASSETS

Current assets:
Cash and cash equivalents	$	770		$	729
Trade receivables, net of allowance for doubtful accounts of $111 and $111		34,617			24,867
Inventories		39,775			32,291
Deferred income tax asset		4,420			493
Other		3,115			2,675

Total current assets		82,697			61,055

Property, plant and equipment, net		13,898			11,199

Other assets:
Restricted cash		—			124
Deferred income tax asset		4,394			4,611
Other, net of accumulated amortization of $106 and $118		653			766

Total assets	$	101,642		$	77,755

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	29,158		$	18,703
Accrued compensation and vacation		5,097			3,198
Current portion of other long-term obligations		146			359
Other		3,588			1,351

Total current liabilities		37,989			23,611

Long-term liabilities:
Revolving loan		1,554			2,412
Other long-term obligations		2,682			618

Total long-term liabilities		4,236			3,030

Commitments and contingencies (Notes 4 and 8)

Shareholders’ equity
Common stock, no par value, authorized 25,000 shares; issued and outstanding 10,264 and 10,066 shares, respectively		40,126			39,359
Retained earnings		19,533			10,843
Accumulated other comprehensive (loss) income		(242	)		912

Total shareholders’ equity		59,417			51,114

Total liabilities and shareholders’ equity	$	101,642		$	77,755

See accompanying notes to consolidated financial statements.

KEY TRONIC CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)


	Years Ended
	July 3, 2010			June 27, 2009		June 28, 2008
Net sales	$	199,620		$	184,924	$	204,122
Cost of sales		180,370			171,744		187,302

Gross margin		19,250			13,180		16,820

Operating expenses (income):
Research, development and engineering		2,783			2,266		2,676
Selling, general and administrative		9,079			8,366		8,261
Goodwill impairment		—			765		—
Gain on sale of real estate		—			—		(951	)

Total operating expense		11,862			11,397		9,986

Operating income		7,388			1,783		6,834

Interest expense, net		102			590		989

Income before income taxes		7,286			1,193		5,845

Income tax (benefit) provision		(1,404	)		130		261

Net income	$	8,690		$	1,063	$	5,584

Earnings per share:
Earnings per common share – basic
	$	0.86		$	0.11	$	0.56
Weighted average shares outstanding – basic		10,124			10,059		9,997
Earnings per common share – diluted	$	0.85		$	0.11	$	0.54
Weighted average shares outstanding – diluted		10,191			10,075		10,267

See accompanying notes to consolidated financial statements.

KEY TRONIC CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(In thousands)


	Common Stock					Accumulated Other Comprehensive Income (Loss)
	Shares	Amount		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balances, June 30, 2007	9,921	$	39,048	$	4,196	—		$	43,244
Net income	—		—		5,584	—			5,584
Exercise of stock options	103		253		—	—			253

Balances, June 28, 2008	10,024		39,301		9,780				49,081

Net income	—		—		1,063	—			1,063
Unrealized gain on foreign exchange contracts	—		—		—	912			912

Comprehensive income, net									1,975
Exercise of stock options	42		58		—	—			58

Balances, June 27, 2009	10,066		39,359		10,843	912			51,114

Net income	—		—		8,690	—			8,690
Unrealized loss on foreign exchange contracts	—		—		—	(1,154	)		(1,154	)

Comprehensive income, net									7,536
Exercise of stock options	198		604		—	—			604
Tax benefit from exercise of stock options	—		163		—	—			163

Balances, July 3, 2010	10,264	$	40,126	$	19,533	(242	)	$	59,417

Other comprehensive income for fiscal year 2010 is reflected net of tax $(119,000).

See accompanying notes to consolidated financial statements.

KEY TRONIC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Year Ended
	July 3, 2010			June 27, 2009			June 28, 2008
Cash flows from operating activities:
Net income	$	8,690		$	1,063		$	5,584
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization		1,794			1,595			1,768
Goodwill impairment charge		—			765			—
Excess tax benefit from exercise of stock options		163			—			—
Accretion of deferred gain on sale of building		(78	)		(78	)		(78	)
Provision for obsolete inventory		2,182			303			159
Provision for doubtful receivables		—			604			122
Provision for (recovery of) warranty		(45	)		(93	)		196
Loss (gain) on sale of assets		(58	)		14			(949	)
SARs expense		57			—			—
Deferred income taxes		(2,062	)		(104	)		—
Changes in operating assets and liabilities:
Trade receivables		(10,104	)		10,547			(5,757	)
Inventories		(9,666	)		5,333			(5,740	)
Other assets		(1,659	)		2,320			(742	)
Accounts payable		10,455			(10,794	)		5,393
Accrued compensation and vacation		1,899			(1,190	)		675
Other liabilities		2,129			(247	)		(1,349	)

Cash provided by (used in) operating activities		3,697			10,038			(718	)

Cash flows from investing activities:
Purchase of property and equipment		(3,378	)		(1,891	)		(1,180	)
Proceeds from sale of property and equipment		74			—			1,485

Cash provided by (used in) investing activities		(3,304	)		(1,891	)		305

Cash flows from financing activities:
Payment of financing costs		(50	)		(50	)		(50	)
Proceeds from exercise of stock options		604			58			253
Proceeds from long-term debt		—			—			215
Repayment of long-term debt		(172	)		(284	)		(249	)
Borrowing under revolving credit agreement		24,931			194,066			204,940
Repayment of revolving credit agreement		(25,789	)		(204,002	)		(205,673	)
Decrease (increase) in restricted cash		124			(85	)		470

Cash used in financing activities		(352	)		(10,297	)		(94	)

Increase (decrease) in cash and cash equivalents		41			(2,150	)		(507	)

Cash and cash equivalents, beginning of year		729			2,879			3,386

Cash and cash equivalents, end of year	$	770		$	729		$	2,879


Supplemental cash flow information:
Interest payments	$	85	$	621	$	1,013
Income tax payments, net of refunds	$	415	$	327	$	301

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

Business

Key Tronic Corporation and subsidiaries (the Company) is engaged in electronic manufacturing services (EMS) for original equipment manufacturers (OEMs), and also manufactures keyboards and other input devices. The Company’s headquarters are located in Spokane Valley, Washington with manufacturing operations in Spokane Valley; Juarez and Reynosa, Mexico; and Shanghai, China.

Principles of Consolidation

The consolidated financial statements include the Company and its wholly owned subsidiaries in Mexico and China. Intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates include the allowance for doubtful receivables, the provision for obsolete and non-saleable inventories, deferred tax assets and liabilities, impairment of long-lived assets, medical self insurance liability, long-term incentive compensation accrual, the provision for warranty costs, and the fair values of options granted under the Company’s stock-based compensation plans. Due to uncertainties with respect to the assumptions and estimates actual results could differ from those estimates.

Cash and Cash Equivalents

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

Allowance for Doubtful Accounts

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

Inventories

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

Property, Plant and Equipment

Property, plant and equipment are carried at cost and depreciated using straight-line methods over the expected useful lives of the assets. Internally constructed molds and dies are depreciated over the expected useful lives of one to two years. Repairs and maintenance costs are expensed as incurred.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Impairment of Long-lived Assets

The Company, using its best estimates based on reasonable and supportable assumptions and projections, reviews assets for impairment whenever events or changes in circumstances have indicated that the carrying amount of its assets might not be recoverable. Impaired assets are reported at the lower of cost or fair value.

Deferred Loan Fees

Deferred loan fees included in other assets are amortized over the term of the related loan agreement.

Accrued Warranty

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

Self-funded Insurance

The Company self-funds its domestic employee health plan. The Company contracted with a separate administrative service company to supervise and administer the program and act as its representative. The Company reduces its risk under this self-funded platform by purchasing stop-loss insurance coverage for claims. In addition, if the aggregate annual claims amount to more than 125% of expected claims for the plan year this insurance will also pay those claims amounts exceeding that level.

The Company estimates its exposure for claims incurred but not paid at the end of each reporting period and uses historical claims data supplied by the Company’s broker to estimate its self-funded insurance liability. This liability is subject to a total limitation that varies based on employee enrollment and factors that are established at each annual contract renewal. Actual claims experience may differ from the Company’s estimates. Costs related to the administration of the plan and related claims are expensed as incurred.

Revenue Recognition

Sales revenue from manufacturing is recognized upon shipment of the manufactured product per contractual terms. Upon shipment, title transfers and the customer assumes risks and rewards of ownership of the product. Unless specifically stated in contractual terms, there are no formal customer acceptance requirements or further obligations related to the manufacturing services; if any such requirements exist, then sales revenue is recognized at the time when such requirements are completed and such obligations are fulfilled. Revenue is recorded net of estimated returns of manufactured product based on management’s analysis of historical returns.

Revenues and associated costs from engineering design, development services and tooling, which are performed under contract of short term durations, are recognized only after the completed performance of the service. Revenue from engineering design, development services and tooling represented approximately 2%, 3%, and 3% of total revenue in fiscal years 2010, 2009, and 2008, respectively.

Shipping and Handling Fees

The Company classifies costs associated with shipping and handling fees as a component of cost of goods sold. Customer billings related to shipping and handling fees are reported as revenue.

Research, Development and Engineering

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.

Earnings Per Common Share

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

Foreign Currency Transactions

The functional currency of the Company’s subsidiaries in Mexico and China is the U.S. dollar. Realized foreign currency transaction gains and losses are included in cost of goods sold.

Fair Value of Financial Instruments

The carrying values of financial instruments reflected on the balance sheets at July 3, 2010 and June 27, 2009, reasonably approximate their fair value. Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of long-term debt is estimated to be $1.6 million and $2.6 million, respectively, as of July 3, 2010 and June 27, 2009, which approximates the carrying values.

Stock -based Compensation

The Company’s incentive plan provides for equity and liability awards to employees in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, stock units, performance shares, performance units, and other stock–based or cash-based awards. Compensation cost is recognized on a straight-line basis over the requisite employee service period, which is generally the vesting period, and is included in selling, general and administrative expenses.

Newly Adopted and Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 168, The FASB Accounting Standards Codification ^TM and the Hierarchy of Generally Accepted Accounting Principles . This statement establishes the FASB Accounting Standards Codification ^TM (ASC) as the single source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. This statement was codified into FASB ASC Topic 105, Generally Accepted Accounting Principles . The Codification structure was created to organize GAAP pronouncements using numerical designation by topic, subtopic, section, and paragraph so users can more easily access the authoritative accounting guidance. This guidance is effective for interim and annual periods ending after September 15, 2009. The Company adopted this statement in the first quarter of fiscal year 2010 and all SFAS references have been replaced with ASC references.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

ASC 825 , Financial Instruments, requires disclosure about fair value of financial instruments in interim financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. The Company adopted this statement in the first quarter of fiscal year 2010 and it did not have a material impact on the Company’s Consolidated Financial Statements.

In August 2009, the FASB issued Accounting Standard Update (ASU) 2009-05, Measuring Liabilities at Fair Value, concerning measuring liabilities at fair value. The new guidance provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain valuation techniques. Additionally, it clarifies that a reporting entity is not required to adjust the fair value of a liability for the existence of a restriction that prevents the transfer of the liability. We have adopted the provisions of ASU 2009-05, which did not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, Improving Disclosures About Fair Value Measurements , which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. ASU 2010-06 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The adoption of ASU 2010-06 did not have a material impact on our consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09), that amends ASC Subtopic 855-10, Subsequent Events – Overall (ASC 855-10). ASU 2010-09 requires an SEC filer to evaluate subsequent events through the date that the financial statements are issued but removed the requirement to disclose this date in the notes to the entity’s financial statements. The amendments are effective upon issuance of the final update and accordingly, we have adopted the provisions of ASU 2010-09. The adoption of this provision did not have a material impact on our consolidated financial statements.

Fiscal Year

The Company operates on a 52/53 week fiscal year. Fiscal years end on the Saturday nearest June 30. As such, fiscal years 2010, 2009, and 2008, ended on July 3, 2010, June 27, 2009, and June 28, 2008, respectively. Fiscal year 2010 was a 53 week year, whereas fiscal years 2009, and 2008 were 52 week years.

2. INVENTORIES

Components of inventories were as follows:


	July 3, 2010		June 27, 2009
	(in thousands)
Finished goods	$	4,492	$	7,898
Work-in-process		4,095		3,968
Raw materials		31,188		20,425

	$	39,775	$	32,291

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. PROPERTY, PLANT AND EQUIPMENT


	Life	July 3, 2010			June 27, 2009
	(in years)	(in thousands)
Land	—	$	2,089		$	970
Buildings and improvements	3 to 30		15,067			13,602
Equipment	1 to 10		33,884			33,346
Furniture and fixtures	3 to 5		2,108			1,761

			53,148			49,679
Accumulated depreciation			(39,250	)		(38,480	)

		$	13,898		$	11,199

During the fourth quarter of fiscal year 2010, the Company purchased a building and land in Juarez, Mexico at a total purchase price of $2.2 million. Of the total $2.2 million, 70% or $1.6 million was paid in cash and the remaining 30% or $0.6 million is payable prior to January 6, 2011.

During the fourth quarter of fiscal year 2007, the Company sold its Las Cruces, New Mexico facility. The total sales price for the facility and adjacent vacant land was $4.3 million. Due to the contingent nature of a portion of the sale, the Company recognized a $1.5 million gain on real estate held and a gain on sale of real estate of $951,000 in fiscal year 2008.

In December 2000, the Company sold its headquarters building, located in Spokane, Washington. In conjunction with the sale, the Company entered into a ten year leaseback agreement for a portion of the building. The gain on the sale of the building was deferred under other long-term obligations and is amortized to offset lease expenses over the remaining original lease term, which expires in December 2010. On June 15, 2010, the company amended the agreement to extend the lease for an additional ten years.

4. LONG-TERM DEBT

On August 19, 2009, the Company entered into a credit agreement with Wells Fargo Bank, N.A. providing for a revolving line of credit facility for up to $20 million and paid off its previously outstanding CIT Group/Business Credit, Inc. (CIT) revolving loan. The agreement specifies that the proceeds of the revolving line of credit be used primarily for working capital and general corporate purposes of the Company and its subsidiaries. Borrowings under this revolving line of credit bear interest at either a “Base Rate” or a “Fixed Rate”, as elected by the Company. The base rate is the higher of the JP Morgan Chase prime rate, daily one month London Interbank Offered Rate (LIBOR) plus 1.5%, or the Federal Funds rate plus 1.5%. The fixed rate is LIBOR plus 2.1% or LIBOR plus 2.5% depending on the level of trailing four quarters Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The new line of credit is secured by substantially all of the assets of the Company.

The agreement is for a term of two years beginning on August 19, 2009 and ending on August 18, 2011. The Company must comply with certain financial covenants, including a cash flow leverage ratio and a trading ratio. The credit agreement requires the Company to maintain a minimum profit threshold, limits the maximum lease expenditures and restricts the Company from declaring or paying dividends in cash or stock.

As of July 3, 2010, the Company had availability to borrow an additional $18.4 million under the Wells Fargo line of credit. The outstanding balance under the credit facility was $1.6 million as of July 3, 2010 and the rate of interest being paid on the outstanding balance was 3.25%. As of June 27, 2009, the outstanding revolving loan balance related to CIT was $2.4 million and the range of interest being paid to CIT on the outstanding balances was 1.82% to 3.25%.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. INCOME TAXES

Income tax expense (benefit) consists of the following:


	Year Ended
	July 3, 2010			June 27, 2009			June 28, 2008
				(in thousands)
Current income tax expense:
United States	$	162		$	15		$	45
Foreign		496			219			216

		658			234			261

Deferred income tax(benefit) expense:
United States		(3,588	)		(104	)		—
Foreign		1,526			—			—

		(2,062	)		(104	)		—

Total income tax(benefit) expense	$	(1,404	)	$	130		$	261

The Company has domestic NOLs of approximately $25.1 million at July 3, 2010. In accordance with ASC 740, management assessed the Company’s recent operating levels and estimated future taxable income and determined there was not a need for a valuation allowance. A valuation allowance against deferred tax assets is required if it is more likely than not that some of the deferred tax assets will not be realized. Management determined during fiscal year 2010, based on the Company’s increased profitability and estimated repatriation from foreign subsidiaries that it was likely that the NOLs will be fully utilized prior to their expiration.

Management also updated its estimates of future repatriation of its undistributed earnings of its foreign subsidiaries during fiscal year 2010. Management expects to repatriate a portion of its foreign undistributed earnings based on increased sales growth driving additional capital requirements domestically, cash requirements for potential acquisitions and to implement certain tax strategies. The Company expects to repatriate approximately $14.5 million in the future. As such, as earnings are recognized in the United States, the Company would be subject to U.S. federal and state income taxes and potential withholding taxes in foreign jurisdictions. Both the domestic tax and estimated withholding tax have been recorded as part of deferred taxes as of July 3, 2010. All other unremitted foreign earnings are expected to remain permanently reinvested in planned fixed assets purchases in foreign locations.

The Company has wholly owned foreign subsidiaries in Mexico that apply certain tax credits related to production assets that currently offset all of the income tax liabilities under general Mexican income tax law. However, the Company is subject to a Mexican business flat tax called Impuesto Empresarial a Tasa Unica (IETU). Based on certain events that occurred during fiscal year 2010, the Company now anticipates that it will be taxable under IETU for the foreseeable future based on projected assets used in its operations. The effect of IETU and an associated presidential decree on fiscal year 2010 has been included in the effective tax rate as of July 3, 2010.

The Company is required to pay taxes in China on its statutory foreign profits. Its subsidiary in China did not have statutory profits during fiscal year 2010. The Company has a full valuation allowance on its Chinese tax net operating loss carryforwards until a consistent statutory profit can be maintained and it becomes likely that they will be utilized before expiration.

ASC 740 requires the Company to recognize in its financial statements uncertainties in tax positions taken that may not be sustained upon examination by the taxing authorities. If interest or penalties are assessed, the Company would recognize these charges as income tax expense. The Company does not have any uncertain tax positions as of July 3, 2010. Unrecognized tax benefits are not anticipated to increase or decrease over the next 12 months.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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


	Year Ended
	July 3, 2010			June 27, 2009			June 28, 2008
				(in thousands)
Federal income tax expense at statutory rates	$	2,477		$	406		$	1,987
Effect of foreign vs. domestic taxes		99			(248	)		(899	)
Expired NOLs, tax credits and permanent differences		—			2,345			977
Effect of repatriation of foreign earnings income, net		2,158			—			—
Effect of change in applied Mexican tax regime		1,526			—			—
Other		211			76			158
Change in valuation allowance		(7,875	)		(2,449	)		(1,962	)

Income tax (benefit) provision	$	(1,404	)		130			261

The domestic and foreign components of income before income taxes were:


	Year Ended
	July 3, 2010		June 27, 2009		June 28, 2008
			(in thousands)
Domestic	$	6,117	$	475	$	2,710
Foreign		1,169		718		3,135

Income before income taxes	$	7,286	$	1,193	$	5,845

Deferred income tax assets and liabilities consist of the following at:


	July 3, 2010			June 27, 2009
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	9,001		$	11,282
Tax credit carryforwards		1,028			384
Inventory		839			536
Accruals		1,244			1,343

Deferred income tax assets		12,112			13,545
Valuation allowance		(469	)		(8,344	)

Deferred income tax assets, net of valuation allowance	$	11,643		$	5,201

Deferred tax liabilities:
Repatriated earnings of foreign subsidiary, net of foreign tax credits		(2,158	)		—
Accruals		(979	)		—
Fixed assets		(850	)		—
Other		(368	)		(97	)

Deferred income tax liabilities	$	(4,355	)	$	(97	)

Total, net deferred income tax assets	$	7,288		$	5,104

Balance sheet caption reported in:
Current deferred tax asset	$	4,420		$	493
Long-term deferred tax asset		4,394			4,611
Other current liabilities		(918	)		—
Other long-term obligations		(608	)		—

Total, net deferred income tax asset	$	7,288		$	5,104

At July 3, 2010 the Company had NOLs of approximately $25.1 million. The remaining net operating loss carryforwards expire in varying amounts through 2025. Utilization of NOLs would be limited in the event the Company’s ownership changes more than 50% in a three-year period. The Company also has

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

alternative minimum tax credits approximating $575,000. The alternative minimum tax credits do not expire.

6. EARNINGS PER SHARE

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


	Years Ended
	July 3, 2010	June 27, 2009	June 28, 2008
Total weighted average shares – basic	10,124,320	10,059,376	9,997,431
Effect of dilutive common stock options	66,626	15,596	269,480

Total weighted average shares – diluted	10,190,946	10,074,972	10,266,911

Antidilutive options not included in diluted earnings per share	112,500	741,492	515,550

7. STOCK OPTION AND BENEFIT PLANS

The Company has an executive stock option plan for certain key employees. Options under this plan vest over one to three years and become exercisable as they vest. Options under the plan become exercisable in full immediately prior to the occurrence of a “Change in Control” as defined in the plan documents. As of July 3, 2010, 266,169 options were outstanding and exercisable under the Executive Stock Option Plan and other plans which have terminated. The plan has terminated and no more options can be granted under this plan. These options expire five to ten years from the date of vesting.

The Company also has a stock option plan for “Nonemployee Directors.” Options under this plan vested over a three-year period and are exercisable. The Company reserved 300,000 shares for issuance under this plan. As of July 3, 2010, 57,325 options were outstanding. The plan has terminated and no more options can be granted under this plan. Outstanding options expire five to ten years from the date of vesting.

In May 2010, the Company established a new Stock Incentive Plan (the “2010 Incentive Plan”). The 2010 Incentive Plan was adopted by the Board of Directors in May 2010, and certain aspects are subject to approval by the shareholders at the 2010 Annual Meeting. The 2010 Incentive Plan provides for the granting of nonqualified stock options within the meaning of Section 422 Internal Revenue Code, as well as stock appreciation rights (SARs), restricted stock, restricted stock units, stock awards, stock units, performance shares, performance units, and other stock –based or cash-based awards. Stock appreciation rights may be settled in stock or cash. Because stock-based awards cannot be issued under the plan until it is approved by shareholders, the Company can only grant stock appreciation rights under the plan as cash-settled SARs. Once the plan has been approved by the shareholders, the Company can then convert the awards into stock-settled SARs at its discretion. Options and SARs under the plan become exercisable in full immediately prior to the occurrence of a “Change in Control” as defined in the plan documents. The 2010 Incentive Plan has a total of 1,200,000 shares authorized for grant. As of July 3, 2010, 555,000 SARs were outstanding. Outstanding options and SARs expire five to ten years from the date of vesting.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company granted 555,000 cash-settled SARs under the 2010 Incentive Plan to certain key employees and outside directors at a strike price of $5.89 and a grant date weighted average fair market value of $3.04 as of May 14, 2010. In addition to service conditions, these SARs contain a performance condition. The additional performance condition is based upon the achievement of Return on Invested Capital (ROIC) goals relative to a peer group. All awards with performance conditions are measured over the vesting period and are charged to compensation expense over the requisite service period based on the number of shares expected to vest. The SARs cliff vest over a three-year period from date of grant and expire in five years from date of grant. ASC 718 requires that the Company classify cash settled awards as liabilities in the Company’s Consolidated Balance Sheets and measure these awards at fair value at each reporting date until the award is ultimately settled (i.e. until the SAR is exercised or canceled). All changes in fair value are recorded in the Company’s Consolidated Statements of Income. As of July 3, 2010, approximately $57,000 related to cash settled awards was recorded as a liability in the Company’s Consolidated Balance Sheets with a related charge to compensation expense in the income statement.

The fair value for SARs was estimated using the Black-Scholes option valuation model with the following weighted average assumptions as of July 3, 2010:


	Fiscal Year 2010
Expected dividend yield		0.00	%
Risk-free interest rate		1.45	%
Expected volatility		67.8	%
Expected life		3.87 years
Fair value	$	2.25

Stock-based compensation expense is recognized only for those awards that are expected to vest, with forfeitures estimated at the date of grant based on the Company’s historical experience and future expectations. This forfeiture rate will be revised, if necessary, in subsequent periods if actual forfeitures differ from the amount estimated.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which differ significantly from the SARs, as traded options have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, particularly for the expected term and expected stock price volatility. Changes in these assumptions can materially affect the fair value estimates.

The intrinsic value for options exercised in fiscal years 2010, 2009 and 2008 was $0.5 million, $0.1 million and $0.2 million, respectively.

As of July 3, 2010, total unrecognized compensation expense related to nonvested share-based compensation arrangements was approximately $1.2 million. This expense is expected to be recognized over a weighted-average period of 2.9 years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes option activity of all plans from June 27, 2009 through July 3, 2010:


	Shares Available For Grant		Options Outstanding		Aggregate Intrinsic Value (in thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)
Balance at June 27, 2009	68,500		784,827		21	$	3.48	1.5
Options authorized
Options granted
Options canceled and expired	(68,500	)	(262,917	)
Options exercised	—		(198,416	)

Balance at July 3, 2010	—		323,494		483		3.57	1.4

Exercisable at July 3, 2010			323,494		483		3.57	1.4

The following is a summary of plan activity:


	Price Range					Number of Options		Weighted Average Exercise Price
Outstanding, June 30, 2007	$	1.15	to	$	16.25	1,650,838		$	4.08

Exercised during 2008	$	1.20	to	$	4.19	(103,263	)	$	2.45
Canceled	$	2.75	to	$	16.25	(279,200	)	$	6.96

Outstanding, June 28, 2008	$	1.15	to	$	6.50	1,268,375		$	3.58

Exercised during 2009	$	1.15	to	$	2.09	(41,666	)	$	1.38
Canceled	$	1.15	to	$	6.50	(441,882	)	$	3.96

Outstanding June 27, 2009	$	1.15	to	$	6.50	784,827		$	3.48

Exercised	$	1.15	to	$	4.81	(198,416	)	$	3.05
Canceled	$	2.61	to	$	5.89	(262,917	)	$	3.69

Outstanding, July 3, 2010	$	1.15	to	$	6.50	323,494		$	3.57

Additional information regarding options outstanding as of July 3, 2010, is as follows:


Options Outstanding			Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Avg. Remaining Contractual Life (yrs.)	Weighted Avg. Exercise Price		Number Exercisable	Weighted Avg. Exercise Price
$1.15 –$1.73	21,669	1.0	$	1.17	21,669	$	1.17
1.74 – 2.60	22,500	2.7		2.13	22,500		2.13
2.61 – 3.92	166,825	2.0		2.87	166,825		2.87
3.93 – 5.89	75,000	0.2		4.80	75,000		4.80
5.90 – 6.50	37,500	0.6		6.50	37,500		6.50

$1.15 to $6.50	323,494	1.4	$	3.57	323,494	$	3.57

The Company also has a defined contribution plan (401(k)) available to U.S. employees who have attained age 21. The Company contributes an amount equal to 100% of the employee’s contribution on the first 3%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

of the employee’s compensation and an additional 50% of the employee’s contribution on the following 2% of the employee’s compensation. Company contributions to the plan were approximately $0.4 million in fiscal years 2010, 2009, and 2008, respectively.

8. COMMITMENTS AND CONTINGENCIES

Leases : The Company has operating leases for certain equipment and production facilities, which expire at various dates during the next ten years. As of July 3, 2010, the Company did not have any property and equipment financed under capital leases. Future minimum payments under non-cancelable operating leases with initial or remaining terms of one year or more at July 3, 2010, are summarized as follows (in thousands):


Fiscal Years Ending	Operating Leases
2011	$	2,819
2012		1,251
2013		772
2014		763
2015		762
Thereafter		3,464

Total minimum lease payments	$	9,831

Rental expense under operating leases was approximately $3.3 million, $3.4 million, and $3.7 million in fiscal years 2010, 2009, and 2008, respectively.

Warranty Costs : The Company provides warranties on certain product sales, and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under warranty. The Company establishes 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 estimates, adjustments to recognize additional cost of sales may be required in future periods.

Components of the reserve for warranty costs during fiscal years 2010, 2009, and 2008 were as follows:


Balance at June 30, 2007	$	40,000
Additions		196,200
Warranty costs incurred		(69,085	)

Balance at June 28, 2008		167,115
Recovery related to current period sales		(92,500	)
Warranty costs incurred		(49,722	)

Balance at June 27, 2009		24,893
Additions		44,529
Warranty costs incurred		(44,959	)

Balance at July 3, 2010	$	24,463

Warranty expense for fiscal years 2010 and 2008 is related to workmanship claims on keyboards and certain EMS products. The recovery in fiscal year 2009 is related to the release of a warranty claim for a specific product that was identified in fiscal year 2008.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Litigation : The Company is party to certain lawsuits or claims in the ordinary course of business. The Company does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the financial position, results of operations or cash flow of the Company.

Indemnification Rights : Under the Company’s bylaws, the Company’s directors and officers have certain rights to indemnification by the Company against certain liabilities that may arise by reason of their status or service as directors or officers. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and officers and former directors in certain circumstances.

9. GOODWILL

In accordance with ASC 350 Intangibles – Goodwill and Other , goodwill is not amortized, but must be analyzed for impairment at least annually. On December 27, 2008, the Company completed its annual impairment test. As the deteriorating global macroeconomic environment adversely affected the Company’s common stock price, the Company concluded that 100% of the goodwill was impaired due to the significant and sustained decline in the Company’s market capitalization to below the book value. The Company recorded an impairment charge of $765,000 during fiscal year 2009. As of July 3, 2010, and June 27, 2009, respectively, there was no goodwill recorded in the Company’s Consolidated Balance Sheet.

10. FAIR VALUE MEASUREMENTS

The Company has adopted ASC 820, Fair Value Measurements, which defines fair value, establishes a framework for assets and liabilities being measured and reported at fair value and expands disclosures about fair value measurements. There are three levels of fair value hierarchy inputs used to value assets and liabilities which include: Level 1 – inputs are quoted market prices for identical assets or liabilities; Level 2 – inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 – inputs are unobservable inputs for the asset or liability.

The following table summarizes the Company’s financial assets and liabilities (only those required to be measured at fair value on a recurring basis) at fair value as of July 3, 2010 and June 27, 2009 (in thousands):


	July 3, 2010
	Level 1		Level 2			Level 3		Total Fair Value
Financial Assets
Foreign currency forward contracts	$	—	$	416		$	—	$	416
Financial Liabilities
Foreign currency forward contracts	$	—	$	(777	)	$	—	$	(777	)

Total	$	—	$	(361	)	$	—	$	(361	)

	June 27, 2009
	Level 1		Level 2			Level 3		Total Fair Value
Financial Assets
Foreign currency forward contracts	$	—	$	912		$	—	$	912

The Company currently has forward contracts to hedge known future cash outflows for expenses denominated in the Mexican peso. These contracts are measured on a recurring basis based on the foreign currency spot rates and forward rates quoted by banks or foreign currency dealers. These contracts are marked to market using level 2 input criteria every period with the unrealized gain or loss, net of tax, reported as a component of shareholders’ equity in accumulated other comprehensive income, as they qualify for hedge accounting.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. DERIVATIVE FINANCIAL INSTRUMENTS

In accordance with ASC 815 , Derivatives and Hedging, the Company has expanded the quarterly and annual disclosures on its derivative instruments and hedging activities. The Company has entered into foreign currency forward contracts and those contracts are accounted for as cash flow hedges. The effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (AOCI) and is reclassified into earnings in the same period in which the underlying hedged transaction affects earnings. The derivative’s effectiveness represents the change in fair value of the hedge that offsets the change in fair value of the hedged item.

The Company transacts business in Mexico and is subject to the risk of foreign currency exchange rate fluctuations. The Company enters into foreign currency forward contracts to manage the foreign currency fluctuations for Mexican peso denominated payroll, utility, tax, and accounts payable expenses. The foreign currency forward contracts have terms that are matched to the underlying transactions being hedged. As a result these transactions fully offset the hedged risk and no ineffectiveness has been recorded.

As of July 3, 2010, the Company had outstanding foreign currency forward contracts of $30.9 million. These contract maturity dates extend through June 27, 2012. As of July 3, 2010, the net amount of existing gains (losses) expected to be reclassified into earnings within the next 24 months was $(361,000). During the fiscal year ended July 3, 2010, the Company entered into $30.9 million of foreign currency forward contracts and settled $17.8 million of such contracts. During the fiscal year ended June 27, 2009 the Company entered into $26.6 million and settled $8.8 million of foreign currency forward contracts. There were no significant foreign currency forward contracts entered into during fiscal year 2008. Subsequent to July 3, 2010, the Company entered into an additional $3.9 million of foreign currency forward contracts that extended the hedge position through September 2012.

The following table summarizes the fair value of derivative instruments in the Consolidated Balance Sheets as of July 3, 2010 (in thousands):


Derivatives Designated as Hedging Instruments	Balance Sheet Location	July 3 , 2010 Fair Value			June 27, 2009 Fair Value
Foreign currency forward contracts	Other current assets	$	416		$	912
Foreign currency forward contracts	Other long term liabilities	$	(777	)	$	—

The following table summarizes the gain (loss) of derivative instruments on the Consolidated Statement of Operations for the fiscal year 2010 (in thousands):


Derivatives Designated as Hedging Instruments	AOCI Balance as of June 27, 2009		Effective Portion Recorded In AOCI			Effective Portion Reclassified From AOCI Into Cost of Sales			AOCI Balance as of July 3, 2010
Settled foreign currency forward contracts	$	912	$	912		$	(1,824	)	$	—
Unsettled foreign currency forward contracts		—		(242	)		—			(242	)

Total	$	912	$	670		$	(1,824	)	$	(242	)

The Company does not enter into derivative instruments for trading or speculative purposes. The Company’s counterparties to the foreign currency forward contracts are major banking institutions. These institutions do not require collateral for the contracts and the Company believes that the risk of the counterparties failing to meet their contractual obligations is remote.

As of July 3, 2010, the Company does not have any foreign exchange contracts with credit-risk-related contingent features.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. ENTERPRISE-WIDE DISCLOSURES

Products and Services

Of the revenues for the years ended July 3, 2010, June 27, 2009, and June 28, 2008, EMS sales were $195.1 million, $180.7 million, and $198.3 million, respectively. Keyboard sales for the years ended July 3, 2010, June 27, 2009, and June 28, 2008 were $4.5 million, $4.2 million, and $5.8 million, respectively.

Geographic Areas

Net sales and long-lived assets (property, plant, and equipment) by geographic area as of July 3, 2010, June 27, 2009, and June 28, 2008, respectively are summarized in the following table. Net sales set forth below are based on the shipping destination.


	Domestic (U.S.)		Foreign		Total
			(in thousands)
2010
Net sales	$	163,915	$	35,705	$	199,620
Long-lived assets	$	931	$	12,967	$	13,898
2009
Net sales	$	164,032	$	20,892	$	184,924
Long-lived assets	$	755	$	10,444	$	11,199
2008
Net sales	$	192,748	$	11,374	$	204,122
Long-lived assets	$	802	$	9,996	$	10,798

For the year ended July 3, 2010, 48.8% of the Company’s foreign net sales were to customers in Canada, 16.9% were to Australia, 13.9% were to China , and the remaining 20.4% were spread among customers in other parts of Europe and Asia.

For the year ended June 27, 2009, 52.3% of the Company’s foreign net sales were to customers in Canada, 24.7% were to Switzerland, 15.8% were to Asia, and the remaining 7.2% were spread among customers in other parts of Europe and Australia.

For the year ended June 28, 2008, 65.8% of the Company’s foreign net sales were to customers in Switzerland, 11.7% were to Canada, 10.2 % were to Asia, and the remaining 12.3% were spread among customers in other parts of Europe and Australia.

Significant Customers

The percentage of net sales to and trade accounts receivables from significant customers were as follows:


	Percentage of Net Sales Fiscal Year						Percentage of Trade Accounts Receivable Fiscal Year
	2010		2009		2008		2010		2009
Customer A	18	%	*		*		22	%	14	%
Customer B	12	%	13	%	18	%	18	%	*
Customer C	*		14	%	15	%	*		14	%
Customer D	*		*		*		10	%	*

*	Amount was less than 10% of total.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

13. QUARTERLY FINANCIAL DATA

(Unaudited)


	Year Ended July 3, 2010
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	(in thousands, except per share amounts)
Net sales	$	41,309	$	44,750	$	51,697	$	61,864
Gross profit		2,675		4,710		5,242		6,623
Income before income taxes		331		1,714		2,217		3,024
Net income		295		1,670		4,414		2,311
Earnings per common share-basic	$	0.03	$	0.17	$	0.44	$	0.23
Earnings per common share-diluted	$	0.03	$	0.17	$	0.43	$	0.22
Weighted average shares outstanding
Basic		10,066		10,087		10,126		10,219
Diluted		10,082		10,110		10,254		10,342

	Year Ended June 27, 2009
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	(in thousands, except per share amounts)
Net sales	$	48,237	$	46,990	$	44,233	$	45,464
Gross profit		3,407		3,816		3,312		2,645
Income before income taxes		462		223		308		200
Net income		408		106		262		287
Earnings per common share-basic	$	0.04	$	0.01	$	0.03	$	0.03
Earnings per common share-diluted	$	0.04	$	0.01	$	0.03	$	0.03
Weighted average shares outstanding
Basic		10,040		10,065		10,066		10,066
Diluted		10,212		10,073		10,066		10,074

Item 9:

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None

Item 9A (T): CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

It is the responsibility of our management to establish, maintain, and monitor disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 are recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Additionally, these disclosure controls include controls and procedures that are designed to accumulate and communicate the information required to be disclosed to our company’s Chief Executive Officer and Chief

Financial Officer, allowing for timely decisions regarding required disclosures. As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(f). Based on our assessment, we believe that as of July 3, 2010, the Company’s disclosure controls and procedures are effective based on that criteria.

Management’s Report on Internal Control over Financial Reporting

Our management has the responsibility to establish and maintain adequate internal controls over our financial reporting, as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Our internal controls are designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our external financial statements in accordance with generally accepted accounting principles (GAAP).

Due to inherent limitations of any internal control system, management acknowledges that there are limitations as to the effectiveness of internal controls over financial reporting and therefore recognize that only reasonable assurance can be gained from any internal control system. Accordingly, our internal control system may not detect or prevent material misstatements in our financial statements and projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and participation of management, including the Chief Executive Officer and Chief Financial Officer, we have performed an assessment of the effectiveness of our internal controls over financial reporting as of July 3, 2010. This assessment was based on the criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that as of July 3, 2010, the Company’s internal control over financial reporting is effective based on that criteria.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal controls over financial reporting during our fourth fiscal quarter ended July 3, 2010 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)).

Item 9B:

OTHER INFORMATION

None

PART III

Item 10:

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors of the Registrant

Information on the nominees for election as Directors of the Company is incorporated by reference from the Company’s definitive proxy statement for the 2010 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the Company’s 2010 fiscal year.

Executive Officers of the Registrant

This information is included in a separate item captioned “Executive Officers of the Registrant” in Item 1 of Part 1 of this report pursuant to Instruction G(3) of Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.

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

Incorporated by reference to Key Tronic Corporation’s 2010 Proxy Statement to Shareholders.

Code of Conduct

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

Item 11:

EXECUTIVE COMPENSATION

Information appearing under the caption “Executive Compensation” in the Company’s 2010 Proxy Statement is incorporated herein by this reference.

Item 12:

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth the aggregate information for the Company’s equity compensation plans in effect as of July 3, 2010.

EQUITY COMPENSATION PLAN INFORMATION


Plan category	Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a)	Weighted-average exercise price of outstanding options, warrants, and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (c)
Equity compensation plans approved by security holders	243,993	$	3.87	—
Equity compensation plans not approved by security holders ⁽¹⁾	79,501	$	2.67	—
Total	323,494	$	3.57	—

⁽¹⁾

Consists of the Key Tronic Corporation 2000 Employee Stock Option Plan. Not included are the 1,200,000 shares subject to the 2010 Plan, the issuance of which is subject to shareholder approval of the 2010 Plan at the Annual Meeting, or the cash-settled SARs issued under the 2010 Plan that may be settled in shares of Common Stock, subject to shareholder approval of the 2010 Plan. See “Proposal 3: Approval of the Key Tronic Corporation 2010 Incentive Plan” for further information about the 2010 Plan.

Information under the caption “Beneficial Ownership of Securities” in the Company’s 2010 Proxy Statement is incorporated herein by this reference.

Item 13:

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information appearing under the caption “Related Person Transactions”, “Compensation Committee Interlocks and Insider Participation”, and “Directors’ Independence” in the Company’s 2010 Proxy Statement is incorporated herein by this reference.

Item 14:

PRINCIPAL ACCOUNTING FEES AND SERVICES

Information appearing under the caption “Principal Accountant Fees and Services” in the Company’s 2010 Proxy Statement is incorporated herein by this reference.

PART IV

Item 15:

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. FINANCIAL STATEMENTS


		Page in Form 10-K
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm		26
Consolidated Balance Sheets, as of July 3, 2010, and June 27, 2009		27
Consolidated Statements of Income for the years ended July 3, 2010, June 27, 2009, and June 28, 2008		28
Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended July 3, 2010, June 27, 2009, and June 28, 2008		29
Consolidated Statements of Cash Flows for the years ended July 3, 2010, June 27, 2009, and June 28, 2008		30 - 31
Notes to Consolidated Financial Statements		32 - 46

2. SCHEDULES


II. Consolidated Valuation and Qualifying Accounts		53

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

3. EXHIBITS


Exhibit No.		Description

3.1		Articles of Incorporation, incorporated by reference to the Exhibits to the Company’s form 10-K for the year ended June 30, 1986

3.2		Bylaws, as amended, incorporated by reference to the Exhibits to the Company’s Form 10-K for the year ended June 30, 1986

10.1*		Executive Stock Option Plan, incorporated by reference to Exhibits to the Company’s Form 10-K for the year ended June 30, 1986

10.2*		Amended and Restated 1990 Stock Option Plan for Non-Employee Directors, as amended, incorporated by reference to the Company’s 1997 Proxy Statement (dated October 10, 1997), pages 14-17



10.3*		1995 Executive Stock Option Plan, incorporated by reference to the Company’s 1995 Proxy Statement, pages 19-22

10.4*		2000 Employee Stock Option Plan, incorporated by reference to the Exhibits to the Company’s Form 10-Q for the quarter ended January 1, 2000

10.5*		Officers’ Employment Contracts, incorporated by reference to the Company’s 1998 Proxy Statement, pages 10 and 11

10.6*		Employment Contract with Michael D. Chard, incorporated by reference to Exhibits to the Company’s Form 10-K for the year ended July 1, 2000

10.7*		Addenda to Officers’ Employment Contracts, incorporated by reference to Exhibits to the Company’s Form 10-Q for the quarter ended January 1, 2000

10.8*		Description of Retention Bonus Plan, incorporated by reference to the Exhibits to the Company’s 10-Q for the quarter ended December 28, 2002

10.9*		Addenda to Officers’ Employment Contracts, incorporated by reference to Exhibits to the Company’s Form 10-K for the year ended June 29, 2002

10.10		Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Company’s Form 10-Q for the quarter ended September 29, 2001

10.11		First and Second Amendments to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Company’s Form 10-K for the year ended June 29, 2002

10.12		Third Amendment to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Company’s Form 10-Q for the quarter ended December 29, 2002

10.13		Fourth Amendment to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Company’s Form 10-K for the year ended June 28, 2003

10.14		Fifth Amendment to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Company’s Form 10-Q for the quarter ended December 27, 2003

10.15		Sixth Amendment to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Company’s Form 10-Q for the quarter ended April 3, 2004

10.16		Seventh Amendment to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Company’s Form 10-K for the year ended July 3, 2004

10.17		Eighth Amendment to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Company’s Form 10-K for the year ended July 3, 2004

10.18		Ninth Amendment to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibits to the Company’s Form 10-Q for the quarter ended October 2, 2004

10.19		Tenth Amendment to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibit to the Company’s Form 8-K filed April 4, 2005

10.20		Promise to execute a Purchase and Sale Agreement with Key Safety Systems de Mexico, S.A. de C.V., incorporated by reference to the Exhibit to the Company’s



		Form 8-K filed April 26, 2005

10.21		Summary of material terms and conditions of the Purchase and Sale Agreement with Key Safety Systems de Mexico, S.A. de C.V., incorporated by reference to the Exhibit to the Company’s Form 8-K filed June 6, 2005

10.22*		Summary of Key Tronic Corporation Incentive Compensation Plan, incorporated by reference to Exhibit 10.23* the Company’s Form 10-K for the year ended July 2, 2005

10.23*		Employment Contract between Key Tronic Corporation and George Robert Alford, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed July 26, 2006

10.24*		Summary of Incentive Compensation Plan Performance goals and Target Payments for fiscal year 2007, incorporated by reference to the Company’s Form 8-K filed July 28, 2006

10.25*		Summary of Fiscal Years 2007 – 2009 Long Term Incentive Plan Performance Measures and Awards, incorporated by reference to the Company’s From 8-K filed July 28, 2006

10.26*		Summary of Key Tronic Corporation Long Term Incentive Compensation Plan, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed September 27, 2005

10.27		Twelfth Amendment to Financing Agreement with CIT Group Business Credit, Inc., incorporated by reference to the Exhibit to the Company’s Form 8-K filed September 7, 2006

10.28		Summary of material terms and conditions of the Purchase and Sale Agreement with Todenko Mexico S.A. de C.V., incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed October 12, 2006

10.29		Summary of material terms and conditions of the Purchase and Sale Agreement with Todenko Mexico S.A. de C.V., incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed November 20, 2006

10.30		Summary of material terms and conditions of the Sale and Purchase Agreement with Adevco Corporation, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed January 5, 2007

10.31		Summary of Second Amendment to Agreement of Sale and Purchase Agreement with Adevco Corporation, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed April 11, 2007

10.32*		Summary of Incentive Compensation Plan Performance Goals and Target Payments for Fiscal Year 2008 and Fiscal Years 2008-2010 Long Term Incentive Plan Performance Measures and Awards incorporated by reference to the Company’s Form 8-K filed July 27, 2007

10.33*		Summary of Incentive Compensation Plan Performance Goals and Target payments for Fiscal Year 2009 and Fiscal Years 2009 – 2011 Long Term Incentive Plan Performance Measures and Awards incorporated by reference to the Company’s Form 8-K filed July 24, 2008

10.34*		Summary of Incentive Compensation Plan Performance Goals and Target payments for Fiscal Year 2010 and Fiscal Years 2010 – 2012 Long Term Incentive Plan Performance Measures and Awards incorporated by reference to the Company’s Form 8-K filed July 23, 2009

10.35		Financing Agreement with Wells Fargo Bank, N.A., incorporated by reference to the



		Exhibits to the Company’s Form 8-K filed on August 24, 2009

10.36*		2010 Incentive Plan, submitted here with the Company’s Form 10-K for the year ended July 3, 2010

10.37*		Employment Contract with Douglas G. Burkhardt, submitted here with the Company’s Form 10-K for the year ended July 3,2010

10.38		Summary of material terms and conditions of the Purchase and Sale Agreement with Autopartes Y Arneses de Mexico S.A. de C.V., submitted here with the Company’s Form 10-K for the year ended July 3,2010

21.		Subsidiaries of Registrant, submitted herewith

23.1		Consent of Independent Registered Public Accounting Firm, submitted herewith

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer, submitted herewith

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer, submitted herewith

32.1		Section 1350 Certification of Chief Executive Officer, submitted herewith

32.2		Section 1350 Certification of Chief Financial Officer, submitted herewith

*	Management contract or compensatory plan or arrangement

PART IV

SCHEDULE II

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

FISCAL YEARS ENDED JULY 3, 2010, JUNE 27, 2009, AND

JUNE 28, 2008


	2010			2009			2008
				(in thousands)
Allowance for Obsolete Inventory
Balance at beginning of year	$	409		$	236		$	211
Provisions		2,182			303			159
Dispositions		(1,288	)		(130	)		(134	)

Balance at end of year	$	1,303		$	409		$	236

Allowance for Doubtful Accounts
Balance at beginning of year	$	111		$	110		$	20
Provisions		—			604			122
Write-offs		—			(603	)		(32	)

Balance at end of year	$	111		$	111		$	110

SIGNATURES

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

Dated: September 13, 2010


KEY TRONIC CORPORATION

By:		/ S / C RAIG D. G ATES
		Craig D. Gates,
		President and Chief Executive Officer
		(Principal Executive Officer)

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



/ S / C RAIG D. G ATES		September 13, 2010
Craig D. Gates		Date
Director and President and Chief Executive Officer
(Principal Executive Officer)

/ S / R ONALD F. K LAWITTER		September 13, 2010
Ronald F. Klawitter		Date
Director and Executive Vice President of Administration, Chief Financial Officer and Treasurer
(Principal Financial Officer)

/ S / B RETT R. L ARSEN		September 13, 2010
Brett R. Larsen		Date
Vice President of Finance and Controller
(Principal Accounting Officer)

/ S / J AMES R. B EAN		September 13, 2010
James R. Bean,		Date
Director

/ S / D ALE F. P ILZ		September 13, 2010
Dale F. Pilz,		Date
Director and Chairman of the Board

/ S / Y ACOV A. S HAMASH		September 13, 2010
Yacov A. Shamash,		Date
Director

/ S / P ATRICK S WEENEY		September 13, 2010
Patrick Sweeney,		Date
Director

Exhibit 10.36

KEY TRONIC CORPORATION

2010 INCENTIVE PLAN

SECTION 1. PURPOSE

The purpose of the Key Tronic Corporation 2010 Incentive Plan is to attract, retain and motivate employees, officers, directors, consultants, agents, advisors and independent contractors of the Company and its Related Companies by providing them the opportunity to acquire a proprietary interest in the Company and to align their interests and efforts to the long-term interests of the Company’s shareholders.

SECTION 2. DEFINITIONS

Certain capitalized terms used in the Plan have the meanings set forth in Appendix A.

SECTION 3. ADMINISTRATION

3.1

Administration of the Plan

(a) The Plan shall be administered by the Board or the Compensation Committee, which shall be composed of two or more directors, each of whom is a “non-employee director” within the meaning of Rule 16b-3(b)(3) promulgated under the Exchange Act, or any successor definition adopted by the Securities and Exchange Commission, and an “outside director” within the meaning of Section 162(m) of the Code, or any successor provision thereto.

(b) Notwithstanding the foregoing, the Board may delegate concurrent responsibility for administering the Plan, including with respect to designated classes of Eligible Persons, to different committees consisting of two or more members of the Board, subject to such limitations as the Board deems appropriate, except with respect to Awards to Participants who are subject to Section 16 of the Exchange Act or Awards granted pursuant to Section 15 of the Plan. Members of any committee shall serve for such term as the Board may determine, subject to removal by the Board at any time. To the extent consistent with applicable law, the Board may authorize one or more senior executive officers of the Company to grant Awards to designated classes of Eligible Persons, within limits specifically prescribed by the Board; provided, however, that no such officer shall have or obtain authority to grant Awards to himself or herself or to any person subject to Section 16 of the Exchange Act.

(c) All references in the Plan to the “ Committee ” shall be, as applicable, to the Board, the Compensation Committee or any other committee or any officer to whom authority has been delegated to administer the Plan.

3.2

Administration and Interpretation by Committee

(a) Except for the terms and conditions explicitly set forth in the Plan and to the extent permitted by applicable law, the Committee shall have full power and exclusive authority, subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be adopted by the Board or a committee composed of members of the Board, to (i) select the Eligible Persons to whom Awards may from time to time be granted under the Plan; (ii) determine the type or types of Award to be granted to each Participant under the Plan; (iii) determine the number of shares of Common Stock to be covered by each Award granted under the Plan; (iv) determine the terms and conditions of any Award granted under the Plan; (v) approve the forms of notice or agreement for use under the Plan; (vi) determine whether, to what extent and under what circumstances Awards may be settled in cash, shares of Common Stock or other property or canceled or suspended; (vii) interpret and administer the Plan and any instrument evidencing an Award, notice or agreement executed or entered into under the Plan; (viii) establish such rules and regulations as it shall deem appropriate for the proper administration of the Plan; (ix) delegate ministerial duties to such of the Company’s employees as it so determines; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan.

(b) In no event, however, shall the Committee have the right, without shareholder approval, to (i) lower the price of an Option after it is granted, except in connection with adjustments provided in Section 14.1; (ii) take any other action that is treated as a repricing under generally accepted accounting principles; or (iii) cancel an Option at a time when its strike price exceeds the Fair Market Value of the underlying stock, in exchange for another option, restricted stock, or other equity, unless the cancellation and exchange occurs in connection with a merger, acquisition, spin-off or other similar corporate transaction.

(c) The effect on the vesting of an Award of a Company-approved leave of absence or a Participant’s reduction in hours of employment or service shall be determined by the Compensation Committee, whose determination shall be final.

(d) Decisions of the Committee shall be final, conclusive and binding on all persons, including the Company, any Participant, any shareholder and any Eligible Person. A majority of the members of the Committee may determine its actions.

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SECTION 4. SHARES SUBJECT TO THE PLAN

4.1

Authorized Number of Shares

Subject to adjustment from time to time as provided in Section 14.1, a maximum of 1,200,000 shares of Common Stock shall be available for issuance under the Plan. Shares issued under the Plan shall be drawn from authorized and unissued shares.

4.2

Share Usage

(a) Shares of Common Stock covered by an Award shall not be counted as used unless and until they are actually issued and delivered to a Participant. If any Award lapses, expires, terminates or is canceled prior to the issuance of shares thereunder or if shares of Common Stock are issued under the Plan to a Participant and thereafter are forfeited to or otherwise reacquired by the Company, the shares subject to such Awards and the forfeited or reacquired shares shall again be available for issuance under the Plan. Any shares of Common Stock (i) tendered by a Participant or retained by the Company as full or partial payment to the Company for the purchase price of an Award or to satisfy tax withholding obligations in connection with an Award, or (ii) covered by an Award that is settled in cash, or in a manner such that some or all of the shares of Common Stock covered by the Award are not issued, shall be available for Awards under the Plan. The number of shares of Common Stock available for issuance under the Plan shall not be reduced to reflect any dividends or dividend equivalents that are reinvested into additional shares of Common Stock or credited as additional shares of Common Stock subject or paid with respect to an Award.

(b) The Committee shall also, without limitation, have the authority to grant Awards as an alternative to or as the form of payment for grants or rights earned or due under other compensation plans or arrangements of the Company.

(c) Notwithstanding any other provision of the Plan to the contrary, the Committee may grant Substitute Awards under the Plan. Substitute Awards shall not reduce the number of shares authorized for issuance under the Plan. In the event that an Acquired Entity has shares available for awards or grants under one or more preexisting plans not adopted in contemplation of such acquisition or combination, then, to the extent determined by the Board or the Compensation Committee, the shares available for grant pursuant to the terms of such preexisting plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to holders of common stock of the entities that are parties to such acquisition or combination) may be used for Awards under the Plan and shall not reduce the number of shares of Common Stock authorized for issuance under the Plan; provided, however, that Awards using such available shares shall not be made after the date awards or grants could have been made under the terms of such preexisting plans, absent the acquisition or combination, and shall only be made to individuals who were not employees or directors of the Company or a Related Company prior to such acquisition or combination. In the event that a written agreement between the Company and an Acquired Entity pursuant to which a merger or consolidation or statutory share exchange is completed is approved by the

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Board and that agreement sets forth the terms and conditions of the substitution for or assumption of outstanding awards of the Acquired Entity, those terms and conditions shall be deemed to be the action of the Committee without any further action by the Committee, except as may be required for compliance with Rule 16b-3 under the Exchange Act, and the persons holding such awards shall be deemed to be Participants.

SECTION 5. ELIGIBILITY

An Award may be granted to any employee, officer or director of the Company or a Related Company whom the Committee from time to time selects. An Award may also be granted to any consultant, agent, advisor or independent contractor for bona fide services rendered to the Company or any Related Company that (a) are not in connection with the offer and sale of the Company’s securities in a capital-raising transaction and (b) do not directly or indirectly promote or maintain a market for the Company’s securities.

SECTION 6. AWARDS

6.1

Form, Grant and Settlement of Awards

The Committee shall have the authority, in its sole discretion, to determine the type or types of Awards to be granted under the Plan. Such Awards may be granted either alone or in addition to or in tandem with any other type of Award. Any Award settlement may be subject to such conditions, restrictions and contingencies as the Committee shall determine.

6.2

Evidence of Awards

Awards granted under the Plan shall be evidenced by a written, including an electronic, instrument that shall contain such terms, conditions, limitations and restrictions as the Committee shall deem advisable and that are not inconsistent with the Plan.

6.3

Dividends and Distributions

Participants may, if the Committee so determines, be credited with dividends paid with respect to shares of Common Stock underlying an Award in a manner determined by the Committee in its sole discretion. The Committee may apply any restrictions to the dividends or dividend equivalents that the Committee deems appropriate. The Committee, in its sole discretion, may determine the form of payment of dividends or dividend equivalents, including cash, shares of Common Stock, Restricted Stock or Stock Units. Notwithstanding the foregoing, the right to any dividends or dividend equivalents declared and paid on the number of shares underlying an Option or a Stock Appreciation Right may not be contingent, directly or indirectly on the exercise of the Option or Stock Appreciation Right, and must comply with or qualify for an exemption under Section 409A. Also notwithstanding the foregoing, the right to any dividends or dividend equivalents declared and paid on Restricted Stock must (a) be paid at the same time such dividends or dividend equivalents are paid to other shareholders and (b) comply with or qualify for an exemption under Section 409A.

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SECTION 7. OPTIONS

7.1

Grant of Options

The Committee may grant Options, which shall be nonqualified stock options that are not intended to qualify as “incentive stock options” as that term is defined for purposes of Section 422 of the Code or any successor provision.

7.2

Option Exercise Price

Options shall be granted with an exercise price per share not less than 100% of the Fair Market Value of the Common Stock on the Grant Date, except in the case of Substitute Awards. Notwithstanding the foregoing, the Committee may grant nonqualified stock options with an exercise price per share of less than the Fair Market Value of the Common Stock on the Grant Date if the Option meets all the requirements for Awards that are considered “deferred compensation” within the meaning of Section 409A.

7.3

Term of Options

Subject to earlier termination in accordance with the terms of the Plan and the instrument evidencing the Option, the maximum term of an Option shall be ten years from the Grant Date.

7.4

Exercise of Options

(a) The Committee shall establish and set forth in each instrument that evidences an Option the time at which, or the installments in which, the Option shall vest and become exercisable, any of which provisions may be waived or modified by the Committee at any time.

(b) To the extent an Option has vested and become exercisable, the Option may be exercised in whole or from time to time in part by delivery to or as directed or approved by the Company of a properly executed stock option exercise agreement or notice, in a form and in accordance with procedures established by the Committee, setting forth the number of shares with respect to which the Option is being exercised, the restrictions imposed on the shares purchased under such exercise agreement or notice, if any, and such representations and agreements as may be required by the Committee, accompanied by payment in full as described in Sections 7.5. An Option may be exercised only for whole shares and may not be exercised for less than a reasonable number of shares at any one time, as determined by the Committee.

7.5

Payment of Exercise Price

The exercise price for shares purchased under an Option shall be paid in full to the Company by delivery of consideration equal to the product of the Option exercise price and the number of shares purchased. Such consideration must be paid before the Company will issue the shares being purchased and must be in a form or a combination of forms acceptable to the Committee for that purchase, which forms may include:

(a) cash;

-5-

(b) check or wire transfer;

(c) having the Company withhold shares of Common Stock that would otherwise be issued on exercise of the Option that have an aggregate Fair Market Value equal to the aggregate exercise price of the shares being purchased under the Option;

(d) tendering (either actually or, so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, by attestation) shares of Common Stock owned by the Participant that have an aggregate Fair Market Value equal to the aggregate exercise price of the shares being purchased under the Option;

(e) so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, and to the extent permitted by law, delivery of a properly executed exercise agreement or notice, together with irrevocable instructions to a brokerage firm designated or approved by the Company to deliver promptly to the Company the aggregate amount of proceeds to pay the Option exercise price and any withholding tax obligations that may arise in connection with the exercise, all in accordance with the regulations of the Federal Reserve Board; or

(f) such other consideration as the Committee may permit.

7.6

Effect of Termination of Service

(a) The Committee shall establish and set forth in each instrument that evidences an Option whether the Option shall continue to be exercisable, and the terms and conditions of such exercise, after a Termination of Service, any of which provisions may be waived or modified by the Committee at any time.

(b) If the exercise of the Option following a Participant’s Termination of Service, but while the Option is otherwise exercisable, would be prohibited solely because the issuance of Common Stock would violate the registration requirements under the Securities Act or similar requirements under the laws of any state or foreign jurisdiction, then the Option shall remain exercisable until the earlier of (i) the Option Expiration Date and (ii) the expiration of a period of three months (or such longer period of time as determined by the Committee in its sole discretion) after the Participant’s Termination of Service during which the exercise of the Option would not be in violation of such Securities Act or other requirements.

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SECTION 8. STOCK APPRECIATION RIGHTS

8.1

Grant of Stock Appreciation Rights

The Committee may grant Stock Appreciation Rights to Participants at any time on such terms and conditions as the Committee shall determine in its sole discretion. An SAR may be granted in tandem with an Option or alone (“freestanding”). The grant price of a tandem SAR shall be equal to the exercise price of the related Option. The grant price of a freestanding SAR shall be established in accordance with procedures for Options set forth in Section 7.2. An SAR may be exercised upon such terms and conditions and for such term as the Committee determines in its sole discretion; provided, however, that, subject to earlier termination in accordance with the terms of the Plan and the instrument evidencing the SAR, the maximum term of a freestanding SAR shall be ten years, and in the case of a tandem SAR, (a) the term shall not exceed the term of the related Option and (b) the tandem SAR may be exercised for all or part of the shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option, except that the tandem SAR may be exercised only with respect to the shares for which its related Option is then exercisable.

8.2

Payment of SAR Amount

Upon the exercise of an SAR, a Participant shall be entitled to receive payment in an amount determined by multiplying: (a) the difference between the Fair Market Value of the Common Stock on the date of exercise over the grant price of the SAR by (b) the number of shares with respect to which the SAR is exercised. At the discretion of the Committee as set forth in the instrument evidencing the Award, the payment upon exercise of an SAR may be in cash, in shares, in some combination thereof or in any other manner approved by the Committee in its sole discretion.

8.3

Waiver of Restrictions

The Committee, in its sole discretion, may waive any other terms, conditions or restrictions on any SAR under such circumstances and subject to such terms and conditions as the Committee shall deem appropriate.

SECTION 9. STOCK AWARDS, RESTRICTED STOCK AND STOCK UNITS

9.1

Grant of Stock Awards, Restricted Stock and Stock Units

The Committee may grant Stock Awards, Restricted Stock and Stock Units on such terms and conditions and subject to such repurchase or forfeiture restrictions, if any, which may be based on continuous service with the Company or a Related Company or the achievement of any performance goals, as the Committee shall determine in its sole discretion, which terms, conditions and restrictions shall be set forth in the instrument evidencing the Award.

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9.2

Vesting of Restricted Stock and Stock Units

Upon the satisfaction of any terms, conditions and restrictions prescribed with respect to Restricted Stock or Stock Units, or upon a Participant’s release from any terms, conditions and restrictions of Restricted Stock or Stock Units, as determined by the Committee (a) the shares of Restricted Stock covered by each Award of Restricted Stock shall become freely transferable by the Participant, and (b) Stock Units shall be paid in shares of Common Stock or, if set forth in the instrument evidencing the Awards, in cash or a combination of cash and shares of Common Stock. Any fractional shares subject to such Awards shall be paid to the Participant in cash.

9.3

Waiver of Restrictions

The Committee, in its sole discretion, may waive the repurchase or forfeiture period and any other terms, conditions or restrictions on any Restricted Stock or Stock Unit under such circumstances and subject to such terms and conditions as the Committee shall deem appropriate.

SECTION 10. PERFORMANCE AWARDS

10.1

Performance Shares

The Committee may grant Awards of Performance Shares, designate the Participants to whom Performance Shares are to be awarded and determine the number of Performance Shares and the terms and conditions of each such Award. Performance Shares shall consist of a unit valued by reference to a designated number of shares of Common Stock, which value may be paid to the Participant by delivery of shares of Common Stock or, if set forth in the instrument evidencing the Award, of such property as the Committee shall determine, including, without limitation, cash, shares of Common Stock, other property, or any combination thereof, upon the attainment of performance goals, as established by the Committee, and other terms and conditions specified by the Committee. The amount to be paid under an Award of Performance Shares may be adjusted on the basis of such further consideration as the Committee shall determine in its sole discretion.

10.2

Performance Units

The Committee may grant Awards of Performance Units, designate the Participants to whom Performance Units are to be awarded and determine the number of Performance Units and the terms and conditions of each such Award. Performance Units shall consist of a unit valued by reference to a designated amount of property other than shares of Common Stock, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including, without limitation, cash, shares of Common Stock, other property, or any combination thereof, upon the attainment of performance goals, as established by the Committee, and other terms and conditions specified by the Committee. The amount to be paid under an Award of Performance Units may be adjusted on the basis of such further consideration as the Committee shall determine in its sole discretion.

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SECTION 11. OTHER STOCK OR CASH-BASED AWARDS

Subject to the terms of the Plan and such other terms and conditions as the Committee deems appropriate, the Committee may grant other incentives payable in cash or in shares of Common Stock under the Plan.

SECTION 12. WITHHOLDING

The Company may require the Participant to pay to the Company the amount of (a) any taxes that the Company is required by applicable federal, state, local or foreign law to withhold with respect to the grant, vesting or exercise of an Award (“tax withholding obligations”) and (b) any amounts due from the Participant to the Company or to any Related Company (“other obligations”). Notwithstanding any other provision of the Plan to the contrary, the Company shall not be required to issue any shares of Common Stock or otherwise settle an Award under the Plan until such tax withholding obligations and other obligations are satisfied.

The Committee may permit or require a Participant to satisfy all or part of the Participant’s tax withholding obligations and other obligations by (a) paying cash to the Company, (b) having the Company withhold an amount from any cash amounts otherwise due or to become due from the Company to the Participant, (c) having the Company withhold a number of shares of Common Stock that would otherwise be issued to the Participant (or become vested, in the case of Restricted Stock) having a Fair Market Value equal to the tax withholding obligations and other obligations, or (d) surrendering a number of shares of Common Stock the Participant already owns having a value equal to the tax withholding obligations and other obligations. The value of the shares so withheld or tendered may not exceed the employer’s minimum required tax withholding rate.

SECTION 13. ASSIGNABILITY

No Award or interest in an Award may be sold, assigned, pledged (as collateral for a loan or as security for the performance of an obligation or for any other purpose) or transferred by a Participant or made subject to attachment or similar proceedings otherwise than by will or by the applicable laws of descent and distribution, except to the extent the Participant designates one or more beneficiaries on a Company-approved form who may exercise the Award or receive payment under the Award after the Participant’s death. During a Participant’s lifetime, an Award may be exercised only by the Participant. Notwithstanding the foregoing, the Committee, in its sole discretion, may permit a Participant to assign or transfer an Award subject to such terms and conditions as the Committee shall specify.

SECTION 14. ADJUSTMENTS

14.1

Adjustment of Shares

In the event, at any time or from time to time, a stock dividend, stock split, spin-off, combination or exchange of shares, recapitalization, merger, consolidation, statutory share exchange, distribution to shareholders other than a normal cash dividend, or other change in

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the Company’s corporate or capital structure results in (a) the outstanding shares of Common Stock, or any securities exchanged therefor or received in their place, being exchanged for a different number or kind of securities of the Company or (b) new, different or additional securities of the Company or any other company being received by the holders of shares of Common Stock, then the Committee shall make proportional adjustments in (i) the maximum number and kind of securities available for issuance under the Plan; (ii) the maximum numbers and kind of securities set forth in Section 15.3; and (iii) the number and kind of securities that are subject to any outstanding Award and the per share price of such securities, without any change in the aggregate price to be paid therefor. The determination by the Committee, as to the terms of any of the foregoing adjustments, shall be conclusive and binding.

Notwithstanding the foregoing, the issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services rendered, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, outstanding Awards. Also notwithstanding the foregoing, a dissolution or liquidation of the Company or a Company Transaction shall not be governed by this Section 14.1 but shall be governed by Sections 14.2 and 14.3, respectively.

14.2

Dissolution or Liquidation

To the extent not previously exercised or settled, and unless otherwise determined by the Committee in its sole discretion, Awards shall terminate immediately prior to the dissolution or liquidation of the Company. To the extent a vesting condition, forfeiture provision or repurchase right applicable to an Award has not been waived by the Committee, the Award shall be forfeited immediately prior to the consummation of the dissolution or liquidation.

14.3

Change in Control

Notwithstanding any other provision of the Plan to the contrary, unless the Committee shall determine otherwise in the instrument evidencing the Award or in a written employment, services or other agreement between the Participant and the Company or a Related Company, in the event of a Change in Control:

(a) All outstanding Awards, other than Performance Shares and Performance Units, shall become fully and immediately vested and exercisable, and all applicable restrictions or forfeiture provisions shall lapse, immediately prior to the Change in Control and shall terminate at the effective time of the Change in Control; provided, however, that with respect to a Change in Control that is a Company Transaction in which such Awards could be converted, assumed or replaced by the Successor Company, any such Awards that vest based on continuous employment or service with the Company shall become fully and immediately

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vested and exercisable, and all applicable restrictions or forfeiture provisions shall lapse, only if and to the extent such Awards are not converted, assumed or replaced by the Successor Company. If an Option or a Stock Appreciation Right shall become fully and immediately vested and exercisable in lieu of being converted, assumed or replaced by the Successor Company in the event of a Company Transaction, the Committee shall notify the Participant in advance of the anticipated closing date of such transaction in writing or electronically that the Option or Stock Appreciation Right shall be fully vested and exercisable for a specified time period after the date of such notice, and the Option or Stock Appreciation Right, to the extent not exercised, shall terminate upon the expiration of such period, in each case conditioned on the consummation of the Company Transaction. Such notice shall be given to the Participant at least seven days prior to the expiration of such period.

For the purposes of this Section 14.3(a), an Award shall be considered converted, assumed or replaced by the Successor Company if, following the Company Transaction, the Option or right confers the right to purchase or receive, for each share of Common Stock subject to the Award immediately prior to the Company Transaction, the consideration (whether stock, cash or other securities or property) received in the Company Transaction by holders of Common Stock for each share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares); provided, however, that if such consideration received in the Company Transaction is not solely common stock of the Successor Company, the Committee may, with the consent of the Successor Company, provide for the consideration to be received pursuant to the Award, for each share of Common Stock subject thereto, to be solely common stock of the Successor Company substantially equal in fair market value to the per share consideration received by holders of Common Stock in the Company Transaction. The determination of such substantial equality of value of consideration shall be made by the Committee, and its determination shall be conclusive and binding.

(b) All Performance Shares or Performance Units earned and outstanding as of the date the Change in Control is determined to have occurred and for which the payout level has been determined shall be payable in full in accordance with the payout schedule pursuant to the instrument evidencing the Award. Any remaining Performance Shares or Performance Units (including any applicable performance period) for which the payout level has not been determined shall be prorated at the target payout level up to and including the date of such Change in Control and shall be payable in full at the target level in accordance with the payout schedule pursuant to the instrument evidencing the Award. Any existing deferrals or other restrictions not waived by the Committee in its sole discretion shall remain in effect.

(c) Notwithstanding the foregoing, the Committee, in its sole discretion, may instead provide, in the event of a Change in Control that is a Company Transaction, that a Participant’s outstanding Awards shall terminate upon or immediately prior to such Company Transaction and that such Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (x) the value of the per share consideration received by holders of Common Stock in the Company Transaction or, in the event the Company Transaction is one of the transactions listed under subsection (c) in the definition of Company Transaction or otherwise does not result in direct receipt of consideration by holders of Common Stock, the value of the deemed per share consideration received, in each case as determined by the Committee in its sole discretion, multiplied by the number of

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shares of Common Stock subject to such outstanding Awards (to the extent then vested and exercisable or whether or not then vested and exercisable, as determined by the Committee in its sole discretion) exceeds (y) if applicable, the respective aggregate exercise price or grant price for such Awards.

14.4

Further Adjustment of Awards

Subject to Sections 14.2 and 14.3, the Committee shall have the discretion, exercisable at any time before a sale, merger, consolidation, statutory share exchange, reorganization, liquidation, dissolution or change of control of the Company, as defined by the Committee, to take such further action as it determines to be necessary or advisable with respect to Awards. Such authorized action may include (but shall not be limited to) establishing, amending or waiving the type, terms, conditions or duration of, or restrictions on, Awards so as to provide for earlier, later, extended or additional time for exercise, lifting restrictions and other modifications, and the Committee may take such actions with respect to all Participants, to certain categories of Participants or only to individual Participants. The Committee may take such action before or after granting Awards to which the action relates and before or after any public announcement with respect to such sale, merger, consolidation, statutory share exchange, reorganization, liquidation, dissolution or change of control that is the reason for such action.

14.5

No Limitations

The grant of Awards shall in no way affect the Company’s right to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

14.6

Fractional Shares

In the event of any adjustment in the number of shares covered by any Award, each such Award shall cover only the number of full shares resulting from such adjustment.

14.7

Section 409A

Notwithstanding any other provision of the Plan to the contrary, (a) any adjustments made pursuant to this Section 14 to Awards that are considered “deferred compensation” within the meaning of Section 409A shall be made in compliance with the requirements of Section 409A and (b) any adjustments made pursuant to this Section 14 to Awards that are not considered “deferred compensation” subject to Section 409A shall be made in such a manner as to ensure that after such adjustment the Awards either (i) continue not to be subject to Section 409A or (ii) comply with the requirements of Section 409A.

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SECTION 15. CODE SECTION 162(m) PROVISIONS

Notwithstanding any other provision of the Plan to the contrary, if the Committee determines, at the time Awards are granted to a Participant who is, or is likely to be as of the end of the tax year in which the Company would claim a tax deduction in connection with such Award, a Covered Employee, then the Committee may provide that this Section 15 is applicable to such Award.

15.1

Performance Criteria

(a) If an Award is subject to this Section 15, then the lapsing of restrictions thereon and the distribution of cash, shares of Common Stock or other property pursuant thereto, as applicable, shall be subject to the achievement of one or more objective performance goals established by the Committee, which shall be based on the attainment of specified levels of one of or any combination of the following “performance criteria” for the Company as a whole or any business unit of the Company, as reported or calculated by the Company: cash flows (including, but not limited to, operating cash flow, free cash flow or cash flow return on capital); working capital; earnings per share; book value per share; operating income (including or excluding depreciation, amortization, extraordinary items, restructuring charges or other expenses); revenues; operating margins; return on assets; return on equity; debt; debt plus equity; market or economic value added; stock price appreciation; total shareholder return; cost control; strategic initiatives; market share; net income; return on invested capital; improvements in capital structure; revenue growth rate; or customer satisfaction, employee satisfaction, services performance, subscriber, cash management or asset management metrics (together, the “ Performance Criteria ”).

(b) Such performance goals also may be based on the achievement of specified levels of Company performance (or performance of an applicable affiliate or business unit of the Company) under one or more of the Performance Criteria described above relative to the performance of other corporations. Such performance goals shall be set by the Committee within the time period prescribed by, and shall otherwise comply with the requirements of, Section 162(m) of the Code, or any successor provision thereto, and the regulations thereunder.

(c) The Committee may provide, at the time it establishes performance goals for any such Award, that any evaluation of performance shall include or exclude any one or more of the following events that occurs during a performance period: (i) asset write-downs; (ii) litigation or claim judgments or settlements; (iii) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results; (iv) any reorganization and restructuring programs; (v) extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 and/or in Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company’s annual report to shareholders for the applicable year; (vi) acquisitions or divestitures; (vii) foreign exchange gains and losses; and (viii) gains and losses on asset sales. To the extent such inclusions or exclusions affect Awards to Covered Employees, they shall be prescribed in a form that satisfies the requirements for “performance-based compensation” within the meaning of Section 162(m)(4)(C) of the Code, or any successor provision thereto.

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15.2

Compensation Committee Certification; Adjustment of Awards

(a) After the completion of each performance period, the Compensation Committee shall certify the extent to which any performance goal established under this Section 15 has been satisfied, and the amount payable as a result thereof, prior to payment, settlement or vesting, as applicable, of any Award subject to this Section 15.

(b) Notwithstanding any provision of the Plan other than Section 14, with respect to any Award that is intended to qualify as performance-based compensation subject to this Section 15, the Committee may adjust downward, but not upward, the amount payable pursuant to such Award, and the Committee may not waive the achievement of the applicable performance goals except in the case of the death or Disability of the Covered Employee.

15.3

Limitations

Subject to adjustment from time to time as provided in Section 14.1, no Covered Employee may be granted Awards other than Performance Units or other cash-based awards subject to this Section 15 in any calendar year period with respect to more than the following: (a) 600,000 shares for Options or SARs; (b) 300,000 shares for Restricted Stock, Restricted Stock Units or Performance Shares; and (c) 300,000 shares for other stock-based Awards. The maximum dollar value payable with respect to Performance Units or other cash-based awards subject to this Section 15 granted to any Covered Employee in any one calendar year is $1,000,000.

The Committee shall have the power to impose such other restrictions on Awards subject to this Section 15 as it may deem necessary or appropriate to ensure that such Awards satisfy all requirements for “performance-based compensation” within the meaning of Section 162(m)(4)(C) of the Code, or any successor provision thereto.

SECTION 16. AMENDMENT AND TERMINATION

16.1

Amendment, Suspension or Termination

The Board or the Compensation Committee may amend, suspend or terminate the Plan or any portion of the Plan at any time and in such respects as it shall deem advisable; provided, however, that, to the extent required by applicable law, regulation or stock exchange rule, shareholder approval shall be required for any amendment to the Plan; and provided, further, that any amendment that requires shareholder approval may be made only by the Board. Subject to Section 16.3, the Committee may amend the terms of any outstanding Award, prospectively or retroactively.

16.2

Term of the Plan

Unless sooner terminated as provided herein, the Plan shall terminate ten years from the Effective Date. After the Plan is terminated, no future Awards may be granted, but Awards previously granted shall remain outstanding in accordance with their applicable terms and conditions and the Plan’s terms and conditions.

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16.3

Consent of Participant

The amendment, suspension or termination of the Plan or a portion thereof or the amendment of an outstanding Award shall not, without the Participant’s consent, materially adversely affect any rights under any Award theretofore granted to the Participant under the Plan. Notwithstanding the foregoing, any adjustments made pursuant to Section 15 shall not be subject to these restrictions.

SECTION 17. GENERAL

17.1

No Individual Rights

No individual or Participant shall have any claim to be granted any Award under the Plan, and the Company has no obligation for uniformity of treatment of Participants under the Plan. Furthermore, nothing in the Plan or any Award granted under the Plan shall be deemed to constitute an employment contract or confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Related Company or limit in any way the right of the Company or any Related Company to terminate a Participant’s employment or other relationship at any time, with or without cause.

17.2

Issuance of Shares

Notwithstanding any other provision of the Plan, the Company shall have no obligation to issue or deliver any shares of Common Stock under the Plan or make any other distribution of benefits under the Plan unless, in the opinion of the Company’s counsel, such issuance, delivery or distribution would comply with all applicable laws (including, without limitation, the requirements of the Securities Act or the laws of any state or foreign jurisdiction) and the applicable requirements of any securities exchange or similar entity.

The Company shall be under no obligation to any Participant to register for offering or resale or to qualify for exemption under the Securities Act, or to register or qualify under the laws of any state or foreign jurisdiction, any shares of Common Stock, security or interest in a security paid or issued under, or created by, the Plan, or to continue in effect any such registrations or qualifications if made.

As a condition to the exercise of an Option or any other receipt of Common Stock pursuant to an Award under the Plan, the Company may require (a) the Participant to represent and warrant at the time of any such exercise or receipt that such shares are being purchased or received only for the Participant’s own account and without any present intention to sell or distribute such shares and (b) such other action or agreement by the Participant as may from time to time be necessary to comply with the federal, state and foreign securities laws. At the option of the Company, a stop-transfer order against any such shares may be placed on the

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official stock books and records of the Company, and a legend indicating that such shares may not be pledged, sold or otherwise transferred, unless an opinion of counsel is provided (concurred in by counsel for the Company) stating that such transfer is not in violation of any applicable law or regulation, may be stamped on stock certificates to ensure exemption from registration. The Committee may also require the Participant to execute and deliver to the Company a purchase agreement or such other agreement as may be in use by the Company at such time that describes certain terms and conditions applicable to the shares.

To the extent the Plan or any instrument evidencing an Award provides for issuance of stock certificates to reflect the issuance of shares of Common Stock, the issuance may be effected on a noncertificated basis, to the extent not prohibited by applicable law or the applicable rules of any stock exchange.

17.3

Indemnification

Each person who is or shall have been a member of the Board, or a committee appointed by the Board, or an officer of the Company to whom authority was delegated in accordance with Section 3, shall be indemnified and held harmless by the Company against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by such person in connection with or resulting from any claim, action, suit or proceeding to which such person may be a party or in which such person may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by such person in settlement thereof, with the Company’s approval, or paid by such person in satisfaction of any judgment in any such claim, action, suit or proceeding against such person; provided, however, that such person shall give the Company an opportunity, at its own expense, to handle and defend the same before such person undertakes to handle and defend it on such person’s own behalf, unless such loss, cost, liability or expense is a result of such person’s own willful misconduct or except as expressly provided by statute.

The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such person may be entitled under the Company’s articles of incorporation or bylaws, as a matter of law, or otherwise, or of any power that the Company may have to indemnify or hold harmless.

17.4

No Rights as a Shareholder

Unless otherwise provided by the Committee or in the instrument evidencing the Award or in a written employment, services or other agreement, no Award, other than a Stock Award or Restricted Stock, shall entitle the Participant to any cash dividend, voting or other right of a shareholder unless and until the date of issuance under the Plan of the shares that are the subject of such Award.

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17.5

Compliance With Laws and Regulations

The Plan and Awards granted under the Plan are intended to be exempt from the requirements of Section 409A to the maximum extent possible, whether pursuant to the short-term deferral exception described in Treasury Regulation Section 1.409A-1(b)(4), the exclusion applicable to stock options, stock appreciation rights and certain other equity-based compensation under Treasury Regulation Section 1.409A-1(b)(5), or otherwise. To the extent Section 409A is applicable to the Plan or any Award granted under the Plan, it is intended that the Plan and any Awards granted under the Plan shall comply with the deferral, payout and other limitations and restrictions imposed under Section 409A. Notwithstanding any other provision of the Plan or any Award granted under the Plan to the contrary, the Plan and any Award granted under the Plan shall be interpreted, operated and administered in a manner consistent with such intentions. Without limiting the generality of the foregoing, and notwithstanding any other provision of the Plan or any Award granted under the Plan to the contrary, with respect to any payments and benefits under the Plan or any Award granted under the Plan to which Section 409A applies, all references in the Plan or any Award granted under the Plan to the termination of the Participant’s employment or service are intended to mean the Participant’s “separation from service,” within the meaning of Section 409A(a)(2)(A)(i). In addition, if the Participant is a “specified employee,” within the meaning of Section 409A, then to the extent necessary to avoid subjecting the Participant to the imposition of any additional tax under Section 409A, amounts that would otherwise be payable under the Plan or any Award granted under the Plan during the six-month period immediately following the Participant’s “separation from service,” within the meaning of Section 409A(a)(2)(A)(i), shall not be paid to the Participant during such period, but shall instead be accumulated and paid to the Participant (or, in the event of the Participant’s death, the Participant’s estate) in a lump sum on the first business day after the earlier of the date that is six months following the Participant’s separation from service or the Participant’s death. Notwithstanding any other provision of the Plan to the contrary, the Committee, to the extent it deems necessary or advisable in its sole discretion, reserves the right, but shall not be required, to unilaterally amend or modify the Plan and any Award granted under the Plan so that the Award qualifies for exemption from or complies with Section 409A; provided, however, that the Committee makes no representations that Awards granted under the Plan shall be exempt from or comply with Section 409A and makes no undertaking to preclude Section 409A from applying to Awards granted under the Plan.

17.6

Participants in Other Countries or Jurisdictions

Without amending the Plan, the Committee may grant Awards to Eligible Persons who are foreign nationals on such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to foster and promote achievement of the purposes of the Plan and shall have the authority to adopt such modifications, procedures, subplans and the like as may be necessary or desirable to comply with provisions of the laws or regulations of other countries or jurisdictions in which the Company or any Related Company may operate or have employees to ensure the viability of the benefits from Awards granted to Participants employed in such countries or jurisdictions, meet the requirements that permit the Plan to operate in a qualified or tax-efficient manner, comply with applicable foreign laws or regulations and meet the objectives of the Plan.

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17.7

No Trust or Fund

The Plan is intended to constitute an “unfunded” plan. Nothing contained herein shall require the Company to segregate any monies or other property, or shares of Common Stock, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant, and no Participant shall have any rights that are greater than those of a general unsecured creditor of the Company.

17.8

Successors

All obligations of the Company under the Plan with respect to Awards shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all the business and/or assets of the Company.

17.9

Severability

If any provision of the Plan or any Award is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the Committee’s determination, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person or Award, and the remainder of the Plan and any such Award shall remain in full force and effect.

17.10

Choice of Law and Venue

The Plan, all Awards granted thereunder and all determinations made and actions taken pursuant hereto, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of Washington without giving effect to principles of conflicts of law. Participants irrevocably consent to the nonexclusive jurisdiction and venue of the state and federal courts located in the State of Washington.

17.11

Legal Requirements

The granting of Awards and the issuance of shares of Common Stock under the Plan are subject to all applicable laws, rules and regulations and to such approvals by any governmental agencies or national securities exchanges as may be required.

SECTION 18. EFFECTIVE DATE

The effective date (the “ Effective Date ”) is the date on which the Plan is adopted by the Board; provided, however, that no Awards other than SARs that are settled in cash, Performance Units or other cash-based awards may be granted prior to the date shareholders approve the Plan.

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APPENDIX A

DEFINITIONS

As used in the Plan,

“ Acquired Entity ” means any entity acquired by the Company or a Related Company or with which the Company or a Related Company merges or combines.

“ Award ” means any Option, Stock Appreciation Right, Stock Award, Restricted Stock, Stock Unit, Performance Share, Performance Unit, cash-based award or other incentive payable in cash or in shares of Common Stock as may be designated by the Committee from time to time.

“ Board ” means the Board of Directors of the Company.

“ Cause ,” unless otherwise defined in the instrument evidencing an Award or in a written employment, services or other agreement between the Participant and the Company or a Related Company, means: (a) conviction of a felony or misdemeanor involving moral turpitude; (b) engaging in illegal business practices or other practices contrary to the written policies of the Company; (c) misappropriation of assets of the Company; (d) continual or repeated insobriety or drug use; (e) continual or repeated absence for reasons other than disability or sickness, (f) fraud; (g) embezzlement; (h) violation of the Company’s written conflict of interest policies, in each case as determined by the Committee, whose determination shall be conclusive and binding.

“ Change in Control ,” unless the Committee determines otherwise with respect to an Award at the time the Award is granted or unless otherwise defined for purposes of an Award in a written employment, services or other agreement between the Participant and the Company or a Related Company, means the occurrence of any of the following events:

(a) an acquisition by any Entity of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 40% or more of either (1) the then-outstanding shares of common stock of the Company (the “ Outstanding Company Common Stock ”) or (2) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the “ Outstanding Company Voting Securities ”); provided, however, that the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege where the security being so converted was not acquired directly from the Company by the party exercising the conversion privilege, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Related Company, or (iv) any acquisition by any Entity pursuant to a transaction that meets the conditions of clauses (i), (ii) and (iii) set forth in the definition of Company Transaction;

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(b) a change in the composition of the Board during any two-year period such that the individuals who, as of the beginning of such two-year period, constitute the Board (the “ Incumbent Board ”) cease for any reason to constitute at least a majority of the Board; provided, however, that for purposes of this definition, any individual who becomes a member of the Board subsequent to the beginning of the two-year period, whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least two-thirds of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided further, however, that any such individual whose initial assumption of office occurs as a result of or in connection with an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of an Entity other than the Board shall not be considered a member of the Incumbent Board; or

“ Code ” means the Internal Revenue Code of 1986, as amended from time to time.

“ Committee ” has the meaning set forth in Section 3.1.

“ Common Stock ” means the common stock, no par value, of the Company.

“ Company ” means Key Tronic Corporation, a Washington corporation.

“ Company Transaction ,” unless the Committee determines otherwise with respect to an Award at the time the Award is granted or unless otherwise defined for purposes of an Award in a written employment, services or other agreement between the Participant and the Company or a Related Company, means consummation of:

(a) a merger or consolidation of the Company with or into any other company;

(b) a statutory share exchange pursuant to which the Company’s outstanding shares are acquired or a sale in one transaction or a series of transactions undertaken with a common purpose of all or substantially all of the Company’s outstanding voting securities; or

(c) a sale, lease, exchange or other transfer in one transaction or a series of related transactions undertaken with a common purpose of all or substantially all of the Company’s assets,

excluding, however, in each case, a transaction pursuant to which

(i) the Entities who are the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Company Transaction will beneficially own, directly or indirectly, at least 50% of the outstanding shares of common stock, and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, of the Successor Company in substantially the same proportions as their ownership, immediately prior to such Company Transaction, of the Outstanding Company Common Stock and Outstanding Company Voting Securities;

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(ii) no Entity (other than the Company, any employee benefit plan (or related trust) of the Company, a Related Company or a Successor Company) will beneficially own, directly or indirectly, 40% or more of, respectively, the outstanding shares of common stock of the Successor Company or the combined voting power of the outstanding voting securities of the Successor Company entitled to vote generally in the election of directors unless such ownership resulted solely from ownership of securities of the Company prior to the Company Transaction; and

(iii) individuals who were members of the Incumbent Board will, immediately after the consummation of the Company Transaction, constitute at least a majority of the members of the board of directors of the Successor Company.

Where a series of transactions undertaken with a common purpose is deemed to be a Company Transaction, the date of such Company Transaction shall be the date on which the last of such transactions is consummated.

“ Compensation Committee ” means the Compensation Committee of the Board.

“ Covered Employee ” means a “covered employee” as that term is defined for purposes of Section 162(m)(3) of the Code or any successor provision.

“ Disability ,” unless otherwise defined by the Committee from time to time for purposes of the Plan, means a period of disability during which a Participant qualifies for benefits under the Company’s then-current long-term disability plan or, in the case of a Participant who is not an employee of the Company, means a period of disability during which such Participant, if he or she were an employee of the Company, would qualify for benefits under the Company’s then-current current long-term disability plan.

“ Effective Date ” has the meaning set forth in Section 18.

“ Eligible Person ” means any person eligible to receive an Award as set forth in Section 5.

“ Entity ” means any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act).

“ Exchange Act ” means the Securities Exchange Act of 1934, as amended from time to time.

“ Fair Market Value ” means the closing price for the Common Stock on any given date during regular trading, or if not trading on that date, such price on the last preceding date on which the Common Stock was traded, unless determined otherwise by the Committee using such methods or procedures as it may establish.

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“ Grant Date ” means the later of (a) the date on which the Committee completes the corporate action authorizing the grant of an Award or such later date specified by the Committee and (b) the date on which all conditions precedent to an Award have been satisfied, provided that conditions to the exercisability or vesting of Awards shall not defer the Grant Date.

“ Option ” means a right to purchase Common Stock granted under Section 7.

“ Option Expiration Date ” means the last day of the maximum term of an Option.

“ Outstanding Company Common Stock ” has the meaning set forth in the definition of “Change in Control.”

“ Outstanding Company Voting Securities ” has the meaning set forth in the definition of “Change in Control.”

“ Parent Company ” means a company or other entity that, as a result of a Company Transaction, owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries.

“ Participant ” means any Eligible Person to whom an Award is granted.

“ Performance Award ” means an Award of Performance Shares or Performance Units granted under Section 10.

“ Performance Criteria ” has the meaning set forth in Section 15.1.

“ Performance Share ” means an Award of units denominated in shares of Common Stock granted under Section 10.1.

“ Performance Unit ” means an Award of units denominated in cash or property other than shares of Common Stock granted under Section 10.2.

“ Plan ” means the Key Tronic Corporation 2010 Incentive Plan.

“ Related Company ” means any entity that is directly or indirectly controlled by, in control of or under common control with the Company.

“ Restricted Stock ” means an Award of shares of Common Stock granted under Section 9, the rights of ownership of which are subject to restrictions prescribed by the Committee.

“ Retirement ,” unless otherwise defined in the instrument evidencing the Award or in a written employment, services or other agreement between the Participant and the Company or a Related Company, means “Retirement” as defined for purposes of the Plan by the Committee or, if not so defined, means Termination of Service on or after the later of (i) the date a Participant attains age 65 and (ii) the fifth anniversary of the date the Participant commenced employment or a service relationship with the Company.

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“ Securities Act ” means the Securities Act of 1933, as amended from time to time.

“ Section 409A ” means Section 409A of the Code.

“ Stock Appreciation Right ” or “ SAR ” means a right granted under Section 8.1 to receive the excess of the Fair Market Value of a specified number of shares of Common Stock over the grant price.

“ Stock Appreciation Right Expiration Date ” means the last day of the maximum term of a Stock Appreciation Right.

“ Stock Award ” means an Award of shares of Common Stock granted under Section 9, the rights of ownership of which are not subject to restrictions prescribed by the Committee.

“ Stock Unit ” means an Award denominated in units of Common Stock granted under Section 9.

“ Substitute Awards ” means Awards granted or shares of Common Stock issued by the Company in substitution or exchange for awards previously granted by an Acquired Entity.

“ Successor Company ” means the surviving company, the successor company or Parent Company, as applicable, in connection with a Company Transaction.

“ Termination of Service ” means a termination of employment or service relationship with the Company or a Related Company for any reason, whether voluntary or involuntary, including by reason of death, Disability or Retirement. Any question as to whether and when there has been a Termination of Service for the purposes of an Award and the cause of such Termination of Service shall be determined by the Company’s chief human resources officer or other person performing that function or, with respect to directors and executive officers, by the Compensation Committee, whose determination shall be conclusive and binding. Transfer of a Participant’s employment or service relationship between the Company and any Related Company shall not be considered a Termination of Service for purposes of an Award. Unless the Compensation Committee determines otherwise, a Termination of Service shall be deemed to occur if the Participant’s employment or service relationship is with an entity that has ceased to be a Related Company. A Participant’s change in status from an employee of the Company or a Related Company to a nonemployee director, consultant, advisor or independent contractor of the Company or a Related Company or a change in status from a nonemployee director, consultant, advisor or independent contractor of the Company or a Related Company to an employee of the Company or a Related Company, shall not be considered a Termination of Service.

“ Vesting Commencement Date ” means the Grant Date or such other date selected by the Committee as the date from which an Award begins to vest.

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Key Tronic Corporation

Recoupment Policy

In the event of a restatement of the Company’s consolidated financial statements (beginning with the financial statements for the quarterly period ending July 3, 2010), the Company shall have the right pursuant to this “Recoupment Policy” to take appropriate action to recoup from any executive officer (as defined for purposes of Rule 3b-7 promulgated under the Securities Exchange Act of 1934 or any successor rule or regulation) (an “executive officer”) any portion of any bonus or other equity or non-equity compensation received by the executive officer the grant of which was tied to the achievement of one or more specific performance targets, with respect to the period for which such financial statements are or will be restated (the “Recoupment Amount”), regardless of whether the executive officer engaged in any misconduct or was at fault or responsible in any way for causing the restatement, if, as a result of such restatement, the executive officer otherwise would not have received such bonus or other compensation (or portion thereof). In the event the Company is entitled to, and seeks, recoupment under this Recoupment Policy, the executive officer will promptly reimburse the Recoupment Amount to which the Company is entitled to recoup hereunder. In the event the executive officer fails to make prompt reimbursement of any such Recoupment Amount to which the Company is entitled to recoup and as to which the Company seeks recoupment under this Recoupment Policy, the Company shall have the right to deduct such Recoupment Amount from the compensation or other payments due to the executive officer from the Company or (ii) to take any other appropriate action to recoup such Recoupment Amount. For purposes of this Recoupment Policy, the Recoupment Amount shall be calculated on an after-tax basis unless such restatement results from the executive officer’s misconduct within the meaning of Section 304 of the Sarbanes-Oxley Act of 2002. The Company does not waive its right to seek recoupment of any Recoupment Amount as described under this Recoupment Policy for failure to demand repayment or reduce the payments made to the executive officer. Any such waiver must be done in a writing that is signed by both the Company and the executive officer. The rights contained in this Recoupment Policy shall be in addition to, and shall not limit, any other rights or remedies that the Company may have under law or in equity, including, without limitation, any rights the Company may have under any other Company agreement or arrangement with the executive officer. Adopted April 21, 2010.

KEY TRONIC CORPORATION

2010 INCENTIVE PLAN

STOCK APPRECIATION RIGHTS AWARD NOTICE

Key Tronic Corporation (the “ Compan y ”) hereby grants to you a Stock Appreciation Rights Award (the “ Award ”) under the Company’s 2010 Incentive Plan (the “ Plan ”). The Award is subject to all the terms and conditions set forth in this Award Notice (this “ Award Notice ”) and in the Stock Appreciation Rights Agreement (the “ Agreement ”), which is attached to and incorporated into this Award Notice in its entirety. Except as expressly provided otherwise in this Award Notice or in the Agreement, the Award is subject to the terms and conditions set forth in the Plan and the Plan Summary, which are available from the current administrator of the Plan and are incorporated into this Award Notice in their entirety.


Participant:

Grant Date:		*[date of Board approval of grant]*

Number of Stock Appreciation Rights:

Base Price (per Right):

Stock Appreciation Rights Expiration Date:		(subject to earlier termination in accordance with the terms of the Plan and the Agreement) *[Insert date that is five years from the Grant Date]*

Vesting and Exercisability Schedule:		The Award will vest in accordance with the schedule set forth in Exhibit A attached to this Award Notice

Retention Requirement		Shares issued pursuant to the Award will be subject to the retention requirement set forth in Exhibit A attached to this Award Notice

Additional Terms/Acknowledgement : You acknowledge receipt of, and understand and agree to, this Award Notice, including Exhibit A to this Award Notice, the Agreement and the Plan. You further acknowledge that as of the Grant Date, this Award Notice, the Agreement and the Plan set forth the entire understanding between you and the Company regarding the Award and supersede all prior oral and written agreements on the subject .


KEY TRONIC CORPORATION						PARTICIPANT


By:						Signature
Its:
						Date:

Attachments :						Address:
1. Stock Appreciation Rights Agreement
2. 2010 Incentive Plan						Taxpayer ID:
3. Plan Summary

KEY TRONIC CORPORATION

2010 INCENTIVE PLAN

STOCK APPRECIATION RIGHTS AGREEMENT

Pursuant to your Stock Appreciation Rights Award Notice (the “ Award Notice ”) and this Stock Appreciation Rights Agreement (this “ Agreement ”), Key Tronic Corporation (the “ Company ”) has granted you a Stock Appreciation Rights Award (the “ Award ”) under its 2010 Incentive Plan (the “ Plan ”) of the number of Stock Appreciation Rights indicated in your Award Notice (the “ Stock Appreciation Rights ”) at the Base Price indicated in your Award Notice. Capitalized terms not explicitly defined in this Agreement but defined in the Plan shall have the same definitions as in the Plan.

The details of the Award are as follows:

1. Vesting and Exercisability. Subject to the limitations contained herein, the Award will vest and become exercisable as provided in your Award Notice, provided that vesting will cease upon the termination of your employment or service relationship with the Company or a Related Company, and the unvested portion of the Award will terminate.

2. Securities Law Compliance. Notwithstanding any other provision of this Agreement, you may not exercise the Award, to the extent the Award is payable in shares of Common Stock, for shares of Common Stock unless the shares of Common Stock issuable upon exercise are registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of the Award for shares of Common Stock must also comply with other applicable laws and regulations governing the issuance of shares of Common Stock under the Plan, and you may not exercise the Award for shares of Common Stock if the Company determines that such exercise would not be in material compliance with such laws and regulations.

3. Method of Exercise and Form of Payment. You may exercise the Award or a portion of the Award by giving written notice to the Company, in form and substance satisfactory to the Company, which will state your election to exercise the Award and the number of Stock Appreciation Rights you are exercising. Upon the exercise of the Award, you will be entitled to receive payment in cash in an amount determined by multiplying: (a) the difference between the per share Fair Market Value of the Common Stock on the date of exercise over the per share Base Price of the Stock Appreciation Right set forth in the Award Notice by (b) the number of Stock Appreciation Rights exercised. Subject to shareholder approval of the Plan, the payment upon exercise of an Award may be made solely in shares of Common Stock, in cash, or in some combination of cash and shares of Common Stock or in any other manner approved by the Committee in its sole discretion.

4. Treatment Upon Termination of Employment or Service Relationship . The unvested portion of the Award will terminate automatically and without further notice immediately upon termination of your employment or service relationship with the Company or a Related Company for any reason (“Termination of Service”). You may exercise the vested portion of the Award as follows:

(a) General Rule . You must exercise the vested portion of the Award on or before the earlier of (i) 90 days after your Termination of Service and (ii) the Stock Appreciation Right Expiration Date;

(b) Retirement or Disability . If your employment or service relationship terminates due to Retirement or Disability, you must exercise the vested portion of the Award on or before the earlier of (i) 180 days after your Termination of Service and (ii) the Stock Appreciation Right Expiration Date.

(c) Death . If your employment or service relationship terminates due to your death, the vested portion of the Award must be exercised on or before the earlier of (i) one year after your Termination of Service and (ii) the Stock Appreciation Right Expiration Date. If you die after your Termination of Service but while the Award is still exercisable, the vested portion of the Award may be exercised until the earlier of (x) one year after the date of death and (y) the Stock Appreciation Right Expiration Date; and

(d) Cause . The vested portion of the Award will automatically expire at the time the Company first notifies you of your Termination of Service for Cause, unless the Committee determines otherwise. If your employment or service relationship is suspended pending an investigation of whether you will be terminated for Cause, all your rights under the Award likewise will be suspended during the period of investigation. If any facts that would constitute termination for Cause are discovered after your Termination of Service, any Award you then hold may be immediately terminated by the Committee.

It is your responsibility to be aware of the date the Award terminates.

Change in Control

Notwithstanding any provision in the Plan to the contrary, the Award will automatically become fully and immediately exercisable immediately prior to a Change in Control and to the extent not exercised shall terminate at the effective time of the Change in Control.

5. Limited Transferability. During your lifetime only you can exercise the Award. The Award is not transferable except by will or by the applicable laws of descent and distribution. The Plan provides for exercise of the Award by a beneficiary designated on a Company-approved form or the personal representative of your estate. Notwithstanding the foregoing, the Committee, in its sole discretion, may permit you to assign or transfer the Award, subject to such terms and conditions as specified by the Committee.

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6. Withholding Taxes. As a condition to the exercise of any portion of an Award, you must make such arrangements as the Company may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such exercise.

7. Award Not an Employment or Service Contract. Nothing in the Plan or any Award granted under the Plan will be deemed to constitute an employment contract or confer or be deemed to confer any right for you to continue in the employ of, or to continue any other relationship with, the Company or any Related Company or limit in any way the right of the Company or any Related Company to terminate your employment or other relationship at any time, with or without Cause.

8. No Right to Damages. You will have no right to bring a claim or to receive damages if you are required to exercise the vested portion of the Award within 90 days (180 days in the case of Retirement or Disability and one year in the case of death) of the Termination of Service or if any portion of the Award is canceled or expires unexercised. The loss of existing or potential profit in Awards will not constitute an element of damages in the event of your Termination of Service for any reason even if the termination is in violation of an obligation of the Company or a Related Company to you.

9. Binding Effect. This Agreement will inure to the benefit of the successors and assigns of the Company and be binding on you and your heirs, executors, administrators, successors and assigns.

[Insert these sections for non-US Residents only: 10. Limitation on Rights; No Right to Future Grants; Extraordinary Item of Compensation. By entering into this Agreement and accepting the grant of the Award evidenced hereby, you acknowledge that: (a) the Plan is discretionary in nature and may be amended, suspended or terminated by the Company at any time; (b) the grant of the Award is a one-time benefit that does not create any contractual or other right to receive future grants of awards or benefits in lieu of awards; (c) all determinations with respect to any such future awards, including, but not limited to, the times when awards will be granted, the number of rights subject to each award, the award base price, and the time or times when each award will be exercisable, will be at the sole discretion of the Company; (d) your participation in the Plan is voluntary; (e) the value of the Award is an extraordinary item of compensation that is outside the scope of your employment contract, if any; (f) the Award is not part of normal or expected compensation for purposes of calculating any benefits, severance, resignation, termination, redundancy, end-of-service payments, bonuses, long-service awards, pension or retirement benefits or similar payments, and you will have no entitlement to compensation or damages as a consequence of your forfeiture of any unvested portion of the Award as a result of your Termination of Service for any reason; (g) the vesting of the Award ceases upon your Termination of Service for any reason except as may otherwise be explicitly provided in the Plan or this Agreement or otherwise permitted by the Committee; (h) the future value of the Common Stock is unknown and cannot be predicted with certainty; (i) if the Common Stock does not increase in value, the Award will have no value; and (j) in the event that you are not a direct employee of the Company, the grant of the Award will not be interpreted to form an employment or other relationship with the Company.

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11. Employee Data Privacy. By entering into this Agreement and accepting the Award, you (a) explicitly and unambiguously consent to the collection, use and transfer, in electronic or other form, of any of your personal data that is necessary to facilitate the implementation, administration and management of the Award and the Plan; (b) understand that the Company and your employer may, for the purpose of implementing, administering and managing the Plan, hold certain personal information about you, including, but not limited to, your name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title and details of all awards or entitlement to payment of the Award granted to you under the Plan or otherwise (“Data”); (c) understand that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, including any broker with whom any shares of Common Stock issued upon exercise of the Award may be deposited, and that these recipients may be located in your country or elsewhere, and that the recipient’s country may have different data privacy laws and protections than your country; (d) waive any data privacy rights you may have with respect to the Data; and (e) authorize the Company, its Related Companies and its agents to store and transmit such information in electronic form.

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Exhibit 10.37

EMPLOYMENT CONTRACT

THIS AGREEMENT is made and entered into as of July 1, 2008, by and between Douglas G. Burkhardt, hereinafter referred to as “Employee”, and Key Tronic Corporation, which has its principal place of business at N. 4424 Sullivan Road, Spokane Valley, Washington, a Washington corporation, hereinafter referred to as “Employer”.

RECITALS

WHEREAS, Employer is engaged in the business of contract manufacturing, maintaining its principal office at N. 4424 Sullivan Road, Spokane Valley, Washington; and

WHEREAS, Employee and Employer wish for the Employee to accept the position of Vice President of Operations; and

WHEREAS, Employee and Employer now desire to enter into a written employment contract between the parties;

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained herein, the parties hereto agree as follows:

1. EMPLOYMENT . Employer hereby employs Employee as its Vice President of Operations, to exercise all ordinary and necessary duties as defined by the President and the CEO of Employer, and Employee hereby accepts and agrees to such employment, subject to the general supervision of the Employer’s President and CEO and Board of Directors. Subject to the provisions of Section 9 of this Agreement, Employer reserves the right to change Employee’s duties from time to time as Employer deems necessary and appropriate as the business of Employer evolves. Employer may, in its discretion, increase Employee’s salary or other benefits without having to amend this Agreement and unless specified in writing such changes in salary or benefits will not modify the term or termination provisions of this Agreement. Employee recognizes that Employee’s employment is at will. During the course of employment, both Employee and Employer have the right to terminate Employee’s employment at any time, subject to the provisions of Section 9 of this Agreement.

2. BEST EFFORTS OF EMPLOYEE . Employee agrees that Employee will at all times fully, industriously, and to the best of Employee’s ability, experience, and talent, perform all of the duties that may be required of and from Employee pursuant to the express and implicit terms hereof, to the satisfaction of Employer in the exercise of its sole discretion. Such duties shall be rendered at the business address of Employer and at such other place or places Employer and Employee shall, in good faith determine, as the interest, needs, business or opportunity of Employer may require. Employee shall comply with all current Employer policies, rules and regulations as adopted from time to time and all specific directions of Employer.

3. COMPENSATION OF EMPLOYEE . Employer shall pay Employee, and Employee shall accept from Employer, effective as of July 1, 2008, as full compensation for Employee’s services hereunder, $5,914.23 bi-weekly, paid in accordance with Employer’s regular payroll policies.

Employee shall be eligible to participate in the benefits set forth below during the term of his employment pursuant to the terms of the respective benefit plans. Employee acknowledges that Employer may change its benefit plans in its sole discretion.

a. Coverage for Employee and Employee’s dependents under Employer’s group medical and group dental plans to the extent the same are provided to other employees.

b. Participation in bonus incentive plans as may be offered by Employer to its key employees from time to time.

c. Other company provided benefits such as holidays, sick leave, and group insurance benefits as adopted by Employer and generally made available to employees of Employer.

4. VACATION . Employee shall receive vacation during each year of employment in accordance with Employer’s then existing personnel policy. Unused vacation time from each year may accumulate in accordance with Employer’s then existing personnel policy.

5. OTHER EMPLOYMENT . Employee shall devote his full time, attention, knowledge, and skills to the business and interests of Employer, and Employer shall be entitled to all benefits, profits, or other issues arising from or incident to all work, services, and advice of Employee. Employee shall not, during the term hereof, be interested directly or indirectly, in any manner, as partner, officer, director, stockholder, advisor, employee, or in any other capacity in any other business similar to Employer’s business. Nothing contained herein shall be deemed to prevent or limit Employee from acquiring stock or other securities of any corporation whose stock or securities are owned or are traded on any public exchange, or from investing in real estate.

6. TRADE SECRETS . Employee shall not at any time, or in any manner, either directly or indirectly, use, divulge, disclose, or communicate to any person, firm, or corporation, in any manner whatsoever, any information containing any matters affecting or relating to the business of Employer, including all information without limiting the generality of the foregoing, regarding any of its customers, the price it obtains or has obtained from the sale of its products, or any other information concerning the business of Employer, its manner of operation, plans, processes, or other data, without regard to whether all of the foregoing matters will be deemed confidential, material, or important, the parties hereto stipulating that as between them, the same are important, material, and confidential, and gravely affect the effective and successful conduct of the business of Employer, and Employer’s good will. Any breach of the terms of this paragraph shall be a breach of this Agreement.

7. TRADE SECRETS AFTER TERMINATION OF EMPLOYMENT . All the terms of Section 6 shall remain in full force and effect for the period of three (3) years after the termination of Employee’s employment for any reason. Employee cannot offer employment to current (current at time of termination) employees of Key Tronic or induce them to leave Key Tronic for a period of one (1) year after termination.

8. AGREEMENTS OUTSIDE OF CONTRACT . This Contract contains the complete agreement concerning the employment arrangement and separation provisions between the parties and shall, as of the effective date hereof, supersede all other written or oral agreements between the parties. The parties stipulate that neither of them have made any representation with respect to the subject matter of this Agreement, or any representations including the execution and delivery hereof except such representations as are specifically set forth in writing herein, and each of the parties hereto acknowledges that such party has relied upon such party’s own judgment in entering into this Agreement. The parties hereto further acknowledge that any representations that may have heretofore been made by either of them to the other are of no effect and that neither of them has relied thereon in connection with this Agreement.

9. TERMINATION .

a) Employer’s Board of Directors, its President or CEO may, in their discretion, terminate Employee’s employment at any time for any reason or for no reason. After such termination, Employer shall pay Employee for Employee’s accumulated unused vacation and, subject to the provisions below, Employer shall continue to pay Employee’s base salary only in effect prior to termination for a period of twelve (12) months after termination. Also, for the period during which any salary payments are being made, Employer will provide, through COBRA, group medical and dental plan coverage for Employee and Employee’s dependents as such plans are then generally offered to employees of Employer. Employee may elect to continue group medical coverage at the termination of severance benefits, for the balance of any COBRA period, at Employee’s sole expense. Employee shall not be entitled to receive any payments under any bonus, profit sharing or other incentive compensation plan of Employer unless Employee is employed by Employer on the date such payments are due to be paid.

b) No severance benefits will be provided if Employee elects to terminate his employment or is terminated for cause. For purposes of this Agreement, “Cause” means (i) conviction of a felony or misdemeanor involving moral turpitude; (ii) engaging in illegal business practices or other practices contrary to the written policies of the Company; (iii) misappropriation of assets of the Company; (iv) continual or repeated insobriety or drug use; (v) continual or repeated absence for reasons other than disability or sickness, (vi) fraud; (vii) embezzlement; (viii) violation of the Company’s written conflict of interest policies; and (ix) material breach of this Agreement.

c) All severance benefits including, but not limited to, the continuation of salary payments in whole or in part, and all other payments made on Employee’s behalf for group medical and dental coverage will terminate immediately upon Employee’s employment by a third party at a base salary equal to or greater than the base salary then being paid Employee by Employer. If Employee is paid a base salary by a third party lower than that being paid by Employer, Employer shall continue to pay the difference for the remainder of the period set forth in Section 9(a) above, but Employer’s obligation to continue payments for medical and dental coverage will terminate immediately upon employment by a third party.

d) Any outstanding stock options held by Employee at termination of employment shall be treated as provided for under the company Stock Option Plan by which options were granted.

e) The provisions of Sections 6, 7, 9, 10, 11, 12 and 16 shall survive the termination of this Agreement.

10. REMEDIES . Any breach or evasion of any of the terms of this Agreement by either party hereto will result in immediate and irreparable injury to the other party and will authorize recourse to injunctive relief and/or specific performance, as well as to all other legal or equitable remedies to which such injured party may be entitled hereunder.

11. COVENANT NOT TO COMPETE . In order to protect the value of Employer’s business and of Employer’s stock, Employee covenants and agrees that Employee will not, either directly or indirectly, own, manage, operate, join, control, or participate in the ownership, management, operation or control of any business which engages in any business similar to, or which competes with Employer, for a period of one year after the termination of Employee’s employment.

Employee further covenants and agrees that Employee will not, during the period of noncompetition, lend Employee’s credit or money for the purpose of establishing or operating any such business described hereinabove, nor give advice, either directly or indirectly, to any person, firm, association, corporation, or other business entity engaged in or engaging in such business; provided however, that Employee may trade, sell, or otherwise deal in publicly-traded securities for Employee’s benefit.

12. RESTRICTIVE COVENANTS . The parties believe that the restrictive covenants contained in Sections 5, 6, 7 and 11 of this Agreement are reasonable. However, if any court having jurisdiction shall, at any time, hold such covenants to be unenforceable or unreasonable, whether as to scope, territory, or period of time as specified, then such court shall declare or determine the scope, territory, or period of time which it deems reasonable.

13. SEVERABILITY . Except as otherwise provided in this Agreement, if any term or provision of this Agreement shall to any extent be determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Agreement shall not be effected thereby, and each term and provision of this Agreement shall be valid and be enforceable to the fullest extent permitted by law.

14. CHOICE OF LAW . It is the intention of the parties hereto that this Agreement and the performance hereunder and all suits and special proceedings hereunder be construed in accordance with and pursuant to the laws of the State of Washington.

15. BINDING EFFECT . This agreement shall bind Employer and its successors, assigns, agents, and representatives.

16. ATTORNEY’S FEES . If any action is commenced to enforce any of the provisions of this Agreement, the prevailing party shall, in addition to its other remedies, be entitled to recover reasonable attorney’s fees.

17. ADVICE OF COUNSEL . Employee acknowledges that Employee has had the opportunity to consult with counsel of his own choosing in the negotiation and preparation of this agreement; that employee has carefully read and fully understands its contents and its legal effect; and that employee enters into this agreement freely, voluntarily and without coercion.

IN WITNESS WHEREOF, the undersigned parties to this Agreement hereinabove expressed, have entered into this Agreement without reservation and have read the terms herein.


EMPLOYEE:	EMPLOYER:

	Key Tronic Corporation
/s/ Douglas G. Burkhardt
Douglas G. Burkhardt

	By:	/s/ Jack W. Oehlke
		Jack W. Oehlke
	Its:	President and CEO

WITNESS:

/s/ Curtis L. Erickson

Exhibit 10.38

VOLUME SIX HUNDRED FORTY NINE

NUMBER: 40,375 (FORTY THOUSAND THREE HUNDRED SEVENTY FIVE) .

In Ciudad Juarez, State of Chihuahua, on July 2, 2010, before me, Mr. LEOPOLDO GOMEZ MELENDEZ , Notary Public Applicant Ascribed to Notary Public Number Twenty Eight due to temporary absence of Mr. OSCAR CAYETANO BECERRA TUCKER, Notary Public Number Twenty Eight, in exercise for this Bravos Judicial District, acting in the Ordinary Open Protocol, I attest the PURCHASE AND SALE AGREEMENT entered into on one part by the company AUTOPARTES Y ARNESES DE MEXICO, SOCIEDAD ANONIMA DE CAPITAL VARIABLE , hereinafter referred to as the “SELLER”, represented by its legal representative Mr. LUIS MIGUEL FOURZAN FIERRO; and on a second part the company KEYTRONIC JUAREZ, SOCIEDAD ANONIMA DE CAPITAL VARIABLE , hereinafter referred to as the “BUYER”, represented by its legal representative Mr. RICARDO HERNANDEZ OÑATE, which is granted t pursuant to the following recitals and clauses:

R E C I TA L S

FIRST. The SELLER declares, through its appearing legal representative, that:

a) It is a company duly incorporated and existing pursuant to the laws of the Mexican United States (hereinafter “México”), and that it has the authority and capacity to execute this Agreement and to abide to its terms and conditions.

b) It is the owner and has the possession and full domain of two tracts of land (hereinafter referred to as “Land One” and “Land Two” and jointly referred to as the “LAND”) located in PARQUE INDUSTRIAL GEMA located in this city which are identified as follows:

b.1) Land One has a surface area of 27,596.122 square meters and the following meets and bounds: Partiendo del punto numero uno del polígono, localizando en la esquina que forman al juntarse las Calles Magneto y Chamizal, al dos, rumbo SE 86º45’, se miden ciento treinta y un metros ochenta y siete centímetros; linda con Calle Magneto; del dos al tres con un ángulo de 89º44’, un radio de veintidós metros cincuenta centímetros, en línea curva se miden treinta y cinco metros veinticuatro centímetros, linda con el punto de intersección que forman al juntarse las Calles Magneto y De Los Deportistas; del tres al cuatro rumbo SW 02º59’, se miden ciento treinta y siete metros sesenta centímetros, linda con propiedad de PIMSA; del cuatro al cinco rumbo SW 10º16’, se miden diecinueve metros treinta y tres centímetros, linda propiedad de PIMSA; del cinco al seis rumbo NW 86º45’, se miden ciento cincuenta y dos metros setenta y nueve centímetros, linda con propiedad particular; y del seis al uno de partida para cerrar la figura rumbo NE 3º15’, se miden ciento setenta y nueve metros treinta centímetros, linda con Calle Chamizal .

b.2) Land Two has a surface area of 2,356.202 square meters, and the following meets and bounds: del punto uno al punto dos con un ángulo de 40º07’10”, radio de setenta metros, en línea curva se miden cuarenta y nueve metros quince milímetros; del dos al tres rumbo SE 42º08’00”, se miden diez metros quinientos cincuenta y dos milímetros; del tres al cuatro con un ángulo de 90º07’25”, un radio de veintiocho metros, en línea curva se miden cuarenta y cuatro metros y cuarenta y tres milímetros; del cuatro al cinco rumbo SW 47º05’20”, se miden diez metros; del cinco al seis con un ángulo de 38º37’44”, un radio de sesenta y cinco metros, en línea curva se miden cuarenta y tres metros ochocientos veintitrés milímetros; del seis al siete rumbo SW 07º38’05”, se miden catorce metros setecientos un milímetros; lindando por todas estas medidas con calle de los deportistas; y del siete al uno de partida para cerrar la figura rumbo NE 03º21’42”, se miden ciento cincuenta y siete metros trescientos ochenta y cinco milímetros, linda con la propiedad de Autopartes y Arneses de México, S.A. de C.V.

c)	It acquired the LAND as follows:

1. Land One was acquired through Public Deed number 9,311, dated May 15, 1995, issued by Mr. Aureliano Gonazalez Baz, Notary Public Number 1 for the Bravos District, State of Chihuahua, recorded with the Public Registry of Property under number 1487, page 86 book 2267, section first, on November 23, 1995, same which contains the transfer of a real estate property through the total execution of a trust and extinction entered into with Banco Nacional de Mexico, S.A. regarding a plot of land with a surface area of 27,596.122.

2. Land Two was acquired through Public Deed number 14,523, dated November 15, 1995, issued by Mr. Oscar Becerra Tucker, Notary Public number 28, acting within the protocol of Mr. Eduardo Romero Ramos, Notary Public Number 4 for the Bravos District, State of Chihuahua, through which Parques Industriales Mexicanos transferred Land Two through a purchase and sale entered into by Autopartes y Arneses de Mexico, S.A. dec.V. as buyer and by Parques Industriales Mexicanos S.A. de C.V. as seller. Such Public Deed was recorded with the Public Registry of Property under number 848, page 52 book 2288, section I, on April 3, 1996.

On Land One there is an industrial building owned by the SELLER with an approximate surface area of 10,518.48 square meters. On Land Two there is an industrial building owned by the SELLER with a total approximate surface area of 143.85 square meters. The buildings mentioned in this Clause shall be referred to as the “BUILDING” or the “BUILDINGS”. For purposes of clarity the LAND and the BUILDING shall be hereinafter jointly referred to ass the “PROPERTY”.

e)	All constructions made on the LAND have been recorded with the respective Property Tax Office and all the corresponding Property Taxes for the BUILDING and any additions or improvements thereto have been paid by the SELLER.

The PROPERTY is free of liens and limitations of domain and up to date in the payment of its tax obligations, as evidenced with the lack of liens certificate and with the receipts of the payments of the Real Property Tax and water supply, which certified copies are attached to the appendix of this volume of my protocol under the number hereinafter established.

g)	The PROPERTY will be transferred to the BUYER with all with all existing easements to its property line for access, water, sewer, storm drainage, electricity, telephone service, natural gas and any other currently existing utilities.

h)	All public utilities are up to date in their payments and are separately metered. Specifically the BUILDING has 623 KVA’s of electricity.

The PROPERTY is zoned for industrial use and has complied with all the applicable environmental laws, as evidenced in the use of land certificates issued by the Local Municipal Authorities, which certified copy is attached to the appendix of this volume of my protocol under the number hereinafter established.

There is no litigation pending pursuant to which the SELLER has been served or has otherwise been given notice or become aware of its existence, and, there is no litigation threatened nor is there any pending or threatened governmental or administrative proceeding which might materially affect SELLER’s title to the PROPERTY or ability to perform its obligations hereunder.

k)	The PROPERTY is not currently leased.

l)	The representative of the SELLER is duly authorized to act on behalf of the SELLER through power of attorney for acts of domain issued through the public deed included in the certification of documents that I attach to the appendix of this public deed under the number hereinafter established.

m)	It wishes to enter into this Agreement and sell the PROPERTY to the BUYER subject to the terms and conditions hereinafter set forth.

SECOND. The BUYER declares, through its legal representative, that:

a)	It is a company duly incorporated and existing pursuant to the laws of Mexico and has the authority and capacity to enter into this Agreement and to abide to its terms and conditions.

b)	It wishes to enter into this Agreement and purchase the PROPERTY pursuant to the terms and conditions hereinafter set forth.

The representative of the BUYER is duly authorized to act on behalf of the BUYER through power of attorney for acts of management issued through the public deed included in the certification of documents that I attach to the appendix of this public deed under the number hereinafter established, and therefore is able to execute this Agreement on its behalf.

THIRD. The parties jointly declare and state, that:

a)	They recognize the legal existence of each one and the legal representation of their representatives.

b)	Regarding the execution hereof, there has been no bad faith, error, deceit or duress that could invalidate or null the same.

Given the above, the parties hereto grant the following:

C L A U S E S

FIRST . AUTOPARTES Y ARNESES DE MEXICO, SOCIEDAD ANONIMA DE CAPITAL VARIABLE , through its appearing legal representative, SELLS to KEYTRONIC JUAREZ, SOCIEDAD ANONIMA DE CAPITAL VARIABLE the PROPERTY with the meets and bounds described paragraphs b.1 and b.2 of First Recital hereof, which are hereby reproduced as if they were literally inserted, as is, ad-corpus, with everything that in fact and by law belongs to the PROPERTY, free of liens and other limitations of domain, and up to date on the payment of its tax obligations, and covenants and agrees to indemnify, protect, hold harmless and defend the BUYER against any rights of third parties to possession

SECOND . The BUYER hereby acquires the PROPERTY as is, ad-corpus, and receives material and legal possession of the PROPERTY, to its full satisfaction.

THIRD. The PROPERTY is hereby be conveyed to the BUYER with all existing easements to its property line for access, water, sewer, storm drainage, electricity, telephone service, natural gas and any other currently existing at the BUILDING.

FOURTH. The parties agree that the items included in the list that is attached to the appendix of this deed with the corresponding letter, are not part of this transaction and shall remain property of the SELLER.

FIFTH. The SELLER hereby assigns all rights regarding public services of the PROPERTY in favor of the BUYER. Specifically, the SELLER hereby assigns and transfer as part of the PROPERTY subject matter of this agreement, the total hired capacity of electricity, including KVA’s that currently correspond to the PROPERTY. SELLER agrees to execute all documents required to transfer the rights of such services and to provide all required assistance to the BUYER so that it may finalize such transfer after the execution hereof.

SIXTH. The agreed price for the PROPERTY is the amount of USD$2,238,112.59 (TWO MILLION TWO HUNDRED THIRTY EIGHT THOUSAND ONE HUNDRED TWELVE DOLLARS AND 59/100 LEGAL CURRENCY OF THE UNITED STATES OF AMERICA) (hereinafter the “PURCHASE PRICE”), plus the Value Added Tax that corresponds to the BUILDINGS, and shall be paid as follows:

I. The SELLER has received the amount of USD$1,566,678.82 (ONE MILLION FIVE HUNDRED SIXTY SIX THOUSAND SIX HUNDRED SEVENTY EIGHT DOLLARS 82/100 LEGAL CURRENCY OF THE UNITED STATES OF AMERICA), same which represents 70% seventy per cent of the PURCHASE PRICE, the SELLER hereby issues the broadest receipt allowed by law for such amount and waives any legal action that it may have against the BUYER regarding the payment of such amount.

The payment of the amount of USD$671,433.78 (SIX HUNDRED SEVENTY ONE THOUSAND FOUR HUNDRED THIRTY THREE DOLLARS 78/100 LEGAL CURRENCY OF THE UNITED STATES OF AMERICA), or its equivalent in pesos legal currency of the Mexican United States, which represents the remaining 30% thirty percent of the PURCHASE PRICE, shall be paid on or before January 4, 2011. Said payment shall be guaranteed by the BUYER through an irrevocable standby letter of credit issued in favor of the SELLER, same which will have immediate availability of funds. Such letter of credit shall be delivered to the SELLER by the BUYER at the latest on July 8, 2010. In the event that the SELLER does not make payment of the balance of the Purchase Price to the SELLER, the SELLER may present the letter of credit for payment through a simple notice in writing delivered to the issuing bank and the BUYER shall not interfere nor object the corresponding payment to the SELLER.

II. The parties declare that of the PURCHASE PRICE, the amount of USD$1,116,468.30 (ONE MILLION ONE HUNDRED SIXTEEN THOUSAND FOUR HUNDRED SIXTY EIGHT DOLLARS 30/100 LEGAL CURRENCY OF THE UNITED STATES OF AMERICA), equivalent to the amount of $14,340,030.43 pesos (FOURTEEN MILLION THREE HUNDRED FORTY THOUSAND THIRTY PESOS 43/100 LEGAL CURRENCY OF THE UNITED MEXICAN STATES), corresponds to the LAND, and the amount of USD$1,121,644.30 (ONE MILLION ONE HUNDRED TWENTY ONE THOUSAND SIX HUNDRED FORTY FOUR DOLLARS 30/100 00/100 LEGAL CURRENCY OF THE UNITED STATES OF AMERICA), equivalent to the amount of $14,406,511.52 pesos (FOURTEEN MILLION FOUR HUNDRED SIX THOUSAND FIVE HUNDRED ELEVEN PESOS 52/100 LEGAL CURRENCY OF THE UNITED MEXICAN STATES), correspond to the BUILDINGS, therefore the Value Added Tax that is transferred pursuant to Article 11 of the Value Added Law, is the amount of USD$179,463.09 (ONE HUNDRED SEVENTY NINE THOUSAND FOUR HUNDRED SIXTY THREE DOLLARS 09/100 LEGAL CURRENCY OF THE UNITED STATES OF AMERICA), therefore the payment of such tax shall be made by the BUYER on the same manner and dates and in the proportion agreed for the payment of the PURCHASE PRICE in this Clause Sixth of this Agreement. For clarity purposes, the PURCHASE PRICE for the BUILDING located in LAND ONE is the amount of USD$1,106,512.19 (ONE MILLION ONE HUNDRED SIX THOUSAND FIVE HUNDRED TWELVE DOLLARS 19/100 LEGAL CURRENCY OF THE UNITED STATES OF AMERICA) equivalent to the amount of $14,212,153.22 pesos (FOURTEEN MILLION

TWO HUNDRED TWELVE HUNDRED ONE HUNDRED FIFTY THREE PESOS 22/100 LEGAL CURRENCY OF THE MEXICAN UNITED STATES), to such amount corresponds a Value Added Tax of $2,273,944.52 pesos (TWO MILLION TWO HUNDRED SEVENTY THREE THOUSAND NINE HUNDRED FORTY FOUR PESOS 52/100 LEGAL CURRENCY OF THE UNITED MEXICAN STATES). The PURCHASE PRICE for the BUILDING located in LAND TWO is the amount of USD$15,132.11 (FIFTEEN THOUSAND ONE HUNDRED THIRTY TWO DOLLARS 11/100 LEGAL CURRENCY OF THE UNITED STATES OF AMERICA) equivalent to $194,358.33 pesos (ONE HUNDRED NINETY FOUR THOUSAND THREE HUNDRED FIFTY EIGHT DOLLARS 33/100 LEGAL CURRENCY OF THE UNITED MEXICAN STATES), to such amount corresponds a Value Added Tax of $31,097.33 pesos (THIRTY ONE THOUSAND NINETY SEVEN PESOS 33/100 LEGAL CURRENCY OF THE MEXICAN UNITED STATES).

SEVENTH. The BUYER assumes the obligation to pay all expenses taxes, costs and fees derived from the issuance of this deed, including without limited to all appraisals, notarial fees, registration costs, taxes and expenses related to the execution and registration of this deed, except for the income tax which shall be paid by the SELLER.

Regarding the above, each party shall pay the fees, expenses and costs of their respective accounting, legal, environmental, engineering and other advisers required for the execution of this instrument.

EIGHTH. The parties agree to prorate all property taxes, utilities and other charges applicable to the PROPERTY as of this date. The prorating shall be made on the basis of a 365 day year, as of 12:01 a.m. of today. If the amount of taxes, maintenance fees, and other amounts are not known at this time, the parties agree that they shall be readjusted (payment or reimbursement) as soon as the amounts of such taxes, maintenance fees or other amounts are known, in accordance with the evidence presented. The prorating shall be made according with the number of days of the year during which each one of the parties was the owner of the PROPERTY. This Clause shall survive the execution hereof.

NINTH. Whenever it shall be necessary or desirable for either of the parties to serve any notice upon the other party pursuant to the provisions of this Deed, such notice shall be in writing and be either served personally or sent by registered or certified mail, return receipt requested to the addresses set forth herein until otherwise directed in writing by the party that wishes to change its address:

To the SELLER: AUTOPARTES Y ARNESES DE MÉXICO, SOCIEDAD ANÓNIMA DE CAPITAL VARIABLE, Ave de la Industria 4250, Parque Industrial Juárez, C.P. 32630, Ciudad Juárez, Chihuahua. Attn: Ingeniero Luis Miguel Fourzan. With copy to: Baker & McKenzie, Paseo Triunfo de la Republica 3304, Colonia Partido Escobedo, Ciudad Juárez, Chihuahua, Attn:: Irlanda Torres Lara.

To the BUYER: KEY TRONIC JUAREZ, SOCIEDAD ANÓNIMA DE CAPITAL VARIABLE, Calle Magneto 7824, Parque Industrial Gema, Ciudad Juárez, Chihuahua, Attn: Mr. Ricardo Hernandez. With a copy to: KEY TRONIC CORPORATION. North 4424 Sullivan Road, Spokane, WA 99216, Attn: Kathleen Nemeth. With a copy to: TOULET, GOTTFRIED, DAVILA Y MARTINEZ, Boulevard Tomas Fernandez 7939-209, Building “B”, Ciudad Juarez, Chihuahua, zip code 32460, Attn: Alejandro Toulet.

TENTH. The BUYER agrees to destine the PROPERTY acquired hereby for industrial purposes or for any other legally permitted purpose, and agrees to comply with the Urban Development Law for the State of Chihuahua and other applicable provisions in force for human settlement issues.

ELEVENTH. The SELLER hereby covenants and agrees to hold the BUYER harmless and to indemnify it against any claim, action, petition, lawsuit, payment and/or liability presented, collected or imposed against it by any authority or governmental entity of administrative, legislative or judicial nature due to any deficiency, error, omission or inaccuracy incurred in the computation and/or payment of the property taxes of the Property to the date of execution hereof, or in the accurate and timely declaration and manifestation to said authorities of the information required for the adequate and correct computation of such property taxes, until and including the date of execution hereof.

TWELFTH. The appearing parties accept this deed in all and each one of its parts, given that it has been drafted in accordance with their agreements; and for everything related to this agreement the parties hereby expressly submit to the provisions of the Civil Code in force in the State of Chihuahua and to the jurisdiction of the Courts of Ciudad Juarez, State of Chihuahua, expressly waiving any other jurisdiction that may correspond to them due to their future or present domiciles.

THIRTEENTH. Given that the SELLER has filed a request of Site Abandonment Study with the corresponding environmental authorities, but as of the date hereof, the corresponding visit to the Property by the authorities has not taken place, the parties agree that the BUYER shall grant access and assistance to the environmental authorities and personnel of the SELLER in order for them to perform an inspection to the premises as required by the authority to be able to issue the Acuerdo de Archivo of the Site Abandonment Study of the PROPERTY. In the event that the authority does not issue the Acuerdo de Archivo of the Site Abandonment Study of the Property for any reason before January 4, 2011, the Seller covenants and agrees to keep the Buyer harmless and indemnify it against any claim, suit, demand, liability, payment or disbursement that is required from it by any bounding third party or competent authority for any direct or indirect breach or infringement of any legal provision of environmental nature that took place and that affects the Property or any person or entity before the date of execution hereof.-----------------------------------------

FOURTEENTH. The possession of the Property is hereby delivered by the SELLER to the BUYER, which receives same to its satisfaction. The BUYER will allow the SELLER to occupy the administrative offices of the Property for a maximum term of 30 calendar days, as of the date of execution hereof, same term that is granted to allow the SELLER to vacate the premises together with the personal property of its ownership. Seller must stay within the area of the PROPERTY designated by the BUYER. In the event the Seller remains occupying the administrative offices of the Property or has not removed its property from the premises, it pay a contractual penalty to the Buyer, equivalent to USD$1,000.00 (ONE THOUSAND DOLLARS 00/100 LEGAL CURRENCY OF THE UNITED STATES OF AMERICA) per each day during which it exceeds the term mentioned in this Clause, same which may be deducted from the amounts due to the Seller by the Buyer. The Seller covenants and agrees to not interfere in any way with the activities of the Buyer at the premises after the date of execution hereof, and agrees and recognizes that its only function at the premises after the date of execution of this agreement will be performing administrative office work within the currently occupied

area, packing and moving of its office equipment, files, and other office furniture, raw materials and equipment property of the SELLER which is currently located at the manufacturing area, same activities which it shall conclude within the specified term of 30 calendar days after the execution of this instrument.

The SELLER hereby covenants and agrees to indemnify the BUYER from and against any damage caused to the PROPERTY while its representatives, agents and employees have a presence thereat during the mentioned 30 calendar day term. The SELLER hereby covenants and agrees to hold the BUYER harmless against any liability, suit, claim or payment of any nature imposed, filed or charged against it by any party or authority for reason of any injury or accident, suffered by any of the agents, representatives and/or employees of the SELLER while they have a presence at the PROPERTY, including any increase in the labor risk insurance premium of the BUYER. Furthermore, the SELLER shall indemnify the BUYER against any damages and loss of business caused to by any labor stoppage or strike filed by SELLER’s employees that for any reason affects the operation of the BUYER at the Property.

EXHIBIT 21

Subsidiaries of Registrant


1.	KT Services, Inc.	2.	Key Tronic Juarez, SA de CV
	100% owned subsidiary		100% owned subsidiary
	Incorporated in the State of Washington		Incorporated in Mexico

3.	Key Tronic China LTD	4.	Key Tronic Computer Peripherals (Shanghai) Co. LTD
	100% owned subsidiary		100% owned subsidiary
	Incorporated in the State of Washington		Incorporated in Republic of China

5.	Key Tronic Reynosa, S.A. de CV*
	100% owned subsidiary
	Incorporated in Mexico

*	We anticipate that this particular subsidiary will cease its operations during fiscal year 2011 and no longer an active operating division in October 2010.

EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Key Tronic Corporation

Spokane Valley, Washington

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-159582, 333-70917, and 333-61202) of Key Tronic Corporation and subsidiaries of our report dated September 13, 2010, relating to the consolidated financial statements and financial statement schedules, which appears in this Form 10-K.

/s/ BDO USA, LLP

September 13, 2010

Spokane, Washington

EXHIBIT 31.1

CERTIFICATION

I, Craig D. Gates, President and Chief Executive Officer of Key Tronic Corporation, certify that:

(1)

I have reviewed this annual report on form 10-K of Key Tronic Corporation;

(2)

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

(3)

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

(4)

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)) for the registrant and have:

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

designed such control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles,

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

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

(5)

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

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

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

Dated: September 13, 2010

/s/ Craig D. Gates

Craig D. Gates

President and Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION

I, Ronald F. Klawitter, Chief Financial Officer of Key Tronic Corporation, certify that:

(1)

I have reviewed this annual report on form 10-K of Key Tronic Corporation;

(2)

(3)

(4)

(5)

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

Dated: September 13, 2010

/s/ Ronald F. Klawitter

Ronald F. Klawitter

Executive Vice President of Administration,

Chief Financial Officer and Treasurer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Key Tronic Corporation (the “Company”) on Form 10-K for the year ended July 3, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Craig D. Gates, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: September 13, 2010

/s/ Craig D. Gates

Craig D. Gates

President and Chief Executive Officer

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Key Tronic Corporation (the “Company”) on Form 10-K for the year ended July 3, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Ronald F. Klawitter, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: September 13, 2010

/s/ Ronald F. Klawitter

Ronald F. Klawitter

Executive Vice President of Administration,

Chief Financial Officer and Treasurer