KULICKE & SOFFA INDUSTRIES INC - 10-Q Quarterly Report

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

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

As of May 1, 2003, there were 49,732,944 shares of the Registrant’s Common Stock, without par value outstanding.

The accompanying notes are an integral part of these consolidated financial statements.

The condensed consolidated financial statement information included herein is unaudited, but in the opinion of management, contains all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position at March 31, 2003, and the results of its operations for the three and six month periods ended March 31, 2002 and 2003 and its cash flows for the six month periods ended March 31, 2002 and 2003. These financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2002.

Asset Retirement Obligations—In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets This standard provides guidance for financial reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It also provides guidance for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessors. The Company adopted this standard effective October 1, 2002 and the adoption did not have a significant impact on its financial position and results of operations, however this standard could impact the Company’s financial position and results of operations in future periods.

Impairment and Disposal of Long-Lived Assets—In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets which supersedes FASB 121, Accounting for the Impairment of Long-Lived Assets and for Assets to Be Disposed Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. This standard applies to all long-lived assets and requires that the assets to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. The Company adopted this standard effective October 1, 2002 and the adoption did not have a material impact on its financial position and results of operations, however this standard could impact the Company’s financial position and results of operations in future periods.

Accounting for Costs Associated with Exit or Disposal Activities—In June 2002, the FASB issued SFAS 146, Accounting for Exit or Disposal Activities which addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in EITF 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The standard will be effective for exit or disposal activities that are initiated after December 31, 2002. The Company has adopted this standard and does not expect the adoption will have a significant impact on its financial position and results of operations, however, this standard will in certain circumstances change the timing of recognition of restructuring costs.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires a company (“the guarantor”) to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee. The Interpretation also incorporates, without change, the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others “ which is being superseded. The recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company has adopted this standard and the adoption did not have a significant impact on its financial position and results of operations, however this standard could impact the Company’s financial position and results of operations in future periods.

employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The standard is effective for financial statements for fiscal years ending after December 15, 2002. The Company has adopted the disclosure provisions of this standard.

At March 31, 2003, the Company had six stock-based employee compensation plans and two director compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee or director compensation cost is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and earning (loss) per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee and director compensation:

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company believes that the adoption of this standard will have no material impact on its consolidated financial statements.

Reclassifications—Certain amounts in the Company’s prior fiscal year financial statements have been reclassified to conform to their presentation in the current fiscal year.

Effective October 1, 2001, the Company adopted SFAS 142, Goodwill and Other Intangible Assets. The intangible assets that are classified as goodwill and those with indefinite lives will no longer be amortized under the provisions of this standard. Intangible assets with determinable lives will continue to be amortized over their estimated useful

life. The standard also requires that an impairment test be performed to support the carrying value of goodwill and intangible assets at least annually.

In fiscal 2002, the Company reviewed its business and determined that there are five reporting units to be reviewed for impairment in accordance with the standard – the reporting units were: the bonding wire, hub blade, substrate, flip chip and test businesses. The bonding wire and hub blade businesses are included in the Company’s packaging materials segment, the substrate and flip chip businesses were included in the Company’s advanced packaging segment and the test business comprises the Company’s test segment. There is no goodwill associated with the Company’s equipment segment. Upon adoption of SFAS 142 in the first quarter of fiscal 2002, the Company completed the required transitional impairment testing of intangible assets, and based upon those analyses, did not identify any impairment charges as a result of adoption of this standard effective October 1, 2001.

Upon adoption of the standard, the Company reclassified $17.2 million of intangible assets relating to an acquired workforce in the test reporting unit into goodwill and correspondingly reduced goodwill by $4.9 million of goodwill associated with a deferred tax liability established for timing differences of U.S. income taxes on the workforce intangible. In fiscal 2002, the Company reduced goodwill associated with the test reporting unit by $1.5 million reflecting the settlement of a purchase price dispute with the former owners of Probe Technology.

The Company has determined that its annual test for impairment of intangible assets will take place at the end of the fourth quarter of each fiscal year, which coincides with the completion of its annual forecasting process. Due to the severity and the length of the current industry downturn and uncertainty of the timing of improvement in industry conditions the Company revised its earnings forecasts for each of its business units that were tested for impairment in the fourth quarter of fiscal 2002. As a result, in fiscal 2002, the Company discontinued its substrate business and wrote-off intangible assets of $1.1 million and recognized a goodwill impairment loss of $72.0 million in its test reporting unit and a goodwill impairment loss of $2.3 million in its hub blade reporting unit. The fair value of each reporting unit was estimated using the expected present value of future cash flows.

The following table outlines the components of goodwill and intangible assets by business segment at March 31, 2003 after adoption of the standard and recognition of the goodwill impairment in fiscal 2002:

The gross carrying amount and accumulated amortization of the intangible assets at March 31, 2003 are as follows:

The aggregate amortization expense related to these intangible assets for the three months and six months ended March 31, 2003 was $2.3 million and $4.6 million, respectively ($2.5 million and $5.0 million for the three and six months ended March 31, 2002). The annual amortization expense, related to these intangible assets, for each of the next five fiscal years will be $9.2 million.

Basic net income (loss) per share (“EPS”) is calculated using the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net income (loss) per share assumes the exercise of stock options and the conversion of convertible securities to common shares unless the inclusion of these will have an anti-dilutive impact on net income (loss) per share. In addition, in computing diluted net income per share if convertible securities are assumed to be converted to common shares the after-tax amount of interest expense recognized in the period associated with the convertible securities is added back to net income. For the three and six months ended March 31, 2002 and 2003, the exercise of stock options and the conversion of the convertible subordinated notes were not assumed since their conversion to common shares would have an anti-dilutive effect on net loss per share.

Due to the Company’s net loss for the three and six months ended March 31, 2002 and 2003, potentially dilutive securities are deemed to be anti-dilutive. The weighted average number of shares for potentially dilutive securities (convertible notes and employee and director stock options) was 15,786,000 and 15,433,000 for the three and six months ended March 31, 2002 and 14,833,472 and 14,682,585 for the three and six months ended March 31, 2003, respectively.

cost containment activities including downsizing and facility consolidations. Accounting for resizing activities requires an evaluation of formally agreed upon and approved plans. Although the Company makes every attempt to consolidate all known resizing activities into one plan, the extreme cycles and rapidly changing forecasting environment places limitations on achieving this objective. The recognition of a resizing event does not necessarily preclude similar but unrelated actions in future periods.

In addition to the resizing costs identified below, the Company continued to downsize its operations in fiscal 2003. These downsizing efforts resulted in workforce reduction charges of $1.9 million and $3.5 million in the three and six months ended March 31, 2003. These workforce reduction charges were recorded as Selling, General and Administrative expenses.

In the first quarter of fiscal 2003 the Company reversed $205 thousand of resizing charges previously recorded during the third and fourth quarters of fiscal 2002 due to the actual severance cost associated with the terminated positions being less than those originally estimated.

In the fourth quarter of fiscal 2002, the Company announced that it would close its substrate operations due to its high capital and operating cash requirements. As a result, the Company recorded a resizing charge of $8.5 million. The resizing charge included a severance charge of $1.2 million for the elimination of 48 positions and lease obligations of $7.3 million. At March 31, 2003 all the positions have been eliminated. Cash payments for the severance charge are expected to be complete by September 30, 2003 but cash payments for the lease obligations are expected to continue into 2006, or such time as the obligations can be satisfied. In addition to these resizing charges, in the fourth quarter of fiscal 2002, the Company wrote-off $7.3 million of fixed assets and $1.1 million of intangible assets associated with the closure of the substrate operation.

The resizing costs were included in accrued liabilities. The table below details the activity related to this resizing program during fiscal 2002 and 2003.

In the third quarter of fiscal 2002, the Company announced a resizing plan to reduce headcount and consolidate manufacturing in its test division. The resizing plan was a result of the Company’s decision to move towards a 24 hour per-day manufacturing model in its major U.S. wafer test facility, which will provide its customers with faster turn-around time and delivery of orders and economies of scale in manufacturing. As part of this plan, the Company moved manufacturing of wafer test products from its facilities in Gilbert, Arizona and Austin, Texas to its facility in San Jose, California and Dallas, Texas and from its Kaohsuing, Taiwan facility to its Hsin Chu, Taiwan facility. The resizing plan includes a severance charge of $1.6 million for the elimination of 149 positions as a result of the manufacturing consolidation. At December 31, 2002, all of the positions had been eliminated. The resizing plan also includes a charge of $0.5 million associated with the closure of the Kaohsuing, Taiwan facility and an Austin, Texas facility representing costs of non-cancelable lease obligations beyond the facility closure and costs required to restore the production

facilities to their original state. Both facilities have been closed. The plans have been completed but cash payments for the severance and facility and contractual obligations are expected to continue through 2005, or such time as the obligations can be satisfied.

The resizing costs were included in accrued liabilities. The table below details the activity related to this resizing program during fiscal 2002 and 2003.

In the second quarter of fiscal 2002, the Company announced a resizing plan comprised of a functional realignment of business management and the consolidation and closure of certain facilities. In connection with the resizing plan, the Company recorded a charge of $11.3 million, consisting of severance and benefits of $9.7 million for 372 positions that were to be eliminated as a result of the functional realignment, facility consolidation, the shift of certain manufacturing to China (including our hub blade business) and the move of the Company’s microelectronics products to Singapore and a charge of $1.6 million for the cost of lease commitments beyond the closure date of facilities to be exited as part of the facility consolidation plan.

To reduce the Company’s short term cash requirements, the Company decided, in the fourth quarter of fiscal 2002, not to relocate either its hub blade manufacturing facility from the United States to China or its microelectronics product manufacturing from the United States to Singapore, as previously announced. This change in the Company’s facility relocation plan resulted in a reversal of $1.6 million of the resizing costs recorded in the second quarter of fiscal 2002.

As a result of the functional realignment, the Company terminated employees at all levels of the organization from factory workers to vice presidents. The organizational change shifted management of the Company businesses to functional (i.e. sales, manufacturing, research and development, etc.) areas across product lines rather than by product line. For example, research and development activities for the entire company are now controlled and coordinated by one corporate vice president under the functional organizational structure, rather than separately by each business unit. This structure provides for a more efficient allocation of human and capital resources to achieve corporate R&D initiatives.

In the second quarter, the Company closed five test facilities: two in the United States, one in France, one in Malaysia, and one in Singapore. These operations were absorbed into other company facilities. The resizing charge for the facility consolidation reflects the cost of lease commitments beyond the exit date that is associated with these closed test facilities.

The plans have been completed but cash payments for the severance charges and the facility and contractual obligations are expected to continue through 2004, or such time as the obligations can be satisfied.

In the fourth quarter of fiscal 2002, the Company reversed $600 thousand of resizing expenses, previously recorded in the second quarter, due to actual severance costs associated with the terminated positions being less than those estimated as a result of employees leaving the Company before they were severed.

The resizing costs were included in accrued liabilities. The table below details the activity related to this resizing program during fiscal 2002 and 2003.

In the quarter ended September 30, 2001, the Company announced a resizing plan to close a bonding wire facility in the United States, and recorded a resizing charge for severance of $2.4 million for the elimination of 215 positions, all of which had been terminated at September 30, 2002. Also in the fourth quarter of fiscal 2001, the Company recorded an increase to goodwill of $0.8 million in connection with the acquisition of Probe Tech for additional lease costs associated with the elimination of four duplicate facilities in the United States. The plans have been completed but cash payments for the severance charge are expected to continue into 2004.

The resizing costs were included in accrued liabilities. The table below details the activity related to this resizing program during fiscal 2001, 2002 and 2003.

In the quarter ended March 31, 2001, the Company announced a 7.0% reduction in its workforce. As a result, the Company recorded a resizing charge for severance of $1.7 million for the elimination of 296 positions across all levels of the organization, all of which were terminated prior to March 31, 2002. In connection with the Company’s acquisition of Probe Tech, it also recorded an increase to goodwill for $0.6 million for severance, lease and other facility charges related to the elimination of four leased Probe Tech facilities in the United States which were found to

be duplicative with the Cerprobe facilities. The plans have been completed and there will be no additional cash obligations related to this program.

The resizing costs were included in accrued liabilities. The table below details the activity related to this resizing program during fiscal 2001, 2002 and 2003.

In the three months ended March 31, 2003, the Company recorded an asset impairment charge of $1.7 million associated with the discontinuation of a test product. In the three months ended March 31, 2002, the Company recorded an asset impairment of $4.9 million related to the cost of certain software which was made redundant by a company-wide integrated information system and the write-off of other assets that were associated with leased facilities to be exited as a result of its facility consolidation.

For the three and six month periods ended March 31, 2002 and 2003, the components of total comprehensive loss are as follows:

Operating results by business segment for the three and six-month periods ended March 31, 2003 and 2002 were as follows:

The Company has issued standby letters of credit to guarantee payments for employee benefit programs and a facility lease. The standby letters of credit were issued in lieu of cash security deposits.

The Company’s products are generally shipped with a one-year warranty against manufacturing defects and the Company does not offer extended warranties in the normal course of our business. The Company reserves for estimated warranty expense when revenue for the related product is recognized. The reserve for estimated warranty expense is based upon historical experience and management estimates of future expenses.

The table below details the activity related to the Company’s reserve for product warranty expense:

From time to time, third parties assert that the Company is, or may be, infringing or misappropriating their intellectual property rights. In such cases, the Company will defend against claims or negotiate licenses where considered appropriate. In addition, some of the Company’s customers are parties to litigation brought by the Lemelson Medical, Education and Research Foundation Limited Partnership (the “Lemelson Foundation”), in which the Lemelson Foundation claims that certain manufacturing processes used by those customers infringe patents held by the Lemelson Foundation. The Company has never been named a party to any such litigation. Some customers have requested that the Company indemnify them to the extent their liability for these claims arises from use of the Company’s equipment. The Company does not believe that products sold by us infringe valid Lemelson patents. If a claim for contribution was brought against the Company, the Company believes it would have valid defenses to assert and also would have rights to contribution and claims against the Company’s suppliers. The Company has never incurred any material liability with respect to the Lemelson claims or any other pending intellectual property claim and the Company does not believe that these claims will materially and adversely affect the Company’s business, financial condition or operating results. The ultimate outcome of any infringement or misappropriation

claim that might be made, however, is uncertain and the Company cannot assure you that the resolution of any such claim will not materially and adversely affect the Company’s business, financial condition and operating results.

The Company has received tax benefits of approximately $6.3 million from the Israeli government which are contingent upon the Company attaining certain sales and employment levels within Israel. The Company has not met all of the required sales and employment levels and may not be entitled to all of the tax benefits received to-date. In the quarter ended March 31, 2003, the Company recorded a reserve of $2.0 million against this potential tax liability. The Company expects to be able to successfully negotiate this matter with the Israeli government therefore the Company believes that any outcome will not have a future material and adverse affect on the Company’s business, financial condition and operating results, other than the amount being accrued.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In addition to historical information, this report contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the safe harbor provisions created by statute. Such forward-looking statements include, but are not limited to, statements that relate to our future revenue, product development, demand forecasts, competitiveness, gross margins, operating expenses and benefits expected as a result of:

Generally words such as “may,” “will,” “should,” “could,” “anticipate,” “expect,” “intend,” “estimate,” “plan,” “continue,” and “believe,” or the negative of or other variation on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements. These risks and uncertainties include, without limitation, those described below under the heading “Risk Factors” within this section and in our reports and registration statements filed from time to time with the Securities and Exchange Commission. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes on pages 6 to 16 of this Form 10-Q for a full understanding of our financial position and results of operations for the three and six month periods ended March 31, 2003.

We design, manufacture and market capital equipment, packaging materials and a broad range of fixtures used to test semiconductor wafers and devices, as well as apply solder bumps to silicon wafers (referred to as flip chip bumping) for sale to companies that manufacture and assemble semiconductor devices. We also service, maintain, repair and upgrade assembly equipment and license our flip chip bumping process technology.

We sell our products to semiconductor device manufacturers and contract manufacturers, which are primarily located in or have operations in the Asia/Pacific region. Sales to customers outside of the United States accounted for 79% of net sales in the first half of fiscal 2003 as compared to 67% of net sales in the first half of the prior fiscal year, and are expected to continue to represent a substantial portion of our future revenues. We have manufacturing operations in the United States, Singapore, Israel, China, France, Scotland, Switzerland and Taiwan; sales and customer support personnel in the United States, China, Hong Kong, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand and Europe; and applications labs in the United States, Singapore, Japan, Israel and Taiwan. We have recently built a manufacturing facility in Suzhou, China and are shipping capillaries from this facility. We expect to add additional manufacturing capabilities to this facility and to transition the manufacture of certain of our test products to

Historically, the demand for semiconductors and our semiconductor assembly equipment has been volatile, with sharp periodic downturns and slowdowns. For instance, a strong upturn in the semiconductor industry that started in fiscal 1999 resulted in record revenues and earnings in fiscal 2000. This industry upturn was followed by a severe industry downturn in fiscal 2001, fiscal 2002 and fiscal 2003 during which time we have reported significant reductions in sales and record net losses. In response to the downturn, we reduced the size of our company in fiscal 2001 and fiscal 2002 and continue to do so in fiscal 2003, to more closely align our cost structure with anticipated revenue levels. See “Resizing Costs” in “Results of Operations” of this section for a detailed description of the resizing programs we initiated in fiscal 2001 and 2002.

Our resizing efforts in the last two fiscal years yielded a 13.2% reduction in selling, general and administrative (“SG&A”) expense and a 22.5% reduction in research and development (“R&D”) expense in the first half of fiscal 2003 from the comparable period in the prior fiscal year, even though in the first half of fiscal 2003, SG&A expense included additional severance expense of $3.5 million, $1.1 million of China start-up expense and a $0.7 million charge for the early termination of an information technology services agreement.

In November 2002, we announced that we were evaluating various alternatives for our dicing and flip chip business units, including their potential sale. We are having discussions with potential buyers for each of these businesses while concurrently exploring other alternatives.

We design, manufacture and market semiconductor assembly equipment. Our principal product line is our family of wire bonders, which are used to connect extremely fine wires, typically made of gold, aluminum or copper, between the bonding pads on the die and the leads on the IC package to which the die has been bonded. We are the world’s largest manufacturer of wire bonders, according to VLSI Research, Inc. In fiscal 2003, we began shipping the Nu-Tek^™, a new automatic wire bonder designed for low lead applications, a segment of the market we had not previously targeted.

We manufacture and market a range of packaging materials to semiconductor device assemblers including very fine gold, aluminum and copper wire, capillaries, wedges, die collets and saw blades, all of which are used in the semiconductor packaging process. Our packaging materials are optimized for use with our wire bonders, to provide leading edge efficiencies and capabilities, as well as with our competitors’ assembly equipment.

Our test interconnect solutions provide a broad range of fixtures used to temporarily connect automatic test equipment to the semiconductor device under test during wafer fabrication (wafer probing) and after the semiconductor device has been assembled and packaged (package or final testing). Our products include probe cards, automatic test equipment (ATE) interface assemblies, ATE test boards, and test socket/contactors. Most of the test interconnect products we offer are custom designed or customized for a specific semiconductor or application.

In fiscal 2003, this business segment reflects the operating results of our flip chip business unit. Through our flip chip business unit we license flip chip technology and provide wafer bumping services and market a wafer level chip scale package (UltraCSP^{^®}). Our flip chip business unit has not been profitable to date. In November 2002, we announced that we were evaluating various alternatives for our flip chip business unit, including its potential sale. We are having discussions with a potential buyer for this business while concurrently exploring other alternatives.

The fiscal 2002 operating results of this business segment, included the results of our former high density substrate

business unit in addition to our flip chip business unit. In order to reduce costs, the high density substrate business unit was closed in the fourth quarter of fiscal 2002.

We believe the following accounting policy is critical to the preparation of our financial statements:

Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, the collectibility is reasonably assured, and we have satisfied any equipment installation obligations and received customer acceptance, or are otherwise released from our installation or customer acceptance obligations. In the event terms of the sale provide for a lapsing customer acceptance period, we recognize revenue based upon the expiration of the lapsing acceptance period or customer acceptance, whichever occurs first. Our standard terms are Ex Works (K&S factory), with title transferring to our customer at our loading dock or upon embarkation. We do have a small percentage of sales with other terms, and revenue is recognized in accordance with the terms of the related customer purchase order. Revenue related to services is generally recognized upon performance of the services requested by a customer order. Revenue for extended maintenance service contracts with a term of more than one month is recognized on a prorated straight-line basis over the term of the contract. Revenue from royalty arrangements and license agreements is recognized in accordance with the contract terms, generally prorated over the life of the contract or based upon specific deliverables. Our business is subject to contingencies related to customer orders as follows:

Generally accepted accounting principles require the use of estimates and assumptions that affect the reported amounts of assets and liabilities and 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. The more significant areas involving the use of estimates in these financial statements include allowances for uncollectible accounts receivable, reserves for excess and obsolete inventory, carrying value and lives of fixed assets, goodwill and intangible assets, valuation allowances for deferred tax assets and deferred tax liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which are the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We are also subject to concentrations of customers and sales to a few geographic locations, which may also impact the collectability of certain receivables. If economic or political conditions were to change in the countries where we do business, it could have a significant impact on the results of our operations, and our ability to realize the full value of our accounts receivable. Our average write-off of bad debts over the past five fiscal years has been less than 0.1% of net sales.

Inventory Reserves. We generally provide reserves for equipment inventory and spare part and consumable inventories considered to be in excess of 18 months of forecasted future demand. The forecasted demand is based upon internal projections, historical sales volumes, customer order activity and a review of consumable inventory levels at our customers’ facilities. We communicate forecasts of our future demand to our suppliers and adjust commitments to those suppliers accordingly. If required, we reduce the carrying value of our inventory to the lower of cost or market value, based upon assumptions about future demand, market conditions and the next cyclical market upturn. If actual market conditions are less favorable than our projections, additional inventory write-downs may be required. We review and dispose of excess and obsolete inventory on a regular basis.

Valuation of Long-lived Assets. Our long-lived assets include property, plant and equipment, goodwill and intangible assets. Long-lived assets are depreciated over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying amount of these assets may not be recoverable. The fair value of our goodwill and intangible assets is based upon our estimates of future cash flows and other factors to determine the fair value of the respective assets. We performed our annual goodwill impairment test in the fourth quarter of fiscal 2002 and determined that our current estimates of future cash flows from our test and hub blade business could not support the carrying value of their assets. Accordingly, we recognized a goodwill impairment charge of $72.0 million in the test business unit and $2.3 million in the hub blade business. If these estimates or their related assumptions change in the future, we may be required to record additional impairment charges in accordance with SFAS 142.

Deferred Taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax asset would decrease income in the period such determination was made. In fiscal 2002, we recognized a $65.3 million charge for the establishment of a valuation allowance against our deferred tax asset consisting primarily of U.S. net operating loss carryforwards. In fiscal 2003, we plan to establish a valuation allowance against all deferred tax assets generated from operating losses.

During the three months ended March 31, 2003 we recorded bookings of $109.0 million compared to $117.0 million in the quarter ended December 31, 2002 and $126.0 million in the quarter ended March 31, 2002. At March 31, 2003, we had a backlog of customer orders totaling $44.0 million, compared to $60.0 million at December 31, 2002 and $63.0 million at March 31, 2002. While our backlog was lower at March 31, 2003 than at December 31, 2002, we expect our net sales in the three months ending June 30, 2003 to be flat with our net sales in the three months ended March 31, 2003, plus or minus 5%. Our backlog as of any date may not be indicative of sales for any period, since the timing of deliveries may vary and orders generally are subject to delay or cancellation.

Net sales for the three months ended March 31, 2003 were $125.9 million, an increase of 17.8% from the $106.9 million reported for the same period in fiscal 2002. The higher sales were primarily due to a 41.3% increase in equipment sales and a 23.1% increase in packaging material sales. We saw a significant increase in unit sales of automatic ball bonders (up 53.4%) in the three months ended March 31, 2003 compared to the same period in the prior fiscal year. However, we continue to experience severe pricing pressure on our automatic ball bonders. The higher packaging materials sales were due to higher unit sales of bonding tools and an increase in the price of gold and the volume of gold wire shipped. Partially offsetting these sales increases were lower sales in our test segment of 8.7% and of flip chip bumping services of 35.7%.

Net sales for the six months ended March 31, 2003 were $237.3 million, an increase of 13.0% from the $210.1 million reported in the same period of the prior fiscal year. The sales of equipment products and packaging materials were 33.7% and 19.6%, respectively, above the same period in the prior fiscal year due again to higher unit sales of automatic ball bonders and bonding tools and an increase in the price of gold and the volume of gold wire shipped. Partially offsetting the sales increases were lower sales in our test segment of 12.0% and lower sales of flip chip bumping services of 35.4%.

For the three and six months ended March 31, 2002 and 2003, the percentage of our net sales by business segment were as follows:

The majority of our sales are to customers that are located outside of the United States or have manufacturing facilities outside of the United States. Shipments of our products with ultimate foreign destinations comprised 79% of our total sales in the first six months of fiscal 2003 compared to 67% in the first six months of the prior fiscal year. The majority of these foreign sales were destined for customer locations in the Asia/Pacific region, including Taiwan, Malaysia, Singapore, Korea and Japan. Taiwan accounted for the largest single destination for our product shipments with 23% of our shipments in the first six months of fiscal 2003 compared to 24% of our shipments in the first six months of the prior fiscal year.

Gross profit increased to $32.5 million for the quarter ended March 31, 2003 from $10.6 million for the comparable period in the prior fiscal year. In the six months ended March 31, 2003, gross profit also increased from $36.0 million to $59.8 million. Included in the results for the three and six months ended March 31, 2002 are inventory write-offs of $13.3 million, $5.2 million of which was due to the discontinuance of a product. Other than the impact of the inventory write-offs in the prior fiscal year, the increase in gross profit in the three and six month periods ended March 31, 2003 was due primarily to the higher unit sales of automatic ball bonders, lower manufacturing cost per unit of our automatic ball bonders and higher unit sales of bonding tools and a higher volume of gold wire shipped. These improvements were partially offset by lower sales and associated gross profit in our test and flip chip business units.

Gross margin (gross profit as a percentage of sales) was 25.8% for the current quarter, as compared to 9.9% for the same period in the prior fiscal year. Gross margin for the six months ended March 31, 2003 was 25.2% as compared to 17.1% for the same period in the prior fiscal year. As indicated above, gross margin for the three and six months ended March 31, 2002, was unfavorably impacted by inventory write-offs. Other than the impact of the inventory write-offs in the prior fiscal year, the increase in gross margin for the three and six month periods ended March 31,

2003 was due primarily to lower unit cost of production for our automatic ball bonders. Partially offsetting the higher gross margin from our automatic ball bonders was lower gross margin in our test and flip chip businesses.

SG&A expenses decreased $5.6 million or 15.9% and $8.8 million or 13.2% for the three and six months ended March 31, 2003 from the same periods in the prior fiscal year. The lower SG&A expenses resulted from our cost saving initiatives, principally related to reductions in employment levels. Partially offsetting the positive result in the three months ended March 31, 2003 were costs associated with additional workforce reductions of $1.9 million and a $0.7 million charge for the early termination of an information technology services agreement. Partially offsetting the positive result in the six months ended March 31, 2003 were costs associated with additional workforce reductions of $3.5 million, start-up costs for our new China facility of approximately $1.1 million and the $0.7 million charge for the early termination of an information technology services agreement.

R&D expense for the three and six months ended March 31, 2003 decreased $2.6 million and $5.8 million to $10.5 million for the quarter and $20.1 million for the six months then ended. The reduction of 19.6% for the quarter, and 22.5% for the six months ended March 31, 2003 was primarily due to the closure of our substrate business unit in the fourth quarter of fiscal 2002 and lower payroll and related expenses due to our ongoing cost reduction efforts.

Historically, the semiconductor industry has been volatile, with sharp periodic downturns and slowdowns. The industry has experienced excess capacity and a severe contraction in demand for semiconductor manufacturing equipment for the past two years. We developed resizing plans in response to these changes in our business environment with the intent to align our cost structure with anticipated revenue levels. Expenses have been incurred associated with cost containment activities, including, downsizing and facility consolidations. Accounting for resizing activities requires an evaluation of formally agreed upon and approved plans. Although we make every attempt to consolidate all known resizing activities into one plan, the extreme cycles and rapidly changing forecasting environment places limitations on achieving this objective. The recognition of a resizing event does not necessarily preclude similar but unrelated actions in future periods.

In addition to the resizing costs discussed below, we continued to downsize our operations in fiscal 2003. These downsizing efforts resulted in workforce reduction charges of $1.9 million and $3.5 million in the three and six months ended March 31, 2003. These workforce reduction charges were recorded as Selling, General and Administrative expenses.

In the first quarter of fiscal 2003, we reversed $205 thousand of resizing charges previously recorded during the third and fourth quarters of fiscal 2002 due to the actual severance cost associated with terminated positions being less than those originally estimated.

In the fourth quarter of fiscal 2002, we announced that we would close our substrate operation due to its high capital and operating cash requirements. As a result, we recorded a resizing charge of $8.5 million. The resizing charge included a severance charge of $1.2 million for the elimination of 48 positions and lease obligations of $7.2 million. At March 31, 2003 all the positions have been eliminated. Cash payments for the severance charge are expected to be complete by September 30, 2003 but cash payments for the lease obligations are expected to continue into 2006, or such time as the obligations can be satisfied. In addition to these resizing charges, in the fourth quarter of fiscal 2002, we wrote-off $7.3 million of fixed assets and $1.1 million of intangible assets associated with the closure of the substrate operation.

The resizing costs were included in accrued liabilities. The table below details the activity related to this resizing

In the third quarter of fiscal 2002, we announced a resizing plan to reduce headcount and consolidate manufacturing in our test division. The resizing plan was a result of our decision to move towards a 24 hour per-day manufacturing model in our major U.S. wafer test facility, which will provide our customers with faster turn-around time and delivery of orders and economies of scale in manufacturing. As part of this plan, we moved manufacturing of wafer test products from our facilities in Gilbert, Arizona and Austin, Texas to our facility in San Jose, California and Dallas, Texas and from our Kaohsuing, Taiwan facility to our Hsin Chu, Taiwan facility. The resizing plan includes a severance charge of $1.6 million for the elimination of 149 positions as a result of the manufacturing consolidation. At December 31, 2002, all of the positions had been eliminated. The resizing plan also includes a charge of $0.5 million associated with the closure of the Kaohsuing, Taiwan facility and an Austin, Texas facility, representing costs of non-cancelable lease obligations beyond the facility closures and costs required to restore the production facilities to their original state. Both facilities have been closed. The plans have been completed but cash payments for the severance and facility and contractual obligations are expected to continue through 2005, or such time as the obligations can be satisfied.

The resizing costs were included in accrued liabilities. The table below details the activity related to this resizing program during fiscal 2002 and 2003.

In the second quarter of fiscal 2002, we announced a resizing plan comprised of a functional realignment of business management and the consolidation and closure of certain facilities. In connection with the resizing plan, we recorded a charge of $11.3 million, consisting of severance and benefits of $9.7 million for 372 positions that were to be eliminated as a result of the functional realignment, facility consolidation, the shift of certain manufacturing to China (including our hub blade business) and the move of the Company’s microelectronics products to Singapore and a charge of $1.6 million for the cost of lease commitments beyond the closure date of facilities to be exited as part of the facility consolidation plan.

To reduce our short term cash requirements, we decided, in the fourth quarter of fiscal 2002, not to move our hub blade manufacturing facility from the United States to China and our microelectronics product manufacturing from the United States to Singapore, as previously announced. This change in our facility relocation plan resulted in a reversal of $1.6 million of the resizing costs recorded in the second quarter of fiscal 2002.

As a result of the functional realignment, we terminated employees at all levels of the organization from factory workers to vice presidents. The organizational change shifted management of our Company businesses to functional (i.e. sales, manufacturing, research and development, etc.) areas across product lines rather than by product line. For example, research and development activities for the entire company are now controlled and coordinated by one corporate vice president under the functional organizational structure, rather than separately by each business unit. This structure provides for a more efficient allocation of human and capital resources to achieve corporate R&D initiatives.

In the second quarter, we closed five test facilities: two in the United States, one in France, one in Malaysia, and one in Singapore, whose operations were absorbed into other Company facilities. The resizing charge for the facility consolidation reflects the cost of lease commitments beyond the exit date that is associated with these closed test facilities.

In the fourth quarter of fiscal 2002, we reversed $600 thousand of resizing expenses, previously recorded in the second quarter, due to actual severance costs associated with the terminated positions being less than those estimated as a result of employees leaving the Company before they were severed.

The resizing costs were included in accrued liabilities. The table below details the activity related to this resizing program during fiscal 2002 and 2003.

In the quarter ended September 30, 2001, we announced a resizing plan to close a bonding wire facility in the United States, and recorded a resizing charge for severance of $2.4 million for the elimination of 215 positions, all of which had been terminated at September 30, 2002. Also in the fourth quarter of fiscal 2001, we recorded an increase to goodwill of $0.8 million in connection with the acquisition of Probe Tech for additional lease costs associated with the elimination of four duplicate facilities in the United States. The plans have been completed but cash payments for the severance charge are expected to continue into 2004.

The resizing costs were included in accrued liabilities. The table below details the activity related to this resizing program during fiscal 2001, 2002 and 2003.

In the quarter ended March 31, 2001, we announced a 7.0% reduction in our workforce. As a result, we recorded a resizing charge for severance of $1.7 million for the elimination of 296 positions across all levels of the organization, all of which were terminated prior to March 31, 2002. In connection with our acquisition of Probe Tech, we also recorded an increase to goodwill for $0.6 million for severance, lease and other facility charges related to the elimination of four leased Probe Tech facilities in the United States which were found to be duplicative with the Cerprobe facilities. The plans have been completed and there will be no additional cash obligations related to this program.

The resizing costs were included in accrued liabilities. The table below details the activity related to this resizing program during fiscal 2001, 2002 and 2003.

In the first quarter of fiscal 2003, we realized a gain of $121 thousand from the sale of assets that were previously written-down as part of the asset impairment charge associated with the closure of our substrate operation in the fourth quarter of fiscal 2002.

In the three months ended March 31, 2003, we recorded an asset impairment charge of $1.7 million associated with the discontinuation of a test product. In the three months ended March 31, 2002, we recorded an asset impairment of $4.9 million related to the cost of certain software which was made redundant by a company-wide integrated information system and the write-off of other assets that were associated with leased facilities to be exited as a result of our facility consolidation.

Amortization of intangible asset expense was $2.3 million and $4.6 million for the three and six months ended March 31, 2003 compared to $2.5 million and $5.0 million for the same periods in the prior fiscal year. The amortization expense is associated with our intangible assets for customer accounts and completed technology arising from the acquisition of our test division. The aggregate amortization expense for each of the next five fiscal years is $9.2 million.

Effective October 1, 2001, we adopted SFAS 142, Goodwill and Other Intangible Assets. The intangible assets that are classified as goodwill and those with indefinite lives will no longer be amortized under the provisions of this standard. Intangible assets with determinable lives will continue to be amortized over their estimated useful life. The standard also requires that an impairment test be performed to support the carrying value of goodwill and intangible assets at least annually.

In fiscal 2002, we reviewed our business and determined that there are five reporting units to be reviewed for impairment in accordance with the standard—the reporting units were: the bonding wire, hub blade, substrate, flip chip and test business. The bonding wire and hub blade businesses are included in our packaging materials segment, the substrate and flip chip businesses were included in our advanced packaging segment and the test business comprises our test segment. There is no goodwill associated with our equipment segment. Upon adoption of SFAS 142 in the first quarter of fiscal 2002, we completed the required transitional impairment testing of intangible assets, and based upon those analyses, did not identify any impairment charges as a result of adoption of this standard effective October 1, 2001.

Upon adoption of the standard, we reclassified $17.2 million of intangible assets relating to an acquired workforce in the test reporting unit into goodwill and correspondingly reduced goodwill by $4.9 million of goodwill associated with a deferred tax liability established for timing differences of U.S. income taxes on the workforce intangible. In fiscal 2002, we reduced goodwill associated with the test reporting unit by $1.5 million reflecting the settlement of a purchase price dispute with the former owners of Probe Technology.

We determined that our annual test for impairment of intangible assets will take place at the end of the fourth quarter of each fiscal year, which coincides with the completion of our annual forecasting process. Due to the severity and the length of the current industry downturn and uncertainty of the timing of improvement in industry conditions, in the fourth quarter of fiscal 2002, we revised our earnings forecasts for each of our business units that were tested for impairment. As a result, in fiscal 2002, we discontinued our substrate business and wrote-off intangible assets of $1.1 million and recognized a goodwill impairment loss of $72.0 million in our test reporting unit and a goodwill impairment loss of $2.3 million in our hub blade reporting unit. The fair value of each reporting unit was estimated using the expected present value of future cash flows.

The loss from operations for the three and six months ended March 31, 2003 was $11.7 million and $24.4 million as compared to a loss from operations of $56.5 million and $78.0 million in the same periods of the prior fiscal year. The lower operating loss in the three and six months ended March 2003 from the prior fiscal year was due primarily to higher gross profit resulting from the increased sales levels and lower operating expenses. The operating loss in the three months ended March 31, 2003 included charges associated with workforce reductions of $1.9 million, an asset impairment of $1.7 million and a $0.7 million charge for the early termination of an information technology services agreement. The operating loss in the six months ended March 31, 2003 included costs associated with workforce reductions of $3.5 million, the asset impairment of $1.7 million, start-up costs for our new China facility

of approximately $1.1 million and the $0.7 million charge for the early termination of an information technology services agreement. The operating loss in the three and six months ended March 31, 2002 included an inventory write-off of $13.3 million, an asset impairment of $4.9 million and the resizing charge of $11.3 million.

Interest income in the three and six months ended March 31, 2003 was $180 thousand and $661 thousand compared to $994 thousand and $2.4 million in the same periods of the prior fiscal year. The lower interest income in fiscal 2003 was due to lower investment balances and lower interest rates on our short-term investments. Interest expense in the three and six months ended March 31, 2003 was $4.4 million and $8.9 million compared to $4.3 million and $9.2 million in the same periods of the prior fiscal year. Interest expense in both years is primarily related to our $300.0 million of convertible subordinated notes.

Other income in fiscal 2002 reflected minority interest, of $4 thousand and $10 thousand for the three and six months ended March 31, 2002, associated with certain foreign ownership in our test business unit.

Tax expense in the three and six months ended March 31, 2003 reflects income tax on income in foreign jurisdictions and a reserve of $2.0 million for potential tax obligations to the Israeli government arising from tax benefits we have received which are contingent upon us attaining certain sales and employment levels within Israel. In jurisdictions (including the United States) that had operating losses in the three and six months ended March 31, 2003 we generated $8.1 million and $15.2 million of tax benefits, all of which were fully reserved. The tax benefit for income tax in the three and six months ended March 31, 2002 was based on an expected tax rate of 28% for fiscal 2002. However, in the fourth quarter of fiscal 2002, we established a valuation allowance against our deferred tax assets, which included the benefit recorded in the first half of fiscal 2002.

Asset Retirement Obligations—In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets—The standard provides guidance for financial reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It also provides guidance for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessors. We adopted this standard effective October 1, 2002 and the adoption did not have a significant impact on our financial position and results of operations, however this standard could impact our financial position and results of operations in future periods.

Impairment and Disposal of Long-Lived Assets—In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets which supersedes FASB 121, Accounting for the Impairment of Long-Lived Assets and for Assets to Be Disposed Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. This standard applies to all long-lived assets and requires that the assets to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. We adopted this standard effective October 1, 2002 and the adoption did not have a material impact on our financial position and results of operations, however this standard could impact our financial position and results of operations in future periods.

activities that are initiated after December 31, 2002. We adopted this standard and do not expect the adoption will have a significant impact on our financial position and results of operations, however, this standard will in certain circumstances change the timing of recognition of restructuring costs.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires a company (“the guarantor”) to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee. The Interpretation also incorporates, without change, the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others “ which is being superseded. The recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. We have adopted this standard and the adoption did not have a significant impact on our financial position and results of operations, however this standard could impact our financial position and results of operations in future periods.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation-Transition and Disclosure. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The standard is effective for financial statements for fiscal years ending after December 15, 2002. We have adopted the disclosure provisions of this standard.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We believe that the adoption of this standard will not have a material impact on our consolidated financial statements.

As of March 31, 2003, cash, cash equivalents and investments totaled $60.7 million, compared to $108.1 million at September 30, 2002. Cash used by operating activities increased to $43.7 million in the first half of fiscal 2003 from $27.8 million in the same period of the prior fiscal year. The cash used in operating activities in the first half of fiscal 2003 was primarily due to the net loss reported in the period and the pay-down of current trade payables and accrued expenses and the buildup of trade accounts receivable. The increase in trade accounts receivable resulted primarily from a significant amount of our second quarter sales being shipped in the later part of the quarter.

Cash provided by investing activities totaled $2.0 million in the first half of fiscal 2003, compared to cash used by investing activities of $1.6 million in the same period of the prior fiscal year. In fiscal 2003 and fiscal 2002, the investing activities consisted of the sale of short-term investments offset by capital expenditures.

Net cash provided by financing activities was $330 thousand in the first half of fiscal 2003 compared to cash used in financing activities of $2.4 million in the same period of the prior fiscal year. The cash provided by financing activities in fiscal 2003 was primarily due to a reduction in restricted cash. The cash used by financing activities in the prior year was primarily due to establishing restricted cash balances, to support letters of credit, partially offset by proceeds from the issuance of common stock, resulting from employee stock option exercises.

At March 31, 2003, the fair value of our $175.0 million 4¾% Convertible Subordinated Notes was $115.7 million, and the fair value of our $125.0 million 5¼% Convertible Subordinated Notes was $87.0 million. The fair values were determined using quoted market prices at the balance sheet date. The fair value of our other assets and liabilities approximates the book value of those assets and liabilities. On March 31, 2003, the Standard & Poor’s rating on the above-referenced Convertible Subordinated Notes was CCC+.

The Securities and Exchange Commission declared effective on August 22, 2002 a shelf registration statement on Form S-3, which will permit us, from time to time, to offer and sell various types of securities, including common stock, preferred stock, senior debt securities, senior subordinated debt securities, subordinated debt securities, warrants and units, having an aggregate sales price of up to $250.0 million.

We believe that our existing cash reserves and anticipated cash flows from operations will be sufficient to meet our liquidity and capital requirements for at least the next 12 months. However, we may seek, as we believe appropriate, additional debt or equity financing to provide capital for corporate purposes and/or to fund strategic business opportunities, including possible acquisitions, joint ventures, alliances or other business arrangements which could require substantial capital outlays. The timing and amount of such potential capital requirements cannot be determined at this time and will depend on a number of factors, including demand for our products, semiconductor and semiconductor capital equipment industry conditions, competitive factors and the nature and size of strategic business opportunities which we may elect to pursue.

We have certain obligations and contingent payments under various arrangements at March 31, 2003 as follows:

Long-term debt includes the amounts due under our 4¾% Convertible Subordinated Notes due 2006 and our 5¼% Convertible Subordinated Notes due 2006. The capital lease obligations principally relate to equipment leases. The operating lease obligations at March 31, 2003 represent obligations due under various facility and equipment leases with terms up to fifteen years in duration. Inventory purchase obligations represent outstanding purchase commitments for inventory components ordered in the normal course of business.

The standby letters of credit represent obligations of the company in lieu of security deposits for a facility lease and employee benefit programs.

The semiconductor industry as a whole is volatile with sharp periodic downturns and slowdowns

Our operating results are significantly affected by the capital expenditures of large semiconductor manufacturers and their subcontract assemblers and vertically integrated manufacturers of electronic systems. Expenditures by semiconductor manufacturers and their subcontract assemblers and vertically integrated manufacturers of electronic systems depend on the current and anticipated market demand for semiconductors and products that use semiconductors, such as personal computers, telecommunications equipment, consumer electronics and automotive goods. Significant downturns in the market for semiconductor devices or in general economic conditions reduce

demand for our products and materially and adversely affect our business, financial condition and operating results.

Historically, the semiconductor industry has been volatile, with sharp periodic downturns and slowdowns. The current industry downturn, which began in fiscal 2000, has been particularly severe and we cannot predict when, the growth and demand for integrated circuits will begin to materially accelerate. These downturns have been characterized by, among other things, diminished product demand, excess production capacity and accelerated erosion of selling prices. This has severely and negatively affected the industry’s demand for capital equipment, including the assembly equipment that we manufacture and market and, to a lesser extent, the packaging materials and test interconnect solutions that we sell.

In response to the current economic environment we must align our costs with our revenues; if we fail to do so, we will be adversely effected.

As a result of the sustained downturn in the market for integrated circuits, we have been engaged in a continual re-evaluation of each business unit and line of business. If we are unable to continue to adjust our cost structure to the volume of business available to us, we could be adversely effected. Alternatively, the infra-structure changes that we have made could, in certain circumstances, impair our ability to respond as aggressively and quickly as we otherwise might to improvements in the market for semiconductors.

Our business strategy for many of our products has been focused on product performance and customer service rather than on price. As a result of current economic conditions, customers have experienced increased cost pressure, and consequently, we have observed increased price sensitivity on their part. If competition for our products should come to focus solely on price rather than on product performance and customer service, we will need to adjust our competitive business strategy accordingly, and if we are unable to do so, our business, financial condition and operating results could be materially and adversely affected.

The recent outbreak of SARS in Asia may adversely impact our operations and sales

We have manufacturing facilities located in Singapore, Taiwan and China and sales and service operations throughout Asia. The majority of our sales are made to customer destinations in Asia. Our operations and sales in this region may be adversely impacted by the recent outbreak of Severe Acute Respiratory Syndrome, or SARS, if our business or the businesses of our customers are disrupted by travel restrictions or the illness and quarantine of employees.

Our quarterly operating results fluctuate significantly and may continue to do so in the future

In the past, our quarterly operating results have fluctuated significantly, which we expect will continue to be the case. Although these fluctuations are partly due to the volatile nature of the semiconductor industry, they also reflect the impact of other factors, many of which are outside of our control.

Some of the factors that could cause our revenues and/or operating margins to fluctuate significantly from period to period are:

—some packaging materials have lower margins than assembly equipment and test interconnect solutions;

Many of our expenses, such as research and development, selling, general and administrative expenses and interest expense, do not vary directly with our net sales. As a result, a decline in our net sales would adversely affect our operating results. In addition, if we were to incur additional expenses in a quarter in which we did not experience comparable increased net sales, our operating results would decline. Factors that could cause our expenses to fluctuate from period to period include:

Because our revenues and operating results are volatile and difficult to predict, we believe that consecutive period-to-period comparisons of our operating results are not a good indication of our future performance.

Our business depends on attracting and retaining management, marketing and technical employees

As is the case with many other technology companies, our future success depends on our ability to hire and retain qualified management, marketing and technical employees. In particular, we have experienced periodic shortages of software engineers. If we are unable to continue to attract and retain the technical and managerial personnel we require, our business, financial condition and operating results could be materially and adversely affected.

We may not be able to rapidly develop and manufacture or acquire new and enhanced products required to maintain or expand our business

We believe that our continued success will depend on our ability to continuously develop and manufacture or acquire new products and product enhancements on a timely and cost-effective basis. We also must introduce these products and product enhancements into the market in response to customers’ demands for higher performance assembly equipment, leading-edge materials and for test interconnect solutions customized to address rapid technological advances in integrated circuits and capital equipment designs. Our competitors may develop enhancements to their products that will offer superior performance, features and lower prices that may render our products non-competitive. The development and commercialization of new products may require significant capital expenditures over an extended period of time, and some products that we seek to develop may never become profitable. In addition, we may not be able to develop and introduce products incorporating new technologies in a timely manner or at a price that will satisfy

We typically operate our business with a relatively short backlog and order supplies and otherwise plan production based on internal forecasts of demand. Due to these factors, we have in the past, and may again in the future, fail to accurately forecast demand, in terms of both volume and configuration for either our current or next-generation wire bonders. This has led to and may in the future lead to delays in product shipments or, alternatively, an increased risk of inventory obsolescence. If we fail to accurately forecast demand for our products, including assembly equipment, packaging materials, test interconnect solutions and flip chip technologies, our business, financial condition and operating results could be materially and adversely affected.

Advanced packaging technologies other than wire bonding may render some of our products obsolete and our strategy for pursuing these other technologies may be costly and ineffective

Advanced packaging technologies have emerged that may improve device performance or reduce the size of an integrated circuit package, as compared to traditional die and wire bonding. These technologies include flip chip and chip scale packaging. In general, these advanced technologies eliminate the need for wires to establish the electrical connection between a die and its package. For some devices, these advanced technologies have largely replaced wire bonding. We cannot assure you that the semiconductor industry will not, in the future, shift a significant part of its volume into advanced packaging technologies, such as those discussed above. If a significant shift to advanced technologies were to occur, demand for our wire bonders and related packaging materials could be materially and adversely affected.

A decline in demand for any of our products could cause our revenues to decline significantly

If demand for, or pricing of, our wire bonders, flip chip technology or test interconnect solutions declines because our competitors introduce superior or lower cost systems, the semiconductor industry changes or because of other events beyond our control, our business, financial condition and operating results could be materially and adversely affected.

Because a small number of customers account for most of our sales, our revenues could decline if we lose any significant customer

The semiconductor manufacturing industry is highly concentrated, with a relatively small number of large semiconductor manufacturers and their subcontract assemblers and vertically integrated manufacturers of electronic systems purchasing a substantial portion of semiconductor assembly equipment, packaging materials, test interconnect solutions and flip chip bumping services and technology. Sales to a relatively small number of customers account for a significant percentage of our net sales. In fiscal 2002, sales to Advanced Semiconductor Engineering accounted for 12% of our net sales. In fiscal 2001, no customer accounted for more than 10% of our net sales and in fiscal 2000, sales to Advanced Semiconductor Engineering and Amkor Technologies accounted for 15% and 10% of our net sales, respectively.

We expect that sales of our products to a limited number of customers will continue to account for a high percentage of our net sales for the foreseeable future. If we lose orders from a significant customer, or if a significant customer reduces its orders substantially, these losses or reductions will materially and adversely affect our business, financial condition and operating results.

We depend on a small number of suppliers for raw materials, components and subassemblies and, if our suppliers do not deliver their products to us, we may be unable to deliver our products to our customers

Our products are complex and require raw materials, components and subassemblies of an exceptionally high degree of reliability, accuracy and performance. We rely on subcontractors to manufacture many of the components and subassemblies for our products and we rely on sole source suppliers for some important components and raw materials, including gold. As a result, we are exposed to a number of significant risks, including:

If we are unable to deliver products to our customers on time for these or any other reasons; if we are unable to meet customer expectations as to cycle time; or if we do not maintain acceptable product quality or reliability in the future, our business, financial condition and operating results would be materially and adversely affected.

We have diversified operations, and if we fail to manage our diverse operations successfully, our business and financial results may be materially and adversely affected

During fiscal 2001, we acquired two companies that design and manufacture test interconnect solutions, Cerprobe Corporation and Probe Technology Corporation, and we have combined their operations to create our test division.

Diversification into new lines of business and expansion through acquisitions and alliances would increase demand on our management, financial resources and information and internal control systems. Our success would depend in significant part on our ability to manage and integrate acquisitions, joint ventures and other alliances and to continue to implement, improve and expand our systems, procedures and controls. If we fail to do this at a pace consistent with the development of our business, our business, financial condition and operating results could be materially and adversely affected.

If we diversify our operations, we expect to encounter a number of risks, which will include:

In addition, sales and servicing of packaging materials, test interconnect solutions and flip chip technologies often require different organizational and managerial skills than sales of traditional wire bonding technology. We cannot assure you that we would be able to develop the necessary skills to successfully produce and market these different products.

We may be unable to continue to compete successfully in the highly competitive semiconductor equipment, packaging materials, test interconnect and flip chip technology industries

The semiconductor equipment, packaging materials, test interconnect solutions and flip chip technology industries are intensely competitive. In the semiconductor equipment, test interconnect solutions and flip chip technology markets, the significant competitive factors include performance, quality, customer support and price. In the semiconductor

packaging materials industry competitive factors include price, delivery and quality.

In each of our markets, we face competition and the threat of competition from established competitors and potential new entrants, some of which have significantly greater financial, engineering, manufacturing and marketing resources than we have. Some of these competitors are Asian and European companies that have had and may continue to have an advantage over us in supplying products to local customers because many of these customers appear to prefer to purchase from local suppliers, without regard to other considerations.

We expect our competitors to improve their current products’ performance, and to introduce new products and materials with improved price and performance characteristics. New product and materials introductions by our competitors or by new market entrants could hurt our sales. If a particular semiconductor manufacturer or subcontract assembler selects a competitor’s product or materials for a particular assembly operation, we may not be able to sell products or materials to that manufacturer or assembler for a significant period of time because manufacturers and assemblers sometimes develop lasting relations with suppliers, and assembly equipment in our industry often goes years without requiring replacement. In addition, we may have to lower our prices in response to price cuts by our competitors, which could materially and adversely affect our business, financial condition and operating results. We cannot assure you that we will be able to continue to compete in these or other areas in the future.

We sell most of our products to customers that are located outside of the United States; we have substantial manufacturing operations located outside of the United States, and we rely on independent foreign distribution channels for certain product lines; all of which subject us to risks from changes in trade regulations, currency fluctuations, political instability and war

Approximately 72% of our sales for fiscal 2002, 62% of our net sales for fiscal 2001 and 91% of our net sales for fiscal 2000 were attributable to sales to customers for delivery outside of the United States. The lower percentage of international sales in fiscal 2002 and 2001 was due primarily to the increased sale of test interconnect products, which are more concentrated in the United States. We expect our sales outside of the United States to continue to represent a large portion of our future revenues. Our future performance will depend, in significant part, on our ability to continue to compete in foreign markets, particularly in Asia. Asian economies have been highly volatile, resulting in significant fluctuation in local currencies, and political and economic instability. These conditions may continue or worsen, which could materially and adversely affect our business, financial condition and operating results. We also rely on non-United States suppliers for materials and components used in the equipment that we sell and we maintain substantial manufacturing operations in countries other than the United States, including operations in Israel and Singapore. We manufacture substantially all of our automatic ball bonders in Singapore, and we have built a facility in China to manufacture capillaries, test products and other products. In addition, we rely on independent foreign distribution channels for certain product lines. As a result, a major portion of our business is subject to the risks associated with international commerce, such as:

Because most of our foreign sales are denominated in United States dollars, an increase in value of the United States dollar against foreign currencies, particularly the Japanese yen, will make our products more expensive than those offered by some of our foreign competitors. Our ability to compete overseas in the future could be materially and adversely affected by a strengthening of the United States dollar against foreign currencies.

The ability of our international operations to prosper also will depend, in part, on a continuation of current trade relations between the United States and foreign countries in which our customers operate and in which our subcontractors and materials suppliers have operations. A change towards more protectionist trade legislation in either the United States or foreign countries in which we do business, such as a change in the current tariff structures, export compliance or other trade policies, could materially and adversely affect our ability to sell our products in foreign markets.

Our success depends in part on our intellectual property, which we may be unable to protect

Our success depends in part on our proprietary technology. To protect this technology, we rely principally on contractual restrictions (such as nondisclosure and confidentiality agreements) in our agreements with employees, vendors, consultants and customers and on the common law of trade secrets and proprietary “know-how.” We also rely, in some cases, on patent and copyright protection, which may become more important to us as we expand our investment in advanced packaging technologies. We may not be successful in protecting our technology for a number of reasons, including:

In addition, our partners and alliances may also have rights to technology that we develop through these alliances. We may incur significant expense to protect or enforce our intellectual property rights. If we are unable to protect our intellectual property rights, our competitive position may be weakened.

Third parties may claim we are infringing on their intellectual property, which could cause us to incur significant litigation costs or other expenses, or prevent us from selling some of our products

The semiconductor industry is characterized by rapid technological change, with frequent introductions of new products and technologies. As a result, industry participants often develop products and features similar to those introduced by others, increasing the risk that their products and processes may give rise to claims that they infringe on the intellectual property of others. We may unknowingly infringe on the intellectual property rights of others and incur significant liability for that infringement. If we are found to infringe on the intellectual property rights of others, we could be enjoined from continuing to manufacture, market or use the affected product, or be required to obtain a license to continue manufacturing or using the affected product. A license could be very expensive to obtain or may not be available at all. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical.

Occasionally, third parties assert that we are, or may be, infringing on or misappropriating their intellectual property rights. In these cases, we will defend against claims or negotiate licenses where we consider these actions appropriate. Intellectual property cases are uncertain and involve complex legal and factual questions. If we become involved in this type of litigation, it could consume significant resources and divert our attention from our business.

Some of our customers are parties to litigation brought by the Lemelson Medical, Education and Research Foundation

Limited Partnership (the “Lemelson Foundation”), in which the Lemelson Foundation claims that certain manufacturing processes used by those customers infringe patents held by the Lemelson Foundation. We have never been named a party to any such litigation. Some customers have requested that we indemnify them to the extent their liability for these claims arises from use of our equipment. We do not believe that products sold by us infringe valid Lemelson patents. If a claim for contribution was brought against us, we believe we would have valid defenses to assert and also would have rights to contribution and claims against our suppliers. We have never incurred any material liability with respect to the Lemelson claims or any other pending intellectual property claim and we do not believe that these claims will materially and adversely affect our business, financial condition or operating results. The ultimate outcome of any infringement or misappropriation claim that might be made, however, is uncertain and we cannot assure you that the resolution of any such claim will not materially and adversely affect our business, financial condition and operating results.

We may be materially and adversely affected by environmental and safety laws and regulations

We are subject to various and frequently changing federal, state, local and foreign laws and regulations governing, among other things, the generation, storage, use, emission, discharge, transportation and disposal of hazardous material, investigation and remediation of contaminated sites and the health and safety of our employees. Increasingly, public attention has focused on the environmental impact of manufacturing operations and the risk to neighbors of chemical releases from such operations.

Proper waste disposal plays an important role in the operation of our manufacturing plants. In many of our facilities we maintain wastewater treatment systems that remove metals and other contaminants from process wastewater. These facilities operate under effluent discharge permits that must be renewed periodically. A violation of those permits may lead to revocation of the permits, fines, penalties or the incurrence of capital or other costs to comply with the permits.

In the future, applicable land use and environmental regulations may: (1) impose upon us the need for additional capital equipment or other process requirements, (2) restrict our ability to expand our operations, (3) subject us to liability, and/or (4) cause us to curtail our operations. We cannot assure you that any costs or liabilities associated with complying with these environmental laws will not materially and adversely affect our business, financial condition and operating results.

Anti-takeover provisions in our articles of incorporation and bylaws and Pennsylvania law may discourage other companies from attempting to acquire us

Some provisions of our articles of incorporation and bylaws and of Pennsylvania law may discourage some transactions where we would otherwise experience a change in control. For example, our articles of incorporation and bylaws contain provisions that:

Further, under the Pennsylvania Business Corporation Law, because our bylaws provide for a classified board of directors, shareholders may only remove directors for cause. These provisions and some provisions of the Pennsylvania Business Corporation Law could delay, defer or prevent us from experiencing a change in control and may adversely affect our common stockholders’ voting and other rights.

Our ability to make payments on our indebtedness, and to fund planned capital expenditures and other activities will depend on our ability to generate cash in the future. This, to some extent, is subject to the volatile nature of our business, and general economic, competitive and other factors that are beyond our control. If our current convertible debt is not converted to our common shares, we will be required to make annual cash interest payments of $14.9

million through fiscal 2005, $14.1 million in fiscal 2006 and $1.7 million in fiscal 2007 on our $300.0 million of convertible subordinated notes and make principal payments of $175.0 million and $125.0 million in fiscal 2006 and fiscal 2007, respectively. Accordingly, we cannot assure you that our business will generate sufficient cash flow to service our debt. In addition, our gold supply agreement contains restrictions on the ability of certain of our subsidiaries to declare and pay dividends to us.

We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms, if at all.

Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect the markets in which we operate and our profitability

Terrorist attacks may negatively affect our operations and your investment. There can be no assurance that there will not be further terrorist attacks against the United States or United States businesses. These attacks or armed conflicts may directly impact our physical facilities or those of our suppliers or customers. Our primary facilities include administrative, sales and R&D facilities in the United States and manufacturing facilities in the United States, Israel, Singapore and China. Also, these attacks have disrupted the global insurance and reinsurance industries with the result that we may not be able to obtain insurance at historical terms and levels for all of our facilities. Furthermore, these attacks may make travel and the transportation of our supplies and products more difficult and more expensive and ultimately affect the sales of our products in the United States and overseas. As a result of terrorism, the United States may enter into an armed conflict, which could have a further impact on our domestic and internal sales, our supply chain, our production capability and our ability to deliver product to our customers. Political and economic instability in some regions of the world may also result and could negatively impact our business. The consequences of any of these armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment.

Our stock price has been and is likely to continue to be highly volatile, which may make the common stock difficult to resell at attractive times and prices

In recent years, the price of our common stock has fluctuated greatly. These price fluctuations have been rapid and severe and have left investors little time to react. The price of our common stock may continue to fluctuate greatly in the future due to a variety of factors, including:

At March 31, 2003, we had a non-trading investment portfolio, excluding those classified as cash and cash equivalents, of $16.1 million. Due to the short term nature of the investment portfolio, if market interest rates were to increase immediately and uniformly by 10% from the levels as of March 31, 2003, there would be no material or adverse affect on our business, financial condition or operating results.

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange

Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the Chief Executive and Chief Financial Officers of the Company concluded that the Company’s disclosure controls and procedures were adequate.

The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Chief Executive and Chief Financial Officers.

The 2003 Annual Meeting of Shareholders of the Company was held on February 11, 2003. At this meeting, Mr. Barry Waite was elected and Mr. C. Scott Kulicke was reelected to the Board of Directors of the Company for terms expiring at the 2007 annual meeting. In such election, 38,746,843 votes were cast for Messrs. Kulicke and Waite. Under Pennsylvania law, votes cannot be cast against a candidate. Proxies filed by the holders of 806,368 shares at the 2003 Annual Meeting withheld authority to vote for Messrs. Kulicke and Waite. Messrs. Philip V. Gerdine, John A. O’Steen, MacDonell Roehm, Jr., Larry D. Striplin, Jr., C. William Zadel and Allison F. Page continue in office as members of the Company’s Board of Directors after the 2003 Annual Meeting.

Lastly, 41,536,487 shares were voted in favor of the reappointment of PricewaterhouseCoopers LLP as independent accountants of the Company to serve until the 2004 Annual Meeting, and 1,654,814 shares were voted against such proposal. Proxies filed by the holders of 200,905 shares at the 2003 Annual Meeting instructed the proxy holders to abstain from voting on such proposal.

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

KULICKE AND SOFFA INDUSTRIES, INC.

By:		/s/ CLIFFORD G. SPRAGUE
		Clifford G. Sprague Senior Vice President, Chief Financial Officer (Principal Financial Officer)

/s/ C. SCOTT KULICKE

C. Scott Kulicke

Chairman of the Board and Chief Executive Officer

/s/ CLIFFORD G. SPRAGUE

Clifford G. Sprague

Senior Vice President and Chief Financial Officer

PENNSYLVANIA		23-1498399
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

2101 BLAIR MILL ROAD, WILLOW GROVE, PENNSYLVANIA		19090
(Address of principal executive offices)		(Zip Code)

		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS

	Condensed Consolidated Balance Sheets September 30, 2002 and March 31, 2003	3

	Condensed Consolidated Statements of Operations Three and Six Months Ended March 31, 2002 and 2003	4

	Condensed Consolidated Statements of Cash Flows Six Months Ended March 31, 2002 and 2003	5

	Notes to Condensed Consolidated Financial Statements	6-16

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	16-36

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	36

Item 4.	CONTROLS AND PROCEDURES	36

PART II.	OTHER INFORMATION

Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	37

Item 6.	EXHIBITS AND REPORTS ON FORM 8-K	37

	SIGNATURES AND CERTIFICATIONS	38

	September 30, 2002			(Unaudited) March 31, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	85,986		$	44,588
Restricted cash		3,180			2,880
Short-term investments		22,134			16,132
Accounts and notes receivable (less allowance for doubtful accounts: 9/30/02—$6,033; 3/31/03—$5,769)		89,132			98,410
Inventories, net		50,887			54,784
Prepaid expenses and other current assets		10,508			13,061
Deferred income taxes		16,072			15,245

TOTAL CURRENT ASSETS		277,899			245,100
Property, plant and equipment, net		89,742			77,925
Intangible assets, (net of accumulated amortization: 9/30/02—$16,927; 3/31/03—$21,575)		75,509			70,880
Goodwill		87,107			87,107
Other assets		8,425			8,050

TOTAL ASSETS	$	538,682		$	489,062

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt	$	186		$	122
Accounts payable		55,659			49,180
Accrued expenses		52,581			43,777
Income taxes payable		9,660			12,350

TOTAL CURRENT LIABILITIES		118,086			105,429
Long term debt		300,393			300,437
Other liabilities		14,106			12,596
Deferred taxes		36,774			35,947

TOTAL LIABILITIES		469,359			454,409

Commitments and contingencies		—			—
SHAREHOLDERS’ EQUITY:
Common stock, without par value		199,886			201,138
Retained deficit		(119,103	)		(156,049	)
Accumulated other comprehensive loss		(11,460	)		(10,436	)

TOTAL SHAREHOLDERS’ EQUITY		69,323			34,653

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	538,682		$	489,062

	Three months ended March 31,						Six months ended March 31,
	2002			2003			2002			2003
Net revenue	$	106,917		$	125,938		$	210,072		$	237,309
Cost of sales		96,285			93,420			174,053			177,460

Gross profit		10,632			32,518			36,019			59,849

Selling, general and administrative		35,409			29,749			66,923			58,075
Research and development, net		13,030			10,478			25,954			20,121
Resizing(recovery) costs		11,283			—			11,283			(205	)
Gain on disposal of assets		—			—			—			(121	)
Asset impairment		4,890			1,708			4,890			1,708
Amortization of intangible assets		2,481			2,321			4,962			4,629

Operating expense		67,093			44,256			114,012			84,207

Loss from operations		(56,461	)		(11,738	)		(77,993	)		(24,358	)
Interest income		994			180			2,436			661
Interest expense		(4,336	)		(4,415	)		(9,186	)		(8,905	)
Other income		4			—			10			—

Loss before income taxes		(59,799	)		(15,973	)		(84,733	)		(32,602	)
Provision (benefit) for income taxes		(16,244	)		3,318			(23,725	)		4,344

Net loss	$	(43,555	)	$	(19,291	)	$	(61,008	)	$	(36,946	)

Net loss per share:
Basic	$	(0.89	)	$	(0.39	)	$	(1.24	)	$	(0.75	)
Diluted	$	(0.89	)	$	(0.39	)	$	(1.24	)	$	(0.75	)
Weighted average shares outstanding
Basic		49,137			49,629			49,081			49,575
Diluted		49,137			49,629			49,081			49,575

	Packaging Materials Segment		Advanced Packaging Technology Segment		Test Segment		Total
	(in thousands)
Goodwill	$	29,685	$	5,666	$	51,756	$	87,107

Intangible Assets
Customer accounts	$	—	$	—	$	31,507	$	31,507
Complete technology		—		—		39,373		39,373

Intangible assets, net of amortization	$	—	$	—	$	70,880	$	70,880

	Gross Carrying Amount		Accumulated Amortization		Total Net Book Value
	(in thousands)
Customer Accounts	$	41,100	$	9,593	$	31,507
Acquired Technology		51,355		11,982		39,373

Total	$	92,455	$	21,575	$	70,880

	September 30, 2002			March 31, 2003
	(in thousands)
Raw materials and supplies	$	39,477		$	41,897
Work in process		18,549			21,342
Finished goods		17,708			14,937

		75,734			78,176
Inventory reserves		(24,847	)		(23,392	)

	$	50,887		$	54,784

Fourth Quarter 2002 Charge	Severance and Benefits			Commitments			Total
	(in thousands)
Provision for resizing	$	1,231		$	7,280		$	8,511
Payment of obligations		—			—			—

Balance, September 30, 2002		1,231			7,280			8,511
Payment of obligations		(762	)		(558	)		(1,320	)

Balance, December 31, 2002		367			6,722			7,089
Payment of obligations		(205	)		(458	)		(663	)

Balance, March 31, 2003	$	162		$	6,264		$	6,426

Third Quarter 2002 Charge	Severance and Benefits			Commitments			Total
	(in thousands)
Provision for resizing	$	1,652		$	452		$	2,104
Payment of obligations		(547	)		(219	)		(766	)

Balance, September 30, 2002		1,105			233			1,338
Change in estimate		(103	)		—			(103	)
Payment of obligations		(467	)		(18	)		(485	)

Balance, December 31, 2002		535			215			750
Payment of obligations		(56	)		(18	)		(74	)

Balance, March 31, 2003	$	479		$	197		$	676

Second Quarter 2002 Charge	Severance and Benefits			Commitments			Total
	(in thousands)
Provision for resizing	$	9,733	⁽¹⁾	$	1,550		$	11,283
Change in estimate		(2,237	)		—			(2,237	)
Payment of obligations		(5,367	)⁽¹⁾		(81	)		(5,448	)

Balance, September 30, 2002		2,129			1,469			3,598
Payment of obligations		(491	)		(183	)		(674	)

Balance, December 31, 2002		1,638			1,286			2,924
Payment of obligations		(422	)		(177	)		(599	)

Balance, March 31, 2003	$	1,216		$	1,109		$	2,325

Fourth Quarter 2001 Charge	Severance and Benefits			Commitments			Total
	(in thousands)
Provision for resizing	$	2,457		$	—		$	2,457
Acquisition restructuring		—			840			840
Payment of obligations		(402	)		—			(402	)

Balance, September 30, 2001		2,055			840			2,895
Payment of obligations		(1,543	)		(840	)		(2,383	)

Balance, September 30, 2002		512			—			512
Payment of obligations		(246	)		—			(246	)

Balance, December 31, 2002		266			—			266
Payment of obligations		(115	)		—			(115	)

Balance, March 31, 2003	$	151		$	—		$	151

Second Quarter 2001 Charge	Severance and Benefits			Commitments			Total
	(in thousands)
Provision for resizing	$	1,709		$	—		$	1,709
Acquisition restructuring		84			562			646
Payment of obligations		(1,699	)		(213	)		(1,912	)

Balance, September 30, 2001		94			349			443
Payment of obligations		(94	)		(330	)		(424	)

Balance, September 30, 2002		—			19			19
Payment of obligations		—			(19	)		(19	)

Balance, December 31, 2002	$	—		$	—		$	—

	Equipment Segment			Packaging Materials Segment		Advanced Packaging Technology Segment			Test Segment			Corporate			Consolidated
	(in thousands)
Quarter ended March 31, 2003:
Net revenue	$	52,569		$	43,602	$	3,658		$	26,109		$	—		$	125,938
Cost of sales		33,338			33,604		5,371			21,107			—			93,420

Gross profit		19,231			9,998		(1,713	)		5,002			—			32,518
Operating costs		18,586			6,518		2,076			10,727			4,641			42,548
Asset impairment		17			—		—			1,691			—			1,708

Income (loss) from operations	$	628		$	3,480	$	(3,789	)	$	(7,416	)	$	(4,641	)	$	(11,738	)

Six months ended March 31, 2003:
Net revenue	$	97,464		$	83,159	$	7,905		$	48,781		$	—		$	237,309
Cost of sales		63,954			62,888		10,789			39,829						177,460

Gross profit		33,510			20,271		(2,884	)		8,952			—			59,849
Operating costs		36,109			13,809		3,694			21,191			8,022			82,825
Resizing costs		—			—		(102	)		(103	)		—			(205	)
Asset impairment and Gain on disposal of assets		17			—		(121	)		1,691			—			1,587

Income (loss) from operations	$	(2,616	)	$	6,462	$	(6,355	)	$	(13,827	)	$	(8,022	)	$	(24,358	)

Segment Assets at March 31, 2003	$	123,628		$	91,356	$	19,436		$	168,390		$	86,252		$	489,062

Nature of guarantee	Term of guarantee	Maximum obligation under guarantee
	(in thousands)
Security deposit for payment of employee health benefits	Expires June 2003	$	1,710
Security deposit for payment of employee worker compensation benefits	Expires October 2003		584
Security deposit for a facility lease	Expires July 2003		300

		$	2,594

	Three months ended March 31,				Six months ended March 31,
	2002		2003		2002		2003
Equipment	34.8	%	41.8	%	34.7	%	41.1	%
Packaging materials	33.1	%	34.6	%	33.1	%	35.0	%
Test interconnect	26.8	%	20.7	%	26.4	%	20.6	%
Advanced packaging technologies	5.3	%	2.9	%	5.8	%	3.3	%

	100.0	%	100.0	%	100.0	%	100.0	%

	Total		Amounts due in less than 1 year		Amounts due in 2-3 years		Amounts due in 4-5 years		Amounts due in more than 5 years
	(in thousands)
Contractual Obligations:
Long-term debt	$	300,000	$	—	$	—	$	300,000	$	—
Capital Lease obligations		559		122		112		75		250
Operating Lease obligations*		47,584		12,383		19,994		7,458		7,749
Inventory Purchase obligations*		39,760		39,220		540		—		—
Commercial Commitments:
Standby Letters of Credit*		2,594		2,594		—		—		—

Total contractual obligations and commercial commitments	$	390,497	$	54,319	$	20,646	$	307,533	$	7,999

	Reserve for Product Warranty Expense
	(in thousands)
Reserve for product warranty expense at September 30, 2002	$	837
Provision for product warranty expense		674
Product warranty expense		(649	)

Reserve for product warranty expense at March 31, 2003	$	862

Exhibit No.		Description

99.1		Certification of C. Scott Kulicke, Chief Executive Officer of Kulicke and Soffa Industries, Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2		Certification of Clifford G. Sprague, Chief Financial Officer of Kulicke and Soffa Industries, Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.