8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of report (Date of earliest event reported): September 30, 2004

KULICKE AND SOFFA INDUSTRIES, INC.

(Exact Name of Registrant as Specified in Charter)

Pennsylvania	000-00121	23-1498399
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)
2101 Blair Mill Road, Willow Grove, PA		19090
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (215) 784-6000

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item  8.01. Other Events.

The purpose of this Form 8-K is to make conforming disclosures to those included in the Company’s September 30, 2004 Registration Statements on Form S-1.

Item  9.01. Financial Statements and Exhibits.

(c) Exhibits.

Exhibit No.	Description
23	Consent of PricewaterhouseCoopers LLP (Registered Independent Public Accounting Firm).
99.1	Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three fiscal years ended September 30, 2003, 2002 and 2001 and for the three and nine months ended June 30, 2004 and 2003.
99.2	Consolidated Financial Statements for the three fiscal years ended September 30, 2003, 2002 and 2001 and Condensed Consolidated Financial Statements for the three and nine months ended June 30, 2004 and 2003.

SIGNATURES

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

	KULICKE AND SOFFA INDUSTRIES, INC.
Date: October 5, 2004	By:	/s/    Maurice E. Carson
		Maurice E. Carson
		Vice President and Chief Financial Officer

EXHIBIT INDEX

Exhibit No.	Description
23	Consent of PricewaterhouseCoopers LLP (Registered Independent Public Accounting Firm).
99.1	Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three fiscal years ended September 30, 2003, 2002 and 2001 and for the three and nine months ended June 30, 2004 and 2003.
99.2	Consolidated Financial Statements for the three fiscal years ended September 30, 2003, 2002 and 2001 and Condensed Consolidated Financial Statements for the three and nine months ended June 30, 2004 and 2003.

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-68488, 33-12453, 33-13577, 33-30884, 33-39265, 333-00567, 333-69445, 333-69441, 333-37276, 333-37278, 333-103433 and 333-103435) and Form S-3 (Nos. 333-106912, 333-82910, 333-11478 and 333-112373) of Kulicke and Soffa Industries, Inc. of our report dated November 19, 2003 , except as to the discontinued operations described in Note 2, Note 4 and Note 13 which are as of May 6, 2004, relating to the financial statements and financial statement schedule, which appear in this Form 8-K.

/s/ PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

October 5, 2004

EX-99.1

Exhibit 99.1

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

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in this prospectus for a full understanding of our financial position and results of operations.

INTRODUCTION

We design, manufacture and market capital equipment, packaging materials and test interconnect products as well as service, maintain, repair and upgrade equipment, all used to assemble semiconductor devices. Today, we are the world’s leading supplier of semiconductor wire bonding assembly equipment, according to VLSI Research, Inc. Our business is divided into three product segments: 1) equipment; 2) packaging materials; and 3) wafer and package test interconnect products. In February 2004 we sold the assets of our flip chip business unit which licensed flip chip technology and provided flip chip bumping and wafer level packaging services. As a result, we have reflected the flip chip business unit as a discontinued operation per the guidance of Financial Accounting Standards Board SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly, we have reclassified our financial statements to exclude the results of the flip chip business unit from our revenues and expenses of our continuing operations.

The semiconductor industry historically has been volatile, with periods of rapid growth followed by industry wide retrenchment. One such downturn started in fiscal 2001 and persisted into fiscal 2003. The industry recovered from this downturn in late fiscal 2003. The impact of the recovery from this downturn was net sales for the nine months ended June 30, 2004 of $570.3 million, a 61.4% increase from the same period in the prior year. Net sales for the quarter ended June 30, 2004 were $194.6 million, a 57.2% increase from the same period in the prior year, but a 12.2% decrease from the quarter ended March 31, 2004. On August 10, 2004, we announced that our customers had indicated a general slowing in the rate of semiconductor growth, and as a result, our wire bonder shipments for the September 2004 quarter will be lower than the June 2004 quarter and lower than we previously estimated. We currently expect net sales in the September 2004 quarter in the $135 million to $165 million range. There can be no assurances regarding levels of demand for our products, and in any case, we believe the historical volatility – both upward and downward – will persist.

During the industry downturn in fiscal 2001 and 2002, we incurred significant resizing charges to scale down the size of our business and consolidated operations. Even after implementing these formal resizing plans (see Note 6 to our Consolidated Financial Statements), we have continued to lower our cost structure by further consolidating operations, moving certain of our manufacturing capacity to China, moving a portion of our supply chain to lower cost suppliers and designing better but lower cost equipment. These cost reduction efforts are ongoing and we believe they will drive down our cost structure below current levels, while not diminishing our product quality. However, we expect to incur additional quarterly charges such as severance and facility closing costs as a result of these long-term cost reduction programs. Our goal is to be both the technology leader, and the lowest cost supplier, in each of our major lines of business.

We reported income from operations at our test business segment in the June 2004 quarter of $899 thousand. This performance is positive and reflects our continuing efforts to improve the performance of this segment but included a non-recurring spike in June 2004 quarter sales from one of our biggest test customers. For the nine months ended June 2004, this segment reported a loss of $17.0 million. We are continuing with our plan to improve the performance of this segment which includes: consolidation of test facilities, the transfer of a greater portion of the test production to our Asian facilities, outsourcing a greater portion of the test production and new product introductions. We expect implementation of this plan will continue through 2005 and will result in future period charges and/or restructuring charges.

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Products and Services

We offer a range of wire bonding equipment and spare parts, packaging materials and test interconnect products.

Set forth below is a table listing the percentage of our total net sales from continuing operations for each business segment for the three and nine months ended June 30, 2003 and 2004:

	Three months ended June 30,				Nine months ended June 30,
	2003		2004		2003		2004
Equipment	39.1	%	49.2	%	41.3	%	54.7	%
Packaging materials	37.0	%	31.7	%	36.5	%	29.4	%
Test interconnect	23.9	%	19.1	%	22.2	%	15.9	%
	100.0	%	100.0	%	100.0	%	100.0	%

Set forth below is a table listing the net sales and percentage of our total net sales from continuing operations for each business segment for our fiscal years ended September 30, 2001, 2002, and 2003.

	(dollars in thousands)
	Fiscal Year Ended September 30,
	2001(1)				2002				2003(2)
	Net Sales		% of Total Net Sales		Net Sales		% of Total Net Sales		Net Sales		% of Total Net Sales
Equipment	$	249,952	48	%	$	169,469	38	%	$	198,447	42	%
Packaging materials		150,945	29	%		157,176	36	%		174,471	37	%
Test interconnect		116,890	23	%		114,698	26	%		104,882	22	%
Other(3)		595	0	%		222	0	%		135	0	%
	$	518,382	100	%	$	441,565	100	%	$	477,935	100	%

(1) In the first quarter of fiscal 2001, we acquired two test interconnect companies, Cerprobe Corporation and Probe Technology Corporation, creating our test interconnect segment.

(2) In the fourth quarter of fiscal 2003, we sold the assets related to the saw and hard material blade businesses that were part of the equipment segment and packaging materials segment, respectively. Those businesses had fiscal 2003 revenue of $11.3 million.

(3) Includes sales associated with our substrate business that was closed in fiscal 2002.

Our equipment sales are highly volatile, based on the semiconductor industry’s need for new capability and capacity, whereas sales in our packaging materials and test business segments are somewhat less volatile, tending to follow the trend of total semiconductor unit production.

In February 2004 we sold the assets of our flip chip business unit which licensed flip chip technology and provided flip chip bumping and wafer level packaging services. As a result, we have reflected the flip chip business unit as a discontinued operation and do not include the results of its operations in our revenues and expenses from continuing operations as reported in our financial statements. This Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Company’s fiscal years ended September 30, 2002 and 2003 reflect the operations of our former flip chip business unit as a discontinued operation.

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Accordingly, the operating results of the Flip Chip business are not included in our revenues and expenses from continuing operations. The following table reflects the operating results of our flip chip business unit and write-offs for the past three fiscal years that have been reclassified to discontinued operations. The corresponding reclassified financial statements are presented in this prospectus.

The table below presents the operating results of the discontinued flip chip operations:

	(In thousands)
	Fiscal year ended September 30,
	2001			2002			2003
Net revenue	$	36,621		$	23,095		$	16,386
Cost of sales		31,274			25,054			21,154
Gross profit		5,347			(1,959	)		(4,768	)
Selling, general and administrative		4,844			4,080			4,541
Research and development, net		1,357			1,019			844
Resizing		—			893			—
Asset impairment		—			—			6,873
Goodwill impairment		—			—			5,667
Amortization of goodwill & intangibles		683			—			—
Operating expense		6,884			5,992			17,925
Loss from operations		(1,537	)		(7,951	)		(22,693	)
Net Interest Expense		7			12			—
Equity in loss of joint venture		—			—			—
Other income and minority interest		346			—			—
Loss from operations before income tax		(1,184	)		(7,939	)		(22,693	)
Benefit for income taxes		(175	)		—			—
Net loss	$	(1,009	)	$	(7,939	)	$	(22,693	)

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Critical Accounting Policies and Estimates

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

Revenue Recognition. We changed our revenue recognition policy in the fourth quarter of fiscal 2001, effective October 1, 2000, based upon guidance provided in the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. 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 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:

• Right of Return: A large portion of our revenue comes from the sale of machines that are used in the semiconductor assembly process. These items are generally built to order, and often include customization to a customer’s specifications. Revenue related to the semiconductor equipment is recognized upon customer acceptance. Other product sales relate to consumable products, which are sold in high-volume quantities, and are generally maintained at low stock levels at our customer’s facility. As a result, customer returns represent a very small percentage of customer sales on an annual basis. Our policy is to provide an allowance for customer returns based upon our historical experience and management assumptions.

• Warranties: Our products are generally shipped with a one-year warranty against manufacturer’s defects and we do not offer extended warranties in the normal course of our business. We recognize a liability for estimated warranty expense when revenue for the related product is recognized. The estimated liability for warranty is based upon historical experience and management estimates of future expenses.

• Conditions of Acceptance: Sales of our consumable products and bonding wire generally do not have customer acceptance terms. In certain cases, sales of our equipment products do have customer acceptance clauses which generally require that the equipment perform in accordance with specifications during an on-site factory inspection by the customer, as well as when installed at the customer’s facility. In such cases, if the terms of acceptance are satisfied at our facility before shipment, the revenue for the equipment will be recognized upon shipment. If the customer must first install the equipment in their own factory then, generally, revenue associated with that sale is not recognized until acceptance is received from the customer.

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• Price Protection: We do not provide price protection to our customers.

Before we adopted SAB 101, we recorded revenue upon the shipment of products or the performance of services. Provisions for estimated product returns, warranty and installation costs were accrued in the period in which the revenue was recognized. This policy assumed customer acceptance when the product specifications were met and the products shipped. Product returns and disputes with customers due to dissatisfaction with the performance of our products have been immaterial; accordingly, we recognized revenue upon the transfer of title and did not require our customers to provide notice of acceptance.

Estimates and Assumptions

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, self insurance reserves, pension benefit liabilities, resizing, warranty, litigation. 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.

We believe the following accounting policies require significant judgements and estimates:

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 would 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 0.2% of net sales per year.

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. Our property, plant and equipment and intangible 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 implied fair value of our goodwill and intangible assets is based upon our estimates of the present value of future cash flows from the respective reporting units and other factors. We manage and value our intangible technology assets in the aggregate, as one asset group, not by individual technology. We perform our annual goodwill and intangible assets impairment test in the fourth quarter of each fiscal year, which coincides with our annual planning process, and whenever a “triggering” event occurs. Our annual impairment testing resulted in an impairment charge of $5.7 million in fiscal 2003 in our former flip chip business unit and a fiscal 2002 impairment charge of $72.0 million in the test business unit and

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$2.3 million in the hub blade business. The sale of certain assets of our test operation, in the March 2004 quarter, resulted in an impairment charge of $3.2 million in that quarter. 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 and SFAS 144.

Deferred Taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that we expect 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 both fiscal 2002 and fiscal 2003 we established a valuation allowance against our deferred tax assets generated from our U.S. net operating losses.

Changes in Accounting Principles and Policies

Shipping and Handling Revenues and Costs. In September 2000, the Emerging Issues Task Force (EITF) reached a final consensus on issue EITF No. 00-10, Accounting for Shipping and Handling Revenues and Costs. The Task Force concluded that amounts billed to customers related to shipping and handling should be classified as revenue. We adopted the consensus in fiscal 2001, and the impact was not material to our financial position and results of operations. 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. We amortize our intangible assets with determinable lives on a straight-line basis over the estimated period to be benefited by the intangible assets which we estimates to be 10 years. The standard also requires that an impairment test be performed to support the carrying value of goodwill and intangible assets at least annually. Our goodwill impairment test utilizes discounted cash flows to determine fair value and comparative market multiples to corroborate fair value. Our intangible assets other than goodwill are tested for impairment based on undiscounted cash flows, and if impaired, written-down to fair value based on either discounted cash flows or appraised values. Our intangible assets are comprised of customer accounts and complete technology in our test interconnect business segment. We manage and value our complete technology in the aggregate as one asset group.

Overview

Net sales. Our equipment sales depend on the capital expenditures of semiconductor manufacturers and subcontract assemblers worldwide which, in turn, depend on the current and anticipated market demand for semiconductors and technology driven advancements in semiconductor design. The semiconductor industry historically has been highly volatile, and has experienced periodic downturns and slowdowns, which have had a severe negative effect on the semiconductor industry’s demand for capital equipment. For example, a downturn in the semiconductor industry from fiscal 2001 through most of fiscal 2003 contributed to lower net sales in each of those fiscal years in comparison to our fiscal 2000 net sales, during which time the semiconductor industry was experiencing an upturn.

Our packaging materials sales depend on manufacturing expenditures of semiconductor manufacturers and subcontract assemblers, many of which also purchase our equipment products. However, the volatility in demand for our packaging materials is less than that of our equipment sales due to the consumable nature of these products.

Our test interconnect solutions sales depend on the manufacturing expenditures of some of the same semiconductor manufacturers and subcontractors as our equipment and packaging materials sales. Because of the consumable and customized nature of most of our test products, however, the volatility in demand for these test products is less than that of our equipment sales.

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Cost of goods sold. Equipment cost of goods sold consists mainly of subassemblies, materials, direct and indirect labor costs and other overhead. We rely on subcontractors to manufacture many of the components and subassemblies for our products and we rely on sole source suppliers for some material components.

Packaging materials cost of goods sold consists primarily of gold, aluminum, direct labor and other materials used in the manufacture of bonding wire, capillaries, wedges and other company products, with gold making up the majority of the cost. Gold bonding wire is generally priced based on a fabrication charge per 1,000 feet of wire, plus the value of the gold. To minimize our exposure to gold price fluctuations, we obtain gold for fabrication under a contract with our gold supplier on consignment and only purchase the gold when we ship the finished product to the customer. Accordingly, fluctuations in the price of gold are generally absorbed by our gold supplier or passed on to our customers. Since gold makes up a significant portion of the cost of goods sold of the bonding wire business unit, the gross profit margins of that business unit and therefore the packaging materials segment will be lower than can be expected in the equipment business. We rely on one supplier for our gold requirements.

Test interconnect cost of goods sold consists primarily of direct labor, indirect labor for engineering design and materials used in the manufacture of wafer and IC package testing cards and devices.

Selling, general and administrative expense. Our selling, general and administrative expense is comprised primarily of personnel and related costs, professional costs, and depreciation expense.

Research and development expense. Our research and development costs consist primarily of labor, prototype material and other costs associated with our developmental efforts to strengthen our product lines and develop new products and depreciation expense. For example, 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. Included in research and development expense is the cost to develop the software that operates our semiconductor assembly equipment, which is expensed as incurred. Our research and development costs decreased in fiscal 2003 as a result of the resizing of our business. However, we expect to continue to incur significant research and development costs.

RESULTS OF OPERATIONS

Three and Nine Months Ended June 30, 2004 Compared with the Three and Nine Months Ended June 30, 2003

Bookings and Backlog

During the June 2004 quarter, we recorded bookings of $186.6 million compared to $219.2 million in the March 2004 quarter and $135.5 million in the June 2003 quarter. A booking is recorded when a customer order is reviewed and a determination is made that all specifications can be met, production (or service) can be scheduled, a delivery date can be set, and the customer meets the Company’s credit requirements. At June 30, 2004, we had a backlog of customer orders totaling $104.0 million, compared to $111.8 million at March 31, 2004 and $49.3 million at June 30, 2003. Our backlog as of any date may not be indicative of net sales for any succeeding period, since the timing of deliveries may vary and orders generally are subject to delay or cancellation. For example, on August 10, 2004, we announced that discussions with customers indicate a general slowing in the rate of semiconductor growth. As a result, some of these customers have requested that we delay the shipment of wire bonders previously ordered and included in our backlog of customer orders at June 30, 2004.

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Sales

Business segment net sales:

	(dollars amounts in thousands)
	Three months ended June 30,						Nine months ended June 30,
	2003		2004		% Change		2003		2004		% Change
Equipment	$	48,416	$	95,732	97.7	%	$	145,880	$	312,172	114.0	%
Packaging materials		45,828		61,740	34.7	%		128,987		167,418	29.8	%
Test interconnect		29,538		37,156	25.8	%		78,319		90,678	15.8	%
Other		—		—				135		—
	$	123,782	$	194,628	57.2	%	$	353,321	$	570,268	61.4	%

Net sales from continuing operations for the June 2004 quarter increased $70.8 million or 57.2% from the same period in the prior year and for the nine months ended June 2004 increased $216.9 million or 61.4%. Increased demand in the semiconductor industry along with our leading position in the semiconductor wire bonding equipment industry and our ability to ramp production to meet customer demand were the driving forces behind the increase in net sales from the same period in the prior year. While net sales in the June 2004 quarter increased from the prior year they were $27.1 million or 12.2% below net sales in the March 2004 quarter. The lower sequential sales reflected a slowing in demand for wire bonders after record wire bonder unit sales in the March 2004 quarter.

Our equipment segment was the primary beneficiary of the increased demand in the semiconductor industry with automatic wire bonder unit sales up 137.2% from the prior year in the June 2004 quarter and up 179.5% for the nine months ended June 2004. The large increases in automatic wire bonder unit sales compared to the prior year was partially offset by a lower blended average selling price per automatic wire bonder unit (ASP) of 4.1% in the June 2004 quarter and 8.9% in the nine months ended June 2004. The decline in blended ASP, from the prior year, was expected and reflects our historical product life cycle pricing pattern. ASPs generally go down over time for any particular model. To mitigate this we introduce new models with additional features that enable us to demand a higher selling price. The blended ASP varies with the proportion of newer models sold and with customer mix. While the blended ASP was lower than the prior year it was relatively even with the prior quarter.

Our packaging materials business also benefited from the increased demand in the semiconductor industry with strong unit sales growth. Our capillary unit sales were up 18.3% in the June 2004 quarter and 28.2% for the nine months ended June 2004. Blended capillary ASP was relatively flat with the prior year in both the quarter and nine months ended June 2004. Blended capillary ASP is a function of the general decline in unit prices and mix between high and low end capillaries. High end capillaries support advanced packaging applications and have higher ASP’s. As in our equipment business, we introduce new capillaries with additional features that enable us to demand a higher selling price. Our wire unit sales (measured in Kft) increased 46.3% in the June 2004 quarter and 35.8% for the nine months ended June 2004. Wire ASP is heavily dependent upon the price of gold and can fluctuate significantly from period to period. In the June 2004 quarter the increase in the price of gold accounted for $5.3 million of the sale increase over the prior year and accounted for $16.0 million of the increase for the nine months ended June 2004.

Our test interconnect sales were 25.8% above the prior year in the June 2004 quarter and 15.8% above for the nine months ended June 2004. During the June 2004 quarter one of our biggest test customers implemented a sudden change in their product road map, driving a spike of business for us. We helped the customer get through their transition and expect our test business to settle back into a more normal trend line. ASPs are not meaningful in the test business due to lack of a standard unit of measure and the large difference in part types sold. As such, ASP’s are not a metric used by management.

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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 87% of our total sales in the first nine months of fiscal 2004 compared to 78% in the first nine months of the prior fiscal year. The majority of these foreign sales were destined for customers 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 26% of our shipments in the first nine months of fiscal 2004 compared to 19% of our shipments in the first nine months of the prior fiscal year.

Gross Profit

Business segment gross profit:

	(dollars amounts in thousands)
	Three months ended June 30,								Nine months ended June 30,
	2003		% Sales		2004		% Sales		2003		% Sales		2004		% Sales
Equipment	$	16,176	33.4	%	$	39,792	41.6	%	$	49,686	34.1	%	$	130,650	41.9	%
Packaging materials		10,758	23.5	%		13,944	22.6	%		31,029	24.1	%		37,450	22.4	%
Test interconnect		5,169	17.5	%		11,336	30.5	%		14,121	18.0	%		20,868	23.0	%
Other		—	—			—	—			135	—			—	—
	$	32,103	25.9	%	$	65,072	33.4	%	$	94,971	26.9	%	$	188,968	33.1	%

Gross profit increased $33.0 million or 102.7% over the prior year in the June 2004 quarter and increased $94.0 million or 99.0% over the prior year for the nine months ended June 2004. In the June 2004 quarter, our gross margin (gross profit as a percentage of sales) improved from 25.9% in the prior year to 33.4% and for the nine months ended June 2004 it improved from 26.9% to 33.1%. The improved gross profit and gross margin was due primarily to the higher sales volume.

Our equipment gross margin increased 8.2 percentage points from the prior year in the June 2004 quarter and 7.8 percentage points in the nine months ended June 2004. A lower cost per automatic wire bonder unit was the primary reason for the higher gross margin in both the quarter and nine months ended June 2004. Our average cost per unit was 13.6% below the prior year in the June 2004 quarter and 22.2% below for the nine months ended June 2004. Like the decline in ASP, our lower cost per unit reflects the lowering of production costs over a product life cycle along with a change in product mix and our continuing efforts to drive down our cost structure.

Our packaging materials gross margin was adversely affected by the higher price of gold in fiscal 2004 compared to fiscal 2003, which makes up a significant portion of our wire cost of sales, and the sale of our hard materials blade product line in August of 2003. The hard materials blades margins were higher than the average packaging material segment margin.

Our test interconnect gross margin increased 13.0 percentage points in the June 2004 quarter and 5.0 percentage points in the nine months ended June 2004 due primarily to the spike in sales volume mentioned above. Start-up costs associated with the ramping of production of cantilever products in our China facility partially offset the positive impact from the higher sales.

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Operating Expenses

	(dollars amounts in thousands)
	Three months ended June 30,								Nine months ended June 30,
	2003		% Sales		2004		% Sales		2003			% Sales		2004			% Sales
Selling, general and administrative	$	22,947	18.5	%	$	24,688	12.7	%	$	77,902		22.0	%	$	78,055		13.7	%
Research and development, net		9,735	7.9	%		8,887	4.6	%		29,412		8.3	%		25,791		4.5	%
Resizing(recovery) costs		—	0.0	%		—	0.0	%		(205	)	-0.1	%		(68	)	0.0	%
Loss (gain) on disposal of assets		4	0.0	%		—	0.0	%		(117	)	0.0	%		(794	)	0.0	%
Asset impairment		1,207	1.0	%		—	0.0	%		2,915		0.8	%		3,293		0.6	%
Amortization of intangible assets		2,315	1.9	%		2,198	1.1	%		6,944		2.0	%		6,828		1.2	%
	$	36,208	29.3	%	$	35,773	18.4	%	$	116,851		33.1	%	$	113,105		20.0	%

Selling, general and administrative

SG&A expenses were relatively flat with the prior year for both the quarter and nine months ended June 2004 but SG&A expense as a percentage of sales was down 5.8 percentage points and 8.3 percentage points, respectively, for the quarter and nine months ending June 2004 compared to the prior year. In the June 2004 quarter, SG&A expense included $0.3 million of China start-up costs and for the nine months ended June 2004 it included charges of $2.7 million associated with the closing of a probe card production facility in France, $1.2 million of severance and $1.5 million of China start-up costs. In the June 2003 quarter, SG&A expense included costs associated with workforce reductions of $1.0 million and a reversal of a $2.0 million reserve, previously established for potential obligations to U.S. Customs and for the nine months ended June 2003 it included costs associated with workforce reductions of $4.5 million, start-up costs for our new China facility of approximately $1.1 million and a $0.7 million charge for the early termination of an information technology services agreement partially offset by the reversal of the $2.0 million U.S. Customs. Reserve. Other than the above mentioned costs, our ongoing SG&A costs were similar to the corresponding periods of the prior year and reflect our efforts to contain operating costs with higher sales volume.

The workforce reduction/severance charges identified in the previous paragraph were included in SG&A expense because they were not related to formal and distinct restructuring programs, but rather, they were normal and recurring management of employment levels in response to business conditions and our ongoing effort to reduce our cost structure. Also, if the business conditions had improved, we were prepared to rehire some of these terminated individuals. These charges are in contrast to the formal and distinct resizing programs we established in prior fiscal years.

Research and Development

R&D expense for the three and nine months ended June 2004 decreased from the corresponding periods of fiscal 2003 by $0.8 million and $3.6 million, respectively. The reduction for the quarter and for the nine months ended June 2004 was primarily due to lower payroll and related expenses resulting from our ongoing cost reduction efforts.

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Gain on sale of assets

In the second quarter of fiscal 2004, we realized a gain of $709 thousand on the sale of land and $85 thousand on the sale of a portion of our PC board business.

Asset Impairment

In the nine months ended June 2004, we recorded an asset impairment charge of $3.3 million associated with exiting our PC board fabrication business and the closure of a probe card production facility in France. In the June 2003 quarter, we recorded an asset impairment charge of $1.2 million associated with the closure of certain test operations in Dallas, Texas. In the nine months ended June 2003, we recorded an asset impairment of $2.8 million, $1.6 million of which was related to the discontinuation of a test product and $1.2 million was related to the closure of certain test operations in Dallas, Texas.

We perform our annual test for impairment of intangible assets at the end of the fourth quarter of each fiscal year, which coincides with the completion of our annual forecasting process. However, we also test for impairment whenever a “triggering” event occurs. We performed interim goodwill impairment tests during the quarters ended December 31, 2003 and March 31, 2004 due to the existence of an impairment trigger, which was the losses experienced in our test business. The results of this goodwill impairment test, indicated that the fair value of the test reporting unit exceeded its carrying value by approximately $24 million at December 31, 2003 and by $29 million at March 31, 2004. Based on these tests no impairment charge was recorded. Due to the improved profitability of our test business in the June 2004 quarter no triggering event occurred. The fair value of the test reporting unit was based on discounted cash flows of our projected future cash flows from this reporting unit, consistent with the methods used in fiscal 2002 and 2003. When conducting our goodwill impairment analysis, we calculate our potential impairment charges based on the two-step test identified in SFAS 142 and using the implied fair value of the respective reporting units. We use the present value of future cash flows from the respective reporting units to determine the implied fair value. We also tested our intangible assets for impairment in the March 2004 quarter, as a result of the sale of certain assets of the test operations and recorded an impairment charge of $3.2 million associated with the reporting unit’s purchased technology intangible asset. The $3.2 million charge is included in the $3.3 million assets charge recorded in the nine months ended June 2004.

Amortization of Intangible Assets

Amortization expense in both fiscal 2003 and 2004 was associated with our intangible assets for customer accounts and completed technology arising from the acquisition of our test division. The aggregate amortization expense for these items for each of the next five fiscal years is expected to approximate $8.8 million.

Income (loss) from Operations

Business segment income (loss) from operations:

	(dollars amounts in thousands)
	Three months ended June 30,										Nine months ended June 30,
	2003			% Sales		2004			% Sales		2003			% Sales		2004			% Sales
Equipment	$	774		1.6	%	$	24,903		26.0	%	$	(1,842	)	-1.3	%	$	85,232		27.3	%
Packaging materials		4,790		10.5	%		8,168		13.2	%		11,252		8.7	%		21,241		12.7	%
Test interconnect		(5,971	)	-20.2	%		899		2.4	%		(19,798	)	-25.3	%		(16,899	)	-18.6	%
Corporate and other		(3,698	)	—			(4,671	)	—			(11,492	)	—			(13,711	)	—
	$	(4,105	)	-3.3	%	$	29,299		15.1	%	$	(21,880	)	-6.2	%	$	75,863		13.3	%

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Income from operations in the three and nine months ended June 2004 was $29.3 million and $75.9 million, respectively, compared to losses from operations in the three and nine months ended June 2003 of $4.1 million and $21.9 million, respectively. Increased demand in the semiconductor industry, which enabled us to significantly increase sales from the prior year in both the three and nine month periods ended June 2004, and our ongoing efforts to reduce our cost structure were the primary reasons for the improved performance.

As indicated above, our equipment and packaging materials businesses benefited from higher industry wide IC unit volume which resulted in higher unit sales of wire bonders, capillaries and wire and along with our cost reduction initiatives yielded significantly improved profitability in both dollars and margin.

Our test business recorded income from operations in the June 2004 quarter as a result of the spike in sales volume indicated above but was not profitable for the nine months ended June 2004. We are continuing with our plan to improve the performance of this segment which includes reducing its cost structure by: consolidation of facilities, the transfer of a greater portion of its production to our Asian facilities and outsourcing a greater portion of its production and increasing sales through new product introductions. We expect implementation of this plan will continue through 2005 and will result in future period charges and/or restructuring charges.

Our corporate and other expenses increased in the quarter and nine months ended June 2004 from the prior year due to recording employee incentive compensation expense in fiscal 2004 compared to no provision for incentive compensation expense in the prior year.

Interest and Charge on Early Extinguishment of Debt

Interest income in the three and nine months ended June 2004 was $275 thousand and $781 thousand compared to $135 thousand and $796 thousand in the same periods of the prior fiscal year. The higher interest income in the June 2004 quarter was due to higher cash and short-term investments and the lower interest income for the nine months ended June 2004 was due to lower interest rates. Interest expense in the three and nine months ended June 2004 was $2.2 million and $9.1 million compared to $4.3 million and $13.2 million in the same periods of the prior fiscal year. Interest expense in both fiscal 2004 and 2003 primarily reflects interest on our convertible subordinated notes and was lower in the both the three and nine months ended June 2004 due to the redemption of our 4.75% convertible subordinated notes in December 2003 and the purchase of $21 million of our 5.25% convertible subordinated notes in March 2004. We issued $65 million of 1.0% convertible subordinated notes on June 30, 2004 and simultaneously purchased $50 million of our 5.25% convertible subordinated notes. We also have called for redemption in the September 2004 quarter the remaining $54 million of our 5.25% convertible subordinated notes. We expect our quarterly interest expense, including amortization of note issuance costs, to be approximately $1.0 million, once the 5.25% convertible subordinated notes are redeemed, compared to $4.3 million in the June 2003 quarter.

In the June 2004 quarter, we wrote-off $775 thousand of issuance costs and incurred $1.0 million of call premium costs associated with the purchase of the $50 million of 5.25% convertible subordinated notes. For the nine months ended June 2004 we incurred the costs just mentioned and we wrote-off $2.6 million of issuance costs and incurred $3.6 million of call premium costs associated with the redemption of the 4.75% convertible subordinated notes and wrote-off $376 thousand of issuance costs and incurred $241 thousand of premium costs associated with the purchase of $21 million of our 5.25% convertible subordinated notes.

Provision for income taxes

Tax expense in the three and nine months ended June 2004 reflects income tax on income in foreign jurisdictions, alternative minimum tax on U.S. income and a provision for California state income tax. The provision for California state income tax resulted from California’s temporary suspension of the benefit of prior year operating losses. Our tax expense in the three and nine months ended June 2003 reflects income tax on

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income in foreign jurisdictions. In fiscal 2003, we established a valuation allowance against tax benefits from the fiscal 2003 losses in the U.S. In fiscal 2004, we reversed approximately $22.8 million of our valuation allowances. This reversal reflects a decrease in the valuation allowance that primarily results from our ability to utilize federal and state net operating losses based on our projected taxable income through June 30, 2004.

Discontinued Operations

In February 1996, we entered into a joint venture agreement with Delco Electronics Corporation (“Delco”) providing for the formation and management of Flip Chip Technologies, LLC (“FCT”). FCT was formed to license related technologies and to provide wafer bumping services on a contract basis. In March 2001, we purchased the remaining interest in the joint venture owned by Delco for $5.0 million and included FCT in our then existing advanced packaging business segment. In fiscal 2003, our then existing advanced packaging business segment consisted solely of FCT, which was not profitable.

In February 2004, we sold the assets of FCT for approximately $3.4 million in cash and notes, the agreement by the buyer to satisfy approximately $5.2 million of the Company’s lease liabilities and the assumption of certain other liabilities. The sale included fixed assets, inventories, and intellectual property of the Company’s flip chip business. The major classes of FCT assets and liabilities sold included: $3.6 million in accounts receivable, $119 thousand in inventory, $2.5 million in property, plant and equipment, $119 thousand in other long term assets, $1.5 million in accounts payable and $1.0 million in accrued liabilities. We recorded a net loss on the sale of FCT of $380 thousand. Net sales from FCT for the nine months ended June 30, 2004 were $9.4 million, and for the three and nine months ended June 30, 2003 were $3.9 million and $11.7 million, respectively.

Net income (loss)

We reported net income of $22.6 million and $52.5 million, respectively, in the three and nine months ended June 30, 2004 compared to net losses of $11.4 million and $48.3 million, respectively, in the three and nine months ended June 30, 2003 for the reasons enumerated above. Over the past several years, we have been reducing our cost structure, through resizing programs, consolidating operations, moving certain manufacturing capacity to China, moving a portion of our supply chain to lower cost suppliers and designing better but lower cost equipment. Through these efforts, we believe we are able to generate net income over a wider range of net sales levels than in prior periods.

Fiscal Years Ended September 30, 2003, September 30, 2002 and September 30, 2001

The table below shows principal line items from our continuing operations, as a percentage of our net sales, for the three years ended September 30:

	Fiscal Year Ended September 30,
	2001		2002		2003
Net sales	100.0	%	100.0	%	100.0	%
Cost of goods sold	69.7		77.2		73.2
Gross margin	30.3		22.8		26.8
Selling, general and administrative	26.4		30.6		21.4
Research and development, net	11.8		11.8		8.0
Resizing	0.8		4.3		(0.1	)
Asset impairment	0.2		7.2		0.8
Goodwill impairment	—		16.8		—
Amortization of goodwill and intangibles	4.3		2.2		1.9
Purchased in-process research and development	2.3		—		—
Loss on sale of product lines	—		—		1.1
Loss from continuing operations	(15.4	)%	(50.0	)%	(6.3	)%

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Fiscal Years Ended September 30, 2003 and September 30, 2002

Bookings and Backlog. During the fiscal year ended September 30, 2003 we recorded bookings of $488.8 million compared to $444.4 million in fiscal 2002. At September 30, 2003, the backlog of customer orders totaled $59.9 million, compared to $49.0 million at September 30, 2002. Since the timing of deliveries may vary and orders are generally subject to cancellation, our backlog as of any date may not be indicative of net sales for any succeeding period.

Sales

Business segment net sales:

	(dollars amounts in thousands)
	Fiscal year ended September 30,
	2002		2003		% Change
Equipment	$	169,469	$	198,447	17.1	%
Packaging materials		157,176		174,471	11.0	%
Test interconnect		114,698		104,882	-8.6	%
Other (1)		222		135
	$	441,565	$	477,935	8.2	%

Sales. Net sales from continuing operations for the year ended September 30, 2003 were $477.9 million, an increase of 8.2% from $441.6 million in fiscal 2002.

Equipment sales were 17.1% higher then and prior year due primarily to a 46.3% increase in unit sales of automatic ball bonders, which is the dominant product in this business segment. The increase in ball bonder unit sales was partially offset by lower sales of other bonding machines and accessories. The blended average selling price per automatic ball bonder unit (ASP) was relatively flat with the prior year. However, ASPs generally go down over time for any particular model. To mitigate this we introduce new models with additional features that enable us to demand a higher selling price. The blended ASP varies with the proportion of newer models sold and with customer mix.

Packaging material sales were 11.0% higher then the prior year. Our capillary unit sales were up 12.2% in fiscal 2003, while our blended capillary ASP was 5.1% below the prior year. Blended capillary ASP is a function of the general decline in unit prices and mix between high and low end capillaries. High end capillaries support advanced packaging applications and have higher ASP’s. As in our equipment business, we introduce new capillaries with additional features that enable us to demand a higher selling price. Our wire unit sales (measured in Kft) decreased 9.4% in fiscal 2003 do primarily to a shift in product mix from the prior year. The lower wire unit sale was offset by an average increase of 16.2% in the price of gold, which is reflected in our gold wire ASP. The price of gold has a significant impact on our wire ASP and can fluctuate significantly from period to period. In fiscal 2003, the increase in the price of gold accounted for $13.6 million of the sale increase over the prior year.

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Our test interconnect sales were 8.6% below the prior year due primarily to lower unit sales in our cantilever product lines, partially offset by higher sales of vertical and package test products. ASPs are not meaningful in the test business due to lack of a standard unit of measure and the large difference in part types sold. As such, ASP’s are not a metric used by management.

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 80% of our total sales in fiscal 2003 compared to 74% in the prior fiscal year. The majority of these foreign sales were to 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 20.6% of our shipments in fiscal 2003 compared to 25.1% of our shipments in the prior fiscal year.

Gross Profit:

Business segment gross profit:

	(dollars amounts in thousands)
	Fiscal year ended September 30,
	2002		% Sales		2003		% Sales
Equipment	$	26,504	15.6	%	$	69,355	34.9	%
Packaging materials		39,096	24.9	%		41,692	23.9	%
Test interconnect		35,012	30.5	%		17,026	16.2	%
Other (1)		208	93.7	%		135	—
	$	100,820	22.8	%	$	128,208	26.8	%

Gross profit. Gross profit increased to $128.2 million in fiscal 2003 from $100.8 million in fiscal 2002. Included in the results for fiscal 2003 and fiscal 2002 are charges for inventory write-downs of $5.1 million and $14.4 million, respectively. The inventory write-down charge in fiscal 2003 was due primarily to excess and obsolete inventory and discontinued products. The charge for inventory write-downs in fiscal 2002 includes three distinct components: $7.8 million related to the write-down of spare parts inventories; $5.2 million associated with the discontinuance of our model 7700 dual spindle saw; and $1.3 million related to excess and obsolete inventory. We provide reserves for equipment inventory and for spare parts and consumables inventory 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 review of consumable inventory levels at our customers’ facilities. We communicate forecasts of our future demand to suppliers and adjust commitments to those suppliers accordingly. We review and dispose of our excess and obsolete inventory on a regular basis. In fiscal 2003 we disposed of $9.6 million of excess and obsolete inventory and in fiscal 2002 we disposed of $18.6 million of excess and obsolete inventory. The charges for inventory write-downs in fiscal 2003 and fiscal 2002 primarily involve items that are not part of our continuing product offerings and accordingly, should not have a significant impact on our future business or profitability.

Our equipment gross margin increased 19.3 percentage points from the prior year, of which 7.8 percentage points was due to the inventory write-offs discussed above. Excluding these inventory write-off, equipment gross margin increased by 11.5 percentage points, due to 14.3% reduction in the cost per ball bonder unit produced. Our lower cost per unit reflects the lowering of production costs over a product life cycle along with a change in product mix and our continuing efforts to drive down our cost structure.

Our packaging materials gross margin was adversely affected by the higher price of gold in fiscal 2003 compared to fiscal 2002, which makes up a significant portion of our wire cost of sales. However, the higher capillary unit sales accounted for the increase in gross profit dollars.

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Our test interconnect gross margin decreased 14.3 percentage points from fiscal 2002, of which 3.2 percentage points was due to the inventory write-offs discussed above. Lower sales and associated gross profit accounted for the remaining reduction in test gross margin.

Operating Expenses:

	(dollars amounts in thousands)
	Fiscal year ended September 30,
	2002		% Sales		2003			% Sales
Selling, general and administrative	$	135,054	30.6	%	$	102,327		21.4	%
Research and development, net		51,929	11.8	%		38,121		8.0	%
Resizing(recovery) costs		18,768	4.3	%		(475	)	-0.1	%
Asset impairment		31,594	16.8	%		3,629		0.0	%
Goodwill impairment		74,295	2.2	%		—		1.9	%
Amortization of intangible assets		9,864	2.2	%		9,260		1.9	%
Loss on sale of product lines		—	7.2	%		5,257		0.8	%
	$	321,504	72.8	%	$	158,119		33.1	%

Selling, general and administrative expenses. Selling, general and administrative (referred to as SG&A) expenses decreased $32.7 million or 24.2% from $135.1 million in fiscal 2002 to $102.3 million in fiscal 2003. The lower SG&A expenses in fiscal 2003 resulted primarily from our cost saving initiatives, principally related to reductions in employment levels. Included in the SG&A expense for fiscal 2003 were costs associated with workforce reductions (severance) of $5.2 million, start-up costs for our new China facility of approximately $2.0 million and a $0.7 million charge for the early termination of an information technology services agreement partially offset by the favorable reversal of a $2.0 million reserve, previously established for potential obligations to U.S. Customs. Included in the fiscal 2002 SG&A expense were workforce reductions (severance) of $5.0 million and training and start-up costs for our new China facility of $2.2 million.

The workforce reduction/severance charges identified in the previous paragraph were included in SG&A expense because they were not related to formal and distinct restructuring programs, but rather, they were normal and recurring management of employment levels in response to business conditions and our ongoing effort to reduce our cost structure. Also, if the business conditions had improved, we were prepared to rehire some of these terminated individuals. These charges are in contrast to the formal and distinct resizing programs we established in prior fiscal years.

Research and development. Research and development (“R&D”) expense in fiscal 2003 decreased $13.8 million or 26.6% from fiscal 2002. The lower R&D expense in fiscal 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.

Resizing: The semiconductor industry has been volatile, with sharp periodic downturns and slowdowns. The industry experienced excess capacity and a severe contraction in demand for semiconductor manufacturing equipment during our fiscal 2001, 2002 and most of 2003. We developed formal resizing plans in response to these changes in our business environment with the intent to align our cost structure with anticipated revenue levels. Accounting for resizing activities requires an evaluation of formally agreed upon and approved plans. We documented and committed to these plans to reduce spending that included facility closings/rationalizations and reductions in workforce. We recorded the expense associated with these plans in the period that it committed to carry-out the 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.

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In fiscal 2003, we reversed $475 thousand ($205 thousand in the first half of 2003) of these resizing charges due to the actual severance cost associated with the terminated positions being less than the cost originally estimated. We recorded resizing charges of $18.7 million in fiscal 2002 and $4.2 million in fiscal 2001.

In addition to the formal resizing costs identified below, we continued (and are continuing) to downsize our operations in fiscal 2002 and 2003. These downsizing efforts resulted in workforce reduction charges of $5.6 million in fiscal 2003 and $5.0 million in fiscal 2002. In contrast to the resizing plans discussed above, these workforce reductions were not related to formal or distinct restructurings, but rather, the normal and recurring management of employment levels in response to business conditions and our ongoing effort to reduce our cost structure. In addition, during fiscal 2003, if the business conditions were to have improved, we were prepared to rehire some of these terminated individuals. These recurring workforce reduction charges were recorded as Selling, General and Administrative expenses.

A summary of the formal resizing plans initiated in fiscal 2002 and 2001 and acquisition restructuring plans initiated in fiscal 2001 appears below:

	(in thousands)
Fiscal 2001 and 2002 Resizing Plans and Acquisition Restructurings	Severance and Benefits			Commitments			Total
Provision for resizing plans in fiscal 2001	$	4,166		$	—		$	4,166
Acquisition restructurings		84			1,402			1,486
Payment of obligations in fiscal 2001		(2,101	)		(213	)		(2,314	)
Balance, September 30, 2001		2,149			1,189			3,338
Provision for resizing plans in fiscal 2002:
Continuing operations		9,486			9,282			18,768
Discontinued operations		893			—			893
Payment of obligations in fiscal 2002		(7,551	)		(1,470	)		(9,021	)
Balance, September 30, 2002		4,977			9,001			13,978
Change in estimate		(475	)					(475	)
Payment of obligations in fiscal 2003		(3,590	)		(3,211	)		(6,801	)
Balance, September 30, 2003	$	912		$	5,790		$	6,702

The remaining balance of the resizing costs are included in accrued liabilities.

The individual resizing plans and acquisition restructuring plans initiated in fiscal 2002 and 2001 are identified below:

Charges in Fiscal Year 2002

Fourth Quarter 2002

In January 1999, we acquired the advanced substrate technology of MicroModule Systems, a Cupertino, California company, to enable production of high density substrates. While showing some progress in developing the substrate technology, the business was not profitable and would have required additional capital and operating cash to complete development of the technology. In light of the business downturn that was affecting the semiconductor industry at the time, in the fourth quarter of fiscal 2002, we announced that we could not afford further development of the substrate technology and would close our substrate operations. 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 $7.3 million. We expected, and achieved, annual payroll related savings of approximately $4.2 million and annual facility/operating savings of

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approximately $3.9 million as a result of this resizing plan. By June 30, 2003, all the positions had been eliminated. The plans have been completed 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. This substrate business was included in our then existing Advanced Packaging business segment.

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 thousands)
Fourth Quarter 2002 Charge	Severance and Benefits			Commitments			Total
Provision for resizing	$	1,231		$	7,280		$	8,511
Balance, September 30, 2002		1,231			7,280			8,511
Change in estimate:
Change in estimate		(102	)		—			(102	)
Payment of obligations		(1,051	)		(2,401	)		(3,452	)
Balance, September 30, 2003	$	78		$	4,879		$	4,957

Third Quarter 2002

As a result of the continuing downturn in the semiconductor industry and our desire to improve the performance of its test business segment, we decided to move towards a 24 hour per-day manufacturing model in its major U.S. wafer test facility, which would provide its customers with faster turn-around time and delivery of orders and economies of scale in manufacturing. As a result, in the third quarter of fiscal 2002, we announced a resizing plan to reduce headcount and consolidate manufacturing in its test business segment. As part of this plan, we moved manufacturing of wafer test products from its facilities in Gilbert, Arizona and Austin, Texas to its facilities in San Jose, California and Dallas, Texas and from its Kaohsuing, Taiwan facility to its Hsin Chu, Taiwan facility. The resizing plan included a severance charge of $1.6 million for the elimination of 149 positions as a result of the manufacturing consolidation. The resizing plan also included 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. We expected, and achieved, annual payroll related savings of approximately $6.9 million and annual facility/operating savings of approximately $84 thousand as a result of this resizing plan. All of the positions have been eliminated and both facilities have been closed. The plans have been completed but cash payments for the severance are expected to continue through 2005 and cash payments for facility and contractual obligations are expected to continue through 2004, or such earlier 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.

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	(in thousands)
Third Quarter 2002 Charge	Severance and Benefits			Commitments			Total
Provision for resizing	$	1,652		$	452		$	2,104
Payment of obligations		(547	)		(219	)		(766	)
Balance, September 30, 2002		1,105			233			1,338
Payment of obligations		(800	)		(72	)		(872	)
Balance, September 30, 2003	$	305		$	161		$	466

Second Quarter 2002

As a result of the continuing downturn in the semiconductor industry and our desire to more efficiently manage its business, 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 ($10.4 million in continuing operations and $0.9 million in discontinued operations), 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 our 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.

In the second quarter of fiscal 2002, we 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 dates that are associated with these closed test facilities.

To reduce our short term cash requirements, we 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 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 we reduced our expected annual savings from this resizing plan for payroll related expenses by approximately $4.7 million.

Also in the fourth quarter of fiscal 2002, we reversed $600 thousand ($590 thousand in continuing operations and $10 thousand in discontinued operations) of the severance resizing expenses and in the fourth quarter of fiscal 2003 we reversed $353 thousand of resizing expenses, previously recorded in the second quarter of fiscal 2002, 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.

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 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.

We expected annual payroll related savings of approximately $17.3 million and annual facility/operating savings of approximately $660 thousand as a result of this resizing plan. As a result of the decision not to relocate either its hub blade manufacturing facility or its microelectronics product manufacturing we ultimately achieved annual payroll related savings of approximately $12.7 million. The plans have been completed but cash payments for the severance charges and the facility and contractual obligations are expected to continue into 2005, or such time as the obligations can be satisfied.

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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 thousands)
Second Quarter 2002 Charge	Severance and Benefits			Commitments			Total
Provision for resizing - Continuing operations	$	8,830	(1)	$	1,550		$	10,380
Provision for resizing - Discontinued operations		903			—			903
Change in estimate - Continuing operations		(2,227	)		—			(2,227	)
Change in estimate - Discontinued operations		(10	)		—			(10	)
Payment of obligations		(5,367	)(1)		(81	)		(5,448	)
Balance, September 30, 2002		2,129			1,469			3,598
Change in estimate		(353	)		—			(353	)
Payment of obligations		(1,284	)		(719	)		(2,003	)
Balance, September 30, 2003	$	492		$	750		$	1,242

(1) Includes $2.6 million non-cash charge for modifications of stock option awards that were granted prior to December 31, 2001 to the employees affected by the resizing plans in accordance with our annual grant of stock options to employees.

Charges in Fiscal Year 2001

Fourth Quarter 2001

As part of our efforts to more efficiently manage our business and reduce operating costs, we announced in the fourth quarter of fiscal 2001 that we would close our bonding wire facility in the United States and move the production capacity to our bonding wire facility in Singapore. We 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. We expected, and achieved, annual payroll related savings of approximately $11.5 million. 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 were expected to continue through 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.

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	(in thousands)
Fourth Quarter 2001 Charge	Severance and Benefits			Commitments			Total
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
Change in estimate		(20	)					(20	)
Payment of obligations		(455	)		—			(455	)
Balance, September 30, 2003	$	37		$	—		$	37

Second Quarter 2001

As a result of the downturn in the semiconductor industry, 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. We expected, and achieved, annual payroll related savings of approximately $7 million. 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 payments related to severance and facility obligations under 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 thousands)
Second Quarter 2001 Charge	Severance and Benefits			Commitments			Total
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, September 30, 2003	$	—		$	—		$	—

Asset impairment. In addition to the workforce resizings and the facility consolidations, over the past two fiscal years we have terminated several of our major initiatives in an effort to more closely align our cost structure with expected revenue levels. As a result, we recorded asset impairment charges of $3.6 million in fiscal 2003 and $31.6 million in fiscal 2002. The fiscal 2003 charge included; $1.7 million associated with the discontinuation of a test product; $1.2 million due to the reduction in the size of a test facility in Dallas, Texas; and $730 thousand resulting from the write-down of assets that were sold and assets that became obsolete. The fiscal 2002 charge included; $16.9 million associated with the cancellation of a company-wide integrated information system; $8.4 million associated with the closure of the substrates operation; $3.6 million charge for the write-off of development and license costs of certain engineering and manufacturing software, which had not yet been completed or placed in service and would never be utilized; $1.4 million associated with a closed wire facility in Taiwan; and $1.3 million related to leasehold improvements at the leased probe card manufacturing facilities in Malaysia and the United States, which have been closed.

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We also recorded an asset impairment charge of $6.9 million, to write-down assets to their realizable value, in our discontinued operation.

Goodwill impairment. 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. We perform our annual impairment test at the end of the fourth quarter of each fiscal year, which coincides with the completion of our annual forecasting process. We also test for impairment between our annual tests if a “trigger” event occurs that may have the effect of reducing the fair value of a reporting unit below its carrying value. When conducting our goodwill impairment analysis, we calculate our potential impairment charges based on the two-step test identified in SFAS 142 and using the implied fair value of the respective reporting units. We use the present value of future cash flows from the respective reporting units to determine the implied fair value. Our intangible assets other than goodwill are tested for impairment based on undiscounted cash flows, and if impaired, written-down to fair value based on either discounted cash flows or appraised values. Our intangible assets are comprised of customer accounts and complete technology in its test interconnect business segment. We manage and value our complete technology in the aggregate as one asset group.

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 businesses. The bonding wire and hub blade businesses are included in our packaging materials segment, the substrate business is included in our advanced packaging segment and the test business comprises our test segment and the flip chip business unit is included in discontinued operations. 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 in fiscal 2002, 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. Also 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 and increased goodwill associated with its flip chip reporting unit by $96 thousand reflecting an increase in the cost to purchase the former joint venture partner’s equity share.

In fiscal 2001, 2002 and 2003, the semiconductor industry experienced a severe industry downturn. Due to the prolonged nature of the industry downturn, we continually recalibrated our businesses and projections of future operating activities. We saw an up-tick in our business in the spring of 2002 and at that time believed we were emerging from the effects of an industry down turn. However, this up-tick in business was not sustained and our business turned back down in the second half of fiscal 2002. By the end of its fiscal 2002, our recalibrated forecasts of future cash flows from our test, hub blades and substrate reporting units were substantially lower than in the beginning of that fiscal year, which lead to the closing of the substrate business and an associated write-off of all the substrate intangible assets of $1.1 million and goodwill impairment charges in the test business of $72.0 million and in our hub blades business of $2.3 million. Likewise, by the end of fiscal 2003, our forecast of future cash flows from our flip chip business unit were lower than previous forecasts and resulted in goodwill and assets impairment charges of $5.7 million and the subsequent sale of the assets of this business. We recorded goodwill impairment charges in the period in which our analysis of future business conditions indicated that the reporting unit’s fair value, and the implied value of its goodwill, was less than its carrying value.

Due to the amount of goodwill associated with our test reporting unit, we retained a third party valuation firm to assist management in estimating the test reporting unit’s fair value at September 30, 2002. The appraisal was based on discounted cash flows of this reporting unit. The estimated fair value was determined using our

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weighted average cost of capital. The estimated fair value was then corroborated by comparing the implied multiples applicable to the test reporting unit’s projected earning to “guideline” companies’ forward earnings and based on this it was determined that they were within the range of the “guideline” companies. The fair value of our test reporting unit at September 30, 2003 was determined in the same manner, however, as it was greater than the carrying value of the reporting unit, there was no goodwill impairment.

We also recorded a goodwill impairment charge at September 30, 2002 in our hub blade reporting unit. We calculated the fair value of this reporting unit based on the present value of its projected future cash. The estimated fair value was determined using our weighted average cost of capital. The triggering event for this impairment charge was the recalibrated forecasts, in the fourth quarter of fiscal 2002, when we first determined that the fair value of the hub blade reporting unit was less then its carrying value.

In September 2003, we recorded a goodwill impairment charge at our flip chip business unit. The fair value of this reporting unit was determined using quoted prices from potential purchasers of this reporting unit. The quoted prices were subsequently confirmed upon the sale of the assets of the flip chip reporting unit in February of 2004. The triggering event for this impairment charge was also recalibrated forecasts in the fourth quarter of fiscal 2003, when we first determined that the fair value of its flip chip reporting unit was less then its carrying value.

The following table presents pro forma net earnings and earnings per share data reflecting the impact of adoption of SFAS 142 as of the beginning of the first quarter of fiscal 2001:

	(in thousands, except per share data)
	Fiscal Year Ended September 30,
	2001			2002			2003
Reported net loss, before adoption of SFAS 142	$	(65,251	)	$	(274,115	)	$	(76,689	)
Addback:
Goodwill amortization, net of tax		9,587			—			—
Pro forma net loss	$	(55,664	)	$	(274,115	)	$	(76,689	)
Net loss per share, as reported:
Basic	$	(1.34	)	$	(5.57	)	$	(1.54	)
Diluted	$	(1.34	)	$	(5.57	)	$	(1.54	)
Goodwill amortization, net of tax per share:
Basic	$	0.20		$	—		$	—
Diluted	$	0.20		$	—		$	—
Pro forma net loss per share:
Basic	$	(1.14	)	$	(5.57	)	$	(1.54	)
Diluted	$	(1.14	)	$	(5.57	)	$	(1.54	)

Amortization of goodwill and intangibles

Amortization expense was $9.3 million in fiscal 2003 compared to $9.9 million in fiscal 2002. The lower amortization expense in fiscal 2003 was due to the elimination of amortization expense in fiscal 2003 on acquired technology at our former substrate business that was written-off upon the closure of this business in the fourth quarter of fiscal 2002. The amortization expense in fiscal 2003 is associated with the intangible assets of our test business unit.

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Purchased in-process research and development

In fiscal 2001, we recorded a charge of $11.7 million for in-process R&D associated with the acquisitions of Cerprobe and Probe Tech, representing the appraised value of products still in the development stage that did not have a future alternative use and which had not reached technological feasibility. As part of the acquisition, we acquired 16 ongoing R&D projects, all aimed at increasing the technological features of the existing probe cards and therefore the number of test applications for which they could be marketed. The R&D projects ranged from researching the feasibility of producing multi-die testing probes to researching the feasibility of producing probes for specialized semiconductor package (CSP and BGA) configurations. The project stage of completion ranged from 10% to 90% and all projects were due for completion and product launch by the third quarter of 2002 at prices and costs similar to the existing probe cards marketed by Cerprobe and Probe Tech.

In the valuation of this in-process technology, we utilize a variation of the income approach. We forecast revenue, earnings and cash flow for the products under development. Revenues are projected to extend out over the expected useful lives for each project. The technology is then valued through the application of the Discounted Cash Flow method. Values were calculated using the present value of their projected future cash flow at discount rates of between 28.4% and 49.1%. We anticipated that some of these projects might take longer to develop than originally thought and that some of these projects may never be marketable and took into account the risk that the anticipated future cash flows might not be achieved. Of the 16 ongoing R&D projects at the time of the acquisition five have been completed, one is still in progress, four have been cancelled due to overlapping technology with our Cobra line of vertical test products, and six were cancelled due to nonproductive results. We believe that the expected returns of the completed and in-process R&D projects will be realized. We also believe that future revenues from our existing Cobra products will offset the expected future revenues from the R&D projects that were cancelled due to the overlapping technology and that there will be no adverse material impact on the Company’s future operating results or the expected return on its investment in the acquired companies. The six projects that were cancelled due to lack of productive results will not have a material impact on our future operating results and expected return on our investment in the acquired companies.

The major R&D projects in process at the time of the acquisition, along with their current status and estimated time for completion are as follows:

(dollars in thousands)
R&D project	Value Assigned at Purchase(2)		Percentage Complete at Purchase		Estimated Cost to Complete Project at Purchase		Current Projected Product Launch Date	Current Status of Project
Next generation contact technology	$	2,700	10	%	$	290	N/A	Cancelled
Socket testing capability for CSP and BGA packages	$	2,000	50	%	$	65	N/A	Complete
ViProbe pitch reduction	$	1,600	40	%	$	89	N/A	Cancelled (1)
Vertical space transformer	$	1,500	25	%	$	278	N/A	Cancelled (1)
Extension of P4 technology to vertical test configurations	$	1,300	40	%	$	229	N/A	Cancelled (1)
Low-force, high-density interface using P4 technology	$	1,300	30	%	$	138	N/A	Cancelled
All other projects combined (total of ten projects)	$	1,300	10-90	%	$	576	Q2 2004	4 complete; 1 in process; 5 cancelled

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We purchased two companies; Cerprobe Corporation (“Cerprobe”) and Probe Technology Corporation (“Probe Tech”) that design and manufacture semiconductor test interconnect solutions, in our fiscal year 2001. Subsequent to the acquisitions, we determined that the vertical probe technology designed and marketed by Probe Tech was superior to the vertical probe technology of Cerprobe. We then shifted our R&D efforts to further enhancement of the Probe Tech vertical probe technology and cancelled the R&D projects at Cerprobe that were enhancing the Cerprobe vertical probe technology. The R&D projects identified by (1) in the above table were Cerprobe projects that were cancelled due to the shift in focus to the Probe Tech vertical probe technology. We expect the future revenue from the Probe Tech vertical probe technology will replace the anticipated revenue from the Cerprobe vertical probe R&D projected that have been cancelled.

The Value Assigned at Purchase reflects the present value of the projected future cash flow generated from the sale of products created by each R&D project from its launch date through the expected life of the product.

Loss on sale of product lines. In the fourth quarter of fiscal 2003, we sold the fixed assets, inventories and intellectual property associated with our sawing and hard material blade product lines for $1.2 million in cash. We wrote-off $6.5 million of net assets associated with the transaction. In addition, we sold the assets associated with our polymers business for $105 thousand. This loss on sale of product lines of $5.3 million has been reclassified to be included in our operating expenses section of the consolidated statement of operations, from its prior presentation outside of the operating results.

Income(loss) from Operations:

	(dollars amounts in thousands)
	Fiscal year ended September 30,
	2002			% Sales		2003			% Sales
Equipment	$	(65,462)		-38.6	%	$	(3,234)		-1.6	%
Packaging materials		6,518		4.1	%		15,919		9.1	%
Test interconnect		(95,065	)	-82.9	%		(27,192	)	-25.9	%
Corporate and other		(66,675	)	—			(15,404	)	—
	$	(220,684)		-50.0	%	$	(29,911)		-6.3%

Our loss from operations in fiscal 2003 was $29.9 million compared to $220.7 million in the prior fiscal year. The smaller operating loss in fiscal 2003 compared to fiscal 2002 was due primarily to higher sales and gross profit, lower SG&A and R&D expenses, no resizing expenses, and lower asset and goodwill impairment charges.

Equipment operating loss was reduced from $65.5 million to $3.3 million due primarily to higher sales and gross profit and lower operating costs. Packaging materials operating income increased by $9.4 million or 144.3% due primarily to recording $5.2 million of assets and goodwill impairment charges in the prior year and higher sales and gross profit in the current year. Test interconnect operating loss was $67.9 million less then the prior year due primarily to recording $73.2 million of goodwill and assets impairment charges in the prior year compared to $3.1 million of assets impairment charges in fiscal 2003. In order to improve the operating results of this business, we plan; to consolidate test facilities, transfer a greater portion of the test production to our Asian facilities, outsourcing a greater portion of the test production, and new product introductions. We expect implementation of this plan will continue through 2005 and will result in future period charges and/or restructuring charges. Our loss from corporate and other activities was $51.3 million less then the prior year due to asset impairment charges of $25.3 million and operating costs of our former substrate operation recorded in the prior year.

Interest. Interest income in fiscal 2003 was $940 thousand compared to $3.8 million in the prior year. The lower interest income was due primarily to lower cash balances to invest coupled with lower interest rates on short-term investments. Interest expense was $17.4 million in fiscal 2003 compared to $18.7 million in the prior year. The lower interest expense in fiscal 2003 resulted from the elimination in fiscal 2003 of interest associated with a receivable securitization program which was cancelled in July of 2002.

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Other income and minority interest. Other income of $2.0 million in fiscal 2002 was associated with the cash settlement of an insurance claim associated with a fire in our bonding tools facility. Other income also includes minority interest of $10 thousand in fiscal 2002 for the portion of the loss of a foreign test division subsidiary that was owned by a third party. We purchased the third party’s interest in fiscal 2002.

Tax expense. We recognized tax expense of $7.6 million in fiscal 2003 compared to $32.6 million in fiscal 2002. The tax expense in fiscal 2003 represents income tax on foreign earnings and reserves for foreign withholding tax on repatriation of certain foreign earnings. In fiscal 2003 we established a valuation allowance of $12.1 million against our U.S and foreign net operating losses. The tax expense in fiscal 2002 was due primarily to a $65.3 million charge to establish a valuation allowance against our U.S. net operating loss carryforwards, a $25.0 million charge to provide for tax expense on repatriation of certain foreign earnings and foreign income taxes of $7.1 million. These charges were partially offset by a benefit of $49.5 million from the pretax loss in the U.S.

Discontinued Operations. The net loss of our former Flip Chip business unit comprises our discontinued operations. Included in the fiscal 2003 loss from discontinued operations are an asset impairment charge of $6.9 million and a goodwill impairment charge of $5.7 million.

Cumulative effect of change in accounting principle. In fiscal 2001, we adopted SAB 101 and recorded a cumulative effect of a change in accounting principle of $8.2 million, net of taxes of $4.4 million. The cumulative effect represents the net income associated with $26.5 million of sales that were deferred upon adoption of the standard. We recognized $6.3 million of the $26.5 million of deferred sales in fiscal 2002 and $19.3 million in fiscal 2001. At September 30, 2003, deferred sales revenue was approximately $300 thousand.

Net loss. Our net loss for fiscal 2003 was $76.7 million compared to a net loss of $274.1 million in fiscal 2002, for the reasons enumerated above.

Fiscal Years Ended September 30, 2002 and September 30, 2001

Bookings and backlog. During the fiscal year ended September 30, 2002 we recorded bookings of $444.4 million compared to $380.7 million in fiscal 2001. At September 30, 2002, the backlog of customer orders totaled $49.0 million, compared to $39.0 million at September 30, 2001. Since the timing of deliveries may vary and orders are generally subject to cancellation, our backlog as of any date may not be indicative of net sales for any succeeding period.

Sales

Business segment net sales:

	(dollars amounts in thousands) Fiscal Year ended September 30,
	2001		2002		% Change
Equipment	$	249,952	$	169,469	-32.2	%
Packaging materials		150,945		157,176	4.1	%
Test interconnect		116,890		114,698	-1.9	%
Other (1)		595		222
	$	518,382	$	441,565	-14.8	%

Net sales from continuing operations for the year ended September 30, 2002 were $441.6 million, a decrease of 14.8% from $518.4 million in fiscal 2001. The decrease in sales reflected the continued downturn in the semiconductor industry, which significantly impacted sales of our semiconductor assembly equipment and test products.

Equipment sales were 32.2% lower then the prior year due primarily to lower unit sales of wedge and tab bonders, ball attachment machines and dicing machines along with a 30.5% lower blended average selling price (ASP) for our automatic ball bonders. These negative impacts on our net sales were partially offset by a 44.1% increase in unit sales of automatic ball bonders, which is the dominant product in this business segment. The decrease in automatic ball bonders blended ASP was particularly severe in fiscal 2002 due to competitive pricing pressure during a prolonged industry downturn. However, ASPs generally go down over time for any particular model. To mitigate this we introduce new models with additional features that enable us to demand a higher selling price. The blended ASP varies with the proportion of newer models sold and with customer mix.

Packaging material sales were 4.1% higher then the prior year. Our capillary unit sales were up 19.8% in fiscal 2002, while our blended capillary ASP was 13.1% below the prior year. Blended capillary ASP is a function of the general decline in unit prices and mix between high and low end capillaries. High end capillaries support advanced packaging applications and have higher ASP’s. As in our equipment business, we introduce new capillaries with additional features that enable us to demand a higher selling price. Our wire unit sales (measured in Kft) increased 22.1% in fiscal 2002 due primarily to higher customer demand in the fourth quarter. In addition to higher wire unit sales the average price of gold, which is reflected in our gold wire ASP, increased 9.5% over the prior year. The price of gold has a significant impact on our wire ASP and can fluctuate significantly from period to period. In fiscal 2002, the increase in the price of gold accounted for a $7.1 million increase in wire sales over the prior year.

Our test interconnect sales were 1.9% below the prior year, however, test sales for fiscal 2001 included only the 10 months from the dates of acquisition through September 30, 2001. ASPs are not meaningful in the test business due to lack of a standard unit of measure and the large difference in part types sold. As such, ASP’s are not a metric used by management.

International sales (shipments of our products with ultimate foreign destinations) comprised 74% and 66% of our total sales during fiscal 2002 and 2001, respectively. The majority of these foreign sales were destined for customer locations in the Asia/Pacific region, including Taiwan, Malaysia, Singapore, Korea, Japan, and the Philippines. Our shipments to customers in China have historically been a small portion of our sales, however we expect this portion to increase as some of our customers increase their production capacity in China. We expect sales outside of the United States to continue to represent a substantial portion of our future revenues.

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Gross profit. Gross profit decreased to $100.8 million in fiscal 2002 from $157.1 million in fiscal 2001. The decline was due primarily to lower average selling prices for automatic ball bonders and lower unit sales of dicing systems and tab bonders in the equipment segment. Partially offsetting the above mentioned declines in gross profit was higher unit sales of automatic ball bonders and packaging materials and higher gross profit in the test segment. Included in the results for fiscal 2002 are charges for inventory write-downs of $14.4 million. These charges for inventory write-downs include three distinct components. The largest component of the charge, amounting to approximately $7.8 million, relates to the write-down of spare parts inventories. We decided in the second quarter of fiscal 2002 to outsource our spare parts inventory management and accordingly wrote-down excess inventory. The second component of the charge relates to the write-down of $5.2 million of inventory associated with the discontinuance of our model 7700 dual spindle saw. Annual revenue for this product over the past several fiscal years has been insignificant therefore, the discontinuance of this product is not expected to have a material impact on sales, gross profit or net income. The smallest portion of the charge, amounting to $1.3 million, related to our normal excess and obsolescence reviews that are a recurring part of our normal business and ongoing operations. We provide reserves for equipment inventory and for spare parts and consumables inventory 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 review of consumable inventory levels at our customers’ facilities. We communicate forecasts of our future demand to suppliers and adjust commitments to those suppliers accordingly. We review and dispose of our excess and obsolete inventory on a regular basis. In fiscal 2002, we disposed of $18.6 million of excess and obsolete inventory. The charges for inventory write-downs in fiscal 2002 primarily involve items that are not part of our continuing product offerings and accordingly, should not have a significant impact on our future business or profitability.

Included in the results for fiscal 2001 are charges for inventory write-downs of $19.9 million (to costs of goods sold). We recorded $1.4 million of the charge in the first quarter for excess and obsolete ball bonder inventory and $6.5 million in the second quarter for ball bonder and spare parts inventory. In the fourth quarter we recorded a charge of $12.0 million for excess and obsolete ball bonder, dicing saw, test fixture and spare parts inventory. The charges for inventory write-downs resulted from the severe and continued downturn in the semiconductor industry. In fiscal 2001, we also recorded an acquisition-related inventory step-up charge of $4.2 million. In fiscal 2001, we disposed of $6.2 million of excess and obsolete inventory.

Gross margin (gross profit as a percentage of sales) was 22.8% in fiscal 2002, as compared to 30.3% for the same period in the prior year. The decline in gross margin for the year was due primarily to lower average selling prices of automatic ball bonders and dicing systems. The inventory write-downs in fiscal 2002 and fiscal 2001 amounted to 3.3% and 3.8% of net sales, respectively.

Selling, general and administrative expenses. Selling, general and administrative (referred to as SG&A) expenses decreased $1.9 million or 1.4% from $136.9 million in fiscal 2001 to $135.1 million in fiscal 2002. Fiscal 2002 SG&A expenses include approximately $13.3 million of expenses which are not comparable to the fiscal 2001 expenses. The $13.3 million of non-comparable expense include $5.0 million of severance expense, $6.1 million for two additional months of expenses at the test division (12 months of operations in 2002 vs. only ten months 2001) and $2.2 million of training and start-up expense associated with our new China facility. Excluding these charges, our fiscal 2002 SG&A expense declined due to reduced compensation and outside services expenses from our resizing initiatives taken in the current and prior year.

The workforce reduction/severance charges identified in the previous paragraph were included in SG&A expense because they were not related to formal and distinct restructuring programs, but rather, they were normal and recurring management of employment levels in response to business conditions and our ongoing effort to reduce our cost structure. Also, if the business conditions had improved, we were prepared to rehire some of these terminated individuals. These charges are in contrast to the formal and distinct resizing programs we established in prior fiscal years.

Research and development. Research and development (“R&D”) expense in fiscal 2002 decreased $9.4 million or 15.4% from fiscal 2001. The lower R&D spending was due to a shift in certain engineering functions to lower-cost foreign subsidiaries, and the ‘push-out’ of certain future product development initiatives. Our R&D expense includes the cost to develop the software that operates our semiconductor assembly equipment, which is expensed as incurred.

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Resizing:The semiconductor industry has been volatile, with sharp periodic downturns and slowdowns. The industry experienced excess capacity and a severe contraction in demand for semiconductor manufacturing equipment during our fiscal 2001 and 2002. We developed formal resizing plans in response to these changes in our business environment with the intent to align our cost structure with anticipated revenue levels. Accounting for resizing activities requires an evaluation of formally agreed upon and approved plans. We documented and committed to these plans to reduce spending that included facility closings/rationalizations and reductions in workforce. We recorded the expense associated with these plans in the period that it committed to carry-out the 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.

We recorded resizing charges of $18.8 million in fiscal 2002 and $4.2 million in fiscal 2001.

In addition to the formal resizing costs identified below, we continued (and are continuing) to downsize our operations in fiscal 2002. These downsizing efforts resulted in workforce reduction charges of $5.0 million in fiscal 2002. In contrast to the resizing plans discussed above, these workforce reductions were not related to formal or distinct restructurings, but rather, the normal and recurring management of employment levels in response to business conditions and our ongoing effort to reduce our cost structure. In addition, if the business conditions were to have improved, we were prepared to rehire some of these terminated individuals. These recurring workforce reduction charges were recorded as Selling, General and Administrative expenses.

Charges in Fiscal Year 2002

Fourth Quarter 2002

In January 1999, we acquired the advanced substrate technology of MicroModule Systems, a Cupertino, California company, to enable production of high density substrates. While showing some progress in developing the substrate technology, the business was not profitable and would have required additional capital and operating cash to complete development of the technology. In light of the business downturn that was affecting the semiconductor industry at the time, in the fourth quarter of fiscal 2002, we announced that we could not afford further development of the substrate technology and would close our substrate operations. 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 $7.3 million. We expected, and achieved, annual payroll related savings of approximately $4.2 million and annual facility/operating savings of approximately $3.9 million as a result of this resizing plan. By June 30, 2003, all the positions had been eliminated. The plans have been completed 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. This substrate business was included in our then existing Advanced Packaging business segment.

The resizing costs were included in accrued liabilities. The table below details the spending and activity related to the resizing plan initiated in the fourth quarter of fiscal 2002:

	(in thousands)
	Severance and Benefits		Commitments		Total
Fourth Quarter 2002 Charge
Provision for resizing	$	1,231	$	7,280	$	8,511
Payment of obligations		—		—		—
Balance, September 30, 2002	$	1,231	$	7,280	$	8,511

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Third Quarter 2002

As a result of the continuing downturn in the semiconductor industry and our desire to improve the performance of its test business segment, we decided to move towards a 24 hour per-day manufacturing model in our major U.S. wafer test facility, which would provide our customers with faster turn-around time and delivery of orders and economies of scale in manufacturing. As a result, in the third quarter of fiscal 2002, we announced a resizing plan to reduce headcount and consolidate manufacturing in its test business segment. As part of this plan, we moved manufacturing of wafer test products from our facilities in Gilbert, Arizona and Austin, Texas to its facilities in San Jose, California and Dallas, Texas and from its Kaohsuing, Taiwan facility to its Hsin Chu, Taiwan facility. The resizing plan included a severance charge of $1.6 million for the elimination of 149 positions as a result of the manufacturing consolidation. The resizing plan also included 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. We expected, and achieved, annual payroll related savings of approximately $6.9 million and annual facility/operating savings of approximately $84 thousand as a result of this resizing plan. All of the positions have been eliminated and both facilities have been closed. The plans have been completed but cash payments for the severance are expected to continue through 2005 and cash payments for facility and contractual obligations are expected to continue through 2004, or such earlier time as the obligations can be satisfied.

The resizing costs were included in accrued liabilities. The table below details the spending and activity related to the resizing plan initiated in the third quarter of fiscal 2002:

	(in thousands)
	Severance and Benefits			Commitments			Total
Third Quarter 2002 Charge
Provision for resizing	$	1,652		$	452		$	2,104
Payment of obligations		(547	)		(219	)		(766	)
Balance, September 30, 2002	$	1,105		$	233		$	1,338

Second Quarter 2002

As a result of the continuing downturn in the semiconductor industry and our desire to more efficiently manage its business, 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 ($10.4 million in continuing operations and $0.9 million in discontinued operations), 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 our 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.

In the second quarter of fiscal 2002, we 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 dates that are associated with these closed test facilities.

To reduce our short term cash requirements, we 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 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 we reduced our expected annual savings from this resizing plan for payroll related expenses by approximately $4.7 million.

Also in the fourth quarter of fiscal 2002, we reversed $600 thousand ($590 thousand in continuing operations and $10 thousand in discontinued operations) of the severance resizing expenses, previously recorded in the second quarter of fiscal 2002, 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.

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 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.

We expected annual payroll related savings of approximately $17.3 million and annual facility/operating savings of approximately $660 thousand as a result of this resizing plan. As a result of the decision not to relocate either its hub blade manufacturing facility or its microelectronics product manufacturing we ultimately achieved annual payroll related savings of approximately $12.7 million. The plans have been completed but cash payments for the severance charges and the facility and contractual obligations are expected to continue into 2005, or such time as the obligations can be satisfied.

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The resizing costs were included in accrued liabilities. The table below details the spending and activity related to the resizing plan initiated in the second quarter of fiscal 2002:

	(in thousands)
	Severance and Benefits			Commitments			Total
Second Quarter 2002 Charge
Provision for resizing - Continuing operations	$	8,830	(1)	$	1,550		$	10,380
Provision for resizing - Discontinued operations		903			—			903
Change in estimate - Continuing operations		(2,227	)		—			(2,227	)
Change in estimate - Discontinued operations		(10	)		—			(10	)
Payment of obligations		(5,367	)(1)		(81	)		(5,448	)
Balance, September 30, 2002	$	2,129		$	1,469		$	3,598

(1) Includes $2.6 million non-cash charge for modifications of stock option awards that were granted prior to December 31, 2001 to the employees affected by the resizing plans in accordance with our annual grant of stock options to employees.

Charges in Fiscal Year 2001

Fourth Quarter 2001

As part of our efforts to more efficiently manage our business and reduce operating costs, we announced in the fourth quarter of fiscal 2001 that we would close our bonding wire facility in the United States and move the production capacity to our bonding wire facility in Singapore. We 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. We expected, and achieved, annual payroll related savings of approximately $11.5 million. 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 were expected to continue through 2004.

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The resizing costs were included in accrued liabilities. The table below details the spending and activity related to the resizing plan initiated in the fourth quarter of fiscal 2001:

	(in thousands)
	Severance and Benefits			Commitments			Total
Fourth Quarter 2001 Charge
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

Second Quarter 2001

As a result of the downturn in the semiconductor industry, 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. We expected, and achieved, annual payroll related savings of approximately $7 million. 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 payments related to severance and facility obligations under this program.

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

	(in thousands)
	Severance and Benefits			Commitments			Total
Second Quarter 2001 Charge
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

Asset impairment. In addition to the workforce resizings and the facility consolidations, we terminated several of our major initiatives in an effort to more closely align our cost structure with expected revenue levels. As a result, we recorded asset impairment charges of $31.6 million in fiscal 2002. We also recorded an asset impairment of $800 thousand in fiscal 2001.

In the fourth quarter of fiscal 2002, we recorded an asset impairment of $26.7 million. The charge included $16.9 million associated with the cancellation of a company-wide integrated information system, an $8.4 million write-off of assets associated with the closure of the substrates operation and $1.4 million of assets associated with a closed wire facility in Taiwan.

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In the second quarter of fiscal 2002, we recorded an asset impairment charge of $4.9 million. The write-off included a $3.6 million charge for the write-off of development and license costs of certain engineering and manufacturing software, which had not yet been completed or placed in service and would never be utilized. Also in the second quarter, we wrote-off $1.3 million related to leasehold improvements at the leased probe card manufacturing facilities in Malaysia and the United States, which have been closed.

In the fourth quarter of fiscal 2001, we recorded an asset impairment charge of $0.8 million related to the closure of a wire facility in the United States and the disposition of the associated equipment.

Goodwill impairment. 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. We perform our annual impairment test at the end of the fourth quarter of each fiscal year, which coincides with the completion of our annual forecasting process. We also test for impairment between our annual tests if a “trigger” event occurs that may have the effect of reducing the fair value of a reporting unit below its carrying value. When conducting our goodwill impairment analysis, we calculate our potential impairment charges based on the two-step test identified in SFAS 142 and using the implied fair value of the respective reporting units. We use the present value of future cash flows from the respective reporting units to determine the implied fair value. Our intangible assets other than goodwill are tested for impairment based on undiscounted cash flows, and if impaired, written-down to fair value based on either discounted cash flows or appraised values. Our intangible assets are comprised of customer accounts and complete technology in its test interconnect business segment. We manage and value our complete technology in the aggregate as one asset group.

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 businesses. The bonding wire and hub blade businesses are included in our packaging materials segment, the substrate business is included in our advanced packaging segment and the test business comprises our test segment and the flip chip business unit is included in discontinued operations. 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 in fiscal 2002, 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. Also 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 and increased goodwill associated with its flip chip reporting unit by $96 thousand reflecting an increase in the cost to purchase the former joint venture partner’s equity share.

In fiscal 2001 and 2002, the semiconductor industry experienced a severe industry downturn. Due to the prolonged nature of the industry downturn, we continually recalibrated our businesses and projections of future operating activities. We saw an up-tick in its business in the spring of 2002 and at that time believed we were emerging from the effects of an industry down turn. However, this up-tick in business was not sustained and our business turned back down in the second half of fiscal 2002. By the end of its fiscal 2002, our recalibrated forecasts of future cash flows from our test, hub blades and substrate reporting units were substantially lower than in the beginning of that fiscal year, which lead to the closing of the substrate business and an associated write-off of all the substrate intangible assets of $1.1 million and goodwill impairment charges in the test business of $72.0 million and in ourits hub blades business of $2.3 million. We recorded goodwill impairment charges in the period in which our analysis of future business conditions indicated that the reporting unit’s fair value, and the implied value of its goodwill, was less than its carrying value.

Due to the amount of goodwill associated with our test reporting unit, we retained a third party valuation firm to assist management in estimating the test reporting unit’s fair value at September 30, 2002. The appraisal was based on discounted cash flows of this reporting unit. The estimated fair value was determined using our weighted average cost of capital. The estimated fair value was then corroborated by comparing the implied multiples applicable to the test reporting unit’s projected earning to “guideline” companies’ forward earnings and based on this it was determined that they were within the range of the “guideline” companies.

We also recorded a goodwill impairment charge at September 30, 2002 in our hub blade reporting unit. We calculated the fair value of this reporting unit based on the present value of its projected future cash. The estimated fair value was determined using our weighted average cost of capital. The triggering event for this impairment charge was the recalibrated forecasts, in the fourth quarter of fiscal 2002, when we first determined that the fair value of the hub blade reporting unit was less then its carrying value.

The following table presents pro forma net earnings and earnings per share data reflecting the impact of adoption of SFAS 142 as of the beginning of the first quarter of fiscal 2001:

	(in thousands, except per share data)
	Fiscal Year Ended September 30,
	2000		2001			2002
Reported net loss, before adoption of SFAS 142	$	103,245	$	(65,251	)	$	(274,115	)
Addback:
Goodwill amortization, net of tax		1,873		9,587			—
Pro forma net loss	$	105,118	$	(55,664	)	$	(274,115	)
Net loss per share, as reported:
Basic	$	2.15	$	(1.34	)	$	(5.57	)
Diluted	$	1.90	$	(1.34	)	$	(5.57	)
Goodwill amortization, net of tax per share:
Basic	$	0.04	$	0.20		$	—
Diluted	$	0.03	$	0.20		$	—
Pro forma net loss per share:
Basic	$	2.19	$	(1.14	)	$	(5.57	)
Diluted	$	1.93	$	(1.14	)	$	(5.57	)

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Amortization of goodwill and intangibles

Amortization expense was $9.9 million in fiscal 2002 compared to $22.8 million in fiscal 2001. The lower amortization expense in fiscal 2002 was primarily the result of our adoption of SFAS 142, Goodwill and Other Intangible Assets effective October 1, 2001, which resulted in the elimination of amortization on goodwill and indefinite lived intangible assets. Intangible assets with determinable lives will continue to be amortized over their estimated useful life.

The agreement governing our purchase of Probe Tech from Siegel-Robert Corp. included a provision for reducing the purchase price if Probe Tech’s actual earnings before interest, taxes, depreciation and amortization (EBITDA) were less than a projected amount. We disputed Probe Tech’s EBITDA calculation and initiated arbitration seeking a reduction in the purchase price. The arbitrator’s award reduced the purchase price by $2.4 million in the second quarter of fiscal 2002. In June 2002, we received the final settlement and reduced goodwill by $1.5 million, reflecting the award, less costs incurred in the arbitration.

Purchased in-process research and development

In fiscal 2001, we recorded a charge of $11.7 million for in-process R&D associated with the acquisitions of Cerprobe and Probe Tech representing the appraised value of products still in the development stage that did not have a future alternative use and which had not reached technological feasibility. As part of the acquisition, we acquired 16 ongoing R&D projects, all aimed at increasing the technological features of the existing probe cards and therefore the number of test applications for which they could be marketed. The R&D projects ranged from researching the feasibility of producing multi-die testing probes to researching the feasibility of producing probes for specialized semiconductor package (CSP and BGA) configurations. The project stage of completion ranged from 10% to 90% and all projects were due for completion and product launch by the third quarter of 2002 at prices and costs similar to the existing probe cards marketed by Cerprobe and Probe Tech.

In the valuation of in-process technology, we utilized a variation of the income approach. We forecast revenue, earnings and cash flow for the products under development. Revenues were projected to extend out over the expected useful lives for each project. The technology was then valued through the application of the Discounted Cash Flow method. Values were calculated using the present value of their projected future cash flow at discount rates of between 28.4% and 49.1%. We anticipated that some of these projects might take longer to develop than originally thought and that some of these projects may never be marketable and there is a risk that the anticipated future cash flows might not be achieved. Of the 16 ongoing R&D projects at the time of the acquisition four have been completed, four are still in progress, four have been cancelled due to overlapping technology with our Cobra line of vertical test products, and four were cancelled due to nonproductive results. We believe that the expected returns of the completed and in-process R&D projects will be realized. We also believe that future revenues from our existing Cobra products will offset the expected future revenues from the R&D projects that were cancelled due to the overlapping technology and that there will be no adverse material impact on the Company’s future operating results or the expected return on its investment in the acquired companies. The four projects that were cancelled due to lack of productive results will not have a material impact on our future operating results and expected return on our investment in the acquired companies.

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The major R&D projects in process at the time of the acquisition, along with their status at September 30, 2002 and estimated time for completion are as follows:

	(dollars in thousands)
R&D project	Value Assigned at Purchase(2)		Percentage Complete Purchase		Estimated Cost to Complete Project at Purchase		Projected Product Launch Date	Current Status of Project
Next generation contact technology	$	2,700	10	%	$	290	Q2 2003	In process
Socket testing capability for CSP and BGA packages	$	2,000	50	%	$	65	N/A	Complete
ViProbe pitch reduction	$	1,600	40	%	$	89	N/A	Cancelled (1)
Vertical space transformer	$	1,500	25	%	$	278	N/A	Cancelled (1)
Extension of P4 technology to vertical test configurations	$	1,300	40	%	$	229	N/A	Cancelled (1)
Low-force, high-density interface using P4 technology	$	1,300	30	%	$	138	N/A	Cancelled
All other projects combined (total of ten projects)	$	1,300	10-90	%	$	576	Q1 2003 -Q4 2004	3 complete; 3 in process; 4 cancelled

We purchased two companies; Cerprobe Corporation (“Cerprobe”) and Probe Technology Corporation (“Probe Tech”) that design and manufacture semiconductor test interconnect solutions, in our fiscal year 2001. Subsequent to the acquisitions, we determined that the vertical probe technology designed and marketed by Probe Tech was superior to the vertical probe technology of Cerprobe. We then shifted our R&D efforts to further enhancement of the Probe Tech vertical probe technology and cancelled the R&D projects at Cerprobe that were enhancing the Cerprobe vertical probe technology. The R&D projects identified by (1) in the above table were Cerprobe projects that were cancelled due to the shift in focus to the Probe Tech vertical probe technology. We expect the future revenue from the Probe Tech vertical probe technology will replace the anticipated revenue from the Cerprobe vertical probe R&D projected that have been cancelled.

The Value Assigned at Purchase reflects the present value of the projected future cash flow generated from the sale of products created by each R&D project from its launch date through the expected life of the product.

Income (loss) from Operations:

	(dollars amounts in thousands)
	Fiscal year ended September 30,
	2001			% Sales		2002			% Sales
Equipment	$	(22,016	)	-8.8	%	$	(65,462	)	-38.6	%
Packaging materials		9,287		6.2	%		6,518		4.1	%
Test interconnect		(33,659	)	-28.8	%		(95,065	)	-82.9	%
Corporate and other		(33,639	)	—			(66,675	)	—
	$	(80,027	)	-15.4	%	$	(220,684	)	-50.0	%

Our loss from operations in fiscal 2002 was $220.7 million compared to $80.0 million in the prior fiscal year. The larger operating loss in fiscal 2002 compared to fiscal 2001 was due primarily to lower sales and gross profit, resizing expenses, and asset and goodwill impairment charges.

Equipment operating loss increased to $65.5 million from 22.0 million due primarily to lower sales and gross profit. Packaging materials operating income decreased by $2.8 million or 29.8% due primarily to recording $5.2 million of assets and goodwill impairment charges. Test interconnect operating loss increased to $95.1 million form $33.7 million in the prior year due primarily to $73.2 million of goodwill and assets impairment charges and $4.7 million of resizing charges. Our loss from corporate and other activities increased to $66.7 million from $33.6 million in the prior year due to $25.3 million of asset impairment charges and $9.1 million of resizing charges.

Interest. Interest income in fiscal 2002 was $3.8 million compared to $8.4 million in the prior year. The lower interest income was due primarily to lower interest rates on short-term investments. Interest expense was $18.7 million in fiscal 2002 compared to $13.9 million in the prior year. The higher interest expense in fiscal 2002 was due to a full year’s interest on the 5 ¹/4% Convertible Subordinated Notes due 2006 that were issued in the fourth quarter of fiscal 2001.

Other income and minority interest. Other income of $2.0 million in fiscal 2002 and $8.4 million in fiscal 2001 are primarily associated with the cash settlement of an insurance claim associated with a fire in our bonding tools facility. Other income also includes minority interest of $10 thousand in fiscal 2002 for the portion of the loss of a foreign test division subsidiary that was owned by a third party. We purchased the third party’s interest in fiscal 2002. Other income in 2001 includes minority interest of $352 thousand in the foreign test division subsidiary.

Tax expense. We recognized tax expense of $32.6 million in fiscal 2002 compared to a tax benefit of $21.2 million in fiscal 2001. The tax expense in fiscal 2002 was due primarily to a $65.3 million charge to establish a valuation allowance against our U.S. net operating loss carryforwards, a $25.0 million charge to provide for tax expense on repatriation of certain foreign earnings and foreign income taxes of $7.1 million. These charges were partially offset by a benefit of $49.5 million from the pretax loss in the U.S.

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Discontinued operations: The net loss of our former Flip Chip business unit comprises our discontinued operations.

Cumulative effect of change in accounting principle. In fiscal 2001, we adopted SAB 101 and recorded a cumulative effect of a change in accounting principle of $8.2 million, net of taxes of $4.4 million. The cumulative effect represents the net income associated with $26.5 million of sales that were deferred upon adoption of the standard. We recognized $6.3 million of the $26.5 million of deferred sales in fiscal 2002 and $19.3 million in fiscal 2001. At September 30, 2002, deferred revenue was approximately $0.9 million.

Net loss. Our net loss for fiscal 2002 was $274.1 million compared to a net loss of $65.3 million in fiscal 2001, for the reasons enumerated above.

Quarterly Results of Operations

The table below shows our quarterly net sales, gross profit and operating income (loss) by quarter for fiscal 2003 and 2002:

	(in thousands)
Fiscal 2003	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Net sales	$	107,259		$	122,280		$	123,782		$	124,614		$	477,935
Gross profit		28,637			34,231			32,103			33,237			128,208
Loss from operations		(9,696	)		(8,079	)		(4,105	)		(2,774	)		(24,654	)

Fiscal 2002	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Net sales	$	96,748		$	101,245		$	126,397		$	117,175		$	441,565
Gross profit		25,537			11,390			35,192			28,701			100,820
Loss from operations		(20,143	)		(53,534	)		(15,603	)		(131,404	)		(220,684	)

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2004, total cash and investments were $141.4 million compared to $103.6 million at March 31, 2004 and $73.1 million at September 30, 2003. Cash and investments increased $68.3 million from September 30, 2003 due primarily to cash provided by operating activities of $57.8 million. We also generated $12.2 million of net proceeds from the issuance of $65 million of 1% Convertible Subordinated Notes due 2010 and the simultaneous purchase of $50 million of our 5.25% Convertible Subordinated Notes due 2006, $3.9 million from the proceeds of the exercise of employee stock options and $2.9 million from the sale of our Flip Chip business and other assets and spent $8.1 million on capital expenditures.

Our primary need for cash for the remainder of the fiscal year will be to redeem the remaining $54 million of 5.25% Convertible Subordinated Notes due 2006 and to provide the working capital necessary to meet our expected production and sales levels. We financed our working capital needs, in the nine months ended June 2004, through internally generated funds and expect to continue to generate cash from operating activities in the fourth quarter of fiscal 2004 to meet our cash needs. We expect our equipment and packaging materials business to generate cash from operations in the September 2004 quarter in excess of their working capital and capital expenditure needs and to generate cash from our test business to cover its working capital and capital expenditure requirements.

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Our long term debt at September 30, 2003 and June 30, 2004 consists of the following:

Long term debt consists of the following:

						(in thousands)
						Outstanding Balance at,
Type	Fiscal Year of Maturity	Conversion Price(1)		Rate		September 30, 2003		June 30, 2004
Convertible Subordinated Notes	2006	$	19.75	5.25	%	$	125,000	$	54,000
Convertible Subordinated Notes	2007	$	22.90	4.75	%		175,000		—
Convertible Subordinated Notes	2009	$	20.33	0.50	%		—		205,000
Convertible Subordinated Notes	2010	$	12.84	1.00	%		—		65,000
Other(2)							338		5,635
						$	300,338	$	329,635

⁽¹⁾ Subject to adjustment.

⁽²⁾ Includes a mortgage of $5.5 million held by a limited liability company which the Company began consolidating into its financial statements at December 31, 2003 in accordance with FIN 46.

In the December 2003 quarter, we issued $205 million of 0.5% Convertible Subordinated Notes due 2008 in a private placement to qualified institutional investors. The notes mature on November 30, 2008, bear interest at 0.5% per annum and are convertible into our common stock at $20.33 per share. The notes are general obligations of the Company and are subordinated to all senior debt. The notes rank equally with our 1.0% and 5.25% convertible subordinated notes. There are no financial covenants associated with the notes and there are no restrictions on incurring additional debt or issuing or repurchasing our securities. Interest on the notes is payable on May 30 and November 30 each year.

We used the majority of the net proceeds from the issuance of the 0.5% Convertible Subordinated Notes due 2008 to redeem all $175 million of our 4.75% Convertible Subordinated Notes due 2006 at a redemption price equal to 102.036% of the principal amount of the notes. We recorded a charge of $6.2 million associated with the redemption of these notes, $2.6 million of which was due to the write-off of unamortized note issuance costs and $3.6 million due to the redemption premium.

In the March 2004 quarter, we used the remainder of the net proceeds from the issuance of the 0.5% Convertible Subordinated Notes to make open market purchases of $21 million of our 5.25% Convertible Subordinated Notes due 2006. We paid a premium of $241 thousand to purchase the $21 million of notes and wrote-off $376 thousand of unamortized note issuance costs.

In the June 2004 quarter, we issued $65 million of 1.0% Convertible Subordinated Notes in a private placement to qualified institutional investors and institutional accredited investors. The Notes mature on June 30, 2010, bear interest at 1.0% and are convertible into common stock of the Company at $12.84 per share, subject to adjustment for certain events. The conversion rights of these notes may be terminated on or after June 30, 2006 if the closing price of the Company’s common stock has exceeded 140% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days. The notes are general obligations of the Company and are subordinated to all senior debt. The notes rank equally with our 5.25% and 0.5% Convertible Subordinated Notes. There are no financial covenants associated with the notes and there are no restrictions on incurring additional debt or issuing or repurchasing our securities. Interest on the notes is payable on June 30 and December 30 each year.

- 36 -

We used the majority of the net proceeds from the issuance of the 1.0% Convertible Subordinated Notes to purchase $50 million if its 5.25% Convertible Subordinated Notes at a purchase price equal to 102.1% of the principal amount of the notes. The Company recorded a charge of $1.8 million associated with the purchase of these notes, $0.8 million of which was due to the write-off of unamortized note issuance costs and $1.0 million due to the purchase premium.

On July 19, 2004, we called for redemption the remaining $54 million principal amount of our 5.25% Convertible Subordinated Notes. Associated with this redemption, we will record a charge of approximately $1.9 million in our September 2004 quarter, $1.1 million due to a redemption premium and $0.8 million due to the write-off of unamortized note issuance costs.

Under GAAP, certain obligations and commitments are not required to be included in our consolidated balance sheets and statements of operations. These obligations and commitments, while entered into in the normal course of business, may have a material impact on liquidity. Certain of the following commitments as of June 30, 2004 have not been included in the consolidated balance sheets and statements of operations included in this Form 10-Q; however, they have been disclosed in the following table in order to provide a more complete picture of our Company’s financial position and liquidity. The most significant of these are our inventory purchase obligations.

The following table identifies obligations and contingent payments under various arrangements at June 30, 2004, including those not included in our consolidated balance sheet:

	(in thousands)
	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
Contractual Obligations:
Long-term debt	$	324,000	$	54,000	$	—	$	205,000	$	65,000
Capital Lease obligations		339		41		164		134		—
Operating Lease obligations*		36,713		10,381		11,061		5,172		10,099
Inventory Purchase obligations*		56,993		56,993		—		—		—
Commercial Commitments:
Gold supply financing guarantee		11,793		11,793
Standby letters of Credit*		3,094		3,094		—		—		—
Total contractual obligations and commercial commitments	$	432,932	$	136,302	$	11,225	$	210,306	$	75,099

* Represents contractual amounts not reflected in the consolidated balance sheet at June 30, 2004.

Long-term debt includes the amounts due under our 5.25% Convertible Subordinated Notes, which were called for redemption in the September 2004 quarter, 0.5% Convertible Subordinated Notes due 2008, and 1.0% Convertible Subordinated Notes due 2010. The capital lease obligations principally relate to equipment leases. The operating lease obligations 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.

To reduce the cost to procure gold, we changed our gold supply financing arrangement in June 2004. As a result, gold is no longer treated as consignment goods and is now reflected and included in our inventory with a corresponding amount in accounts payable. Our obligation for payment and the price we pay for gold continues to be at the time and price we ship gold wire to our customers. The guarantee for our gold supply financing arrangement is secured by the assets of our wire manufacturing subsidiary and contains restrictions on that subsidiary’s net worth, ratio of total liabilities to net worth, ratio of EBITDA to interest expense and ratio of current assets to current liabilities.

- 37 -

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

At June 30, 2004, the fair value of our $54.0 million 5.25% Convertible Subordinated Notes was $54.9 million, the fair value of our $205.0 million 0.5% Convertible Subordinated Notes was $170.7 million, and fair value of our $65.0 million 1.0% Convertible Subordinated Notes was $63.7 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. At June 30, 2004, the Standard & Poor’s rating on our 5.25% and 0.5% convertible subordinated notes was CCC+.

We have an effective shelf registration statement on Form S-3, which permits 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.

However, we cannot assure you that we will be able to issue securities under the shelf registration statement, or otherwise, on terms that are favorable to us, if at all.

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, our liquidity is affected by many factors, some based on normal operations of the business and others related to uncertainties of the industry and global economies. We may seek, as we believe appropriate, additional debt or equity financing to provide capital for corporate purposes. We may also seek additional debt or equity financing for the refinancing or redemption of existing debt 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, the condition of financial markets and the nature and size of strategic business opportunities which we may elect to pursue.

As of September 30, 2003, total cash and investments were $73.1 million, compared to $59.0 million at June 30, 2003 and $111.3 million at September 30, 2002.

Cash used by operating activities totaled $29.1 million in fiscal 2003 compared to $72.0 million in fiscal 2002. Cash used by operating activities in fiscal 2003 was primarily to fund the net loss and working capital needs. The working capital needs in fiscal 2003 were primarily for the pay-down of current trade payables, the pay-out of costs associated with our fiscal 2001 and 2002 resizing programs and an increase in trade accounts receivable. Cash used by operating activities in fiscal 2002 was primarily to fund the net loss in that year.

Cash provided by investing activities totaled $8.3 million in fiscal 2003 compared to $6.4 million in the prior year. In fiscal 2003 and 2002, the investing activities consisted primarily of proceeds from sales of investments, offset by purchases of investments and capital expenditures. In fiscal 2003 we spent $11.0 million in capital expenditures, consisting primarily of $3.6 million for continued expansion of our China facility, $3.4 million for manufacturing equipment in our test business unit and $4.0 million of manufacturing equipment in our other manufacturing facilities. In fiscal 2002 we spent $20.4 million in capital expenditures, $8.8 million of which was for costs associated with our initiative to implement a company-wide integrated information system. These costs were accounted for in accordance with SOP 98-1. We discontinued this project in the fourth quarter of fiscal 2002 and wrote-off the $8.8 million as part of a total write-off of $16.9 million associated with this project. In fiscal 2002, we also spent approximately $5.2 million on facility upgrades and manufacturing equipment in our test business. In addition, in fiscal 2002, we announced plans to build a facility in China to manufacture capillaries, selected test products and other products. We spent $1.8 million on this China facility in fiscal 2002.

- 38 -

Cash provided by financing activities was $563 thousand in fiscal 2003 compared to cash used in financing activities of $3.4 million in the prior fiscal year. The cash provided by financing activities in fiscal 2003 was primarily due to a reduction in restricted cash and proceeds from the issuance of common stock, resulting from employee stock option exercises. Cash used by financing activities in the prior year was primarily due to establishing restricted cash balances, to support letters of credit, and payments on capital leases partially offset by proceeds from the issuance of common stock, resulting from employee stock option exercises.

At September 30, 2003, the fair value of our $175.0 million 4 ³/4% Convertible Subordinated Notes was $154.9 million, and the fair value of our $125.0 million 5 ¹/4% Convertible Subordinated Notes was $115.6 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 September 30, 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. On June 15, 2003, we issued and contributed 150,000 shares of common stock with a fair market value of $987,000 to fund certain obligations to our pension plan. We will not receive any of the proceeds from the sale of these shares by the pension plan. The proceeds will be retained by the pension plan Trust to fund future obligations to participants of the pension plan.

Under GAAP, certain obligations and commitments are not required to be included in the consolidated balance sheets and statements of operations. These obligations and commitments, while entered into in the normal course of business, may have a material impact on liquidity. Certain of the following commitments as of September 30, 2003 have not been included in the consolidated balance sheets and statements of operations. However, they have been disclosed in the following table in order to provide a more complete picture of our Company’s financial position and liquidity.

The following table identifies obligations and contingent payments under various arrangements at September 30, 2003, including those not included on our consolidated balance sheet:

	(in thousands)
	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
Contractual Obligations:
Long-term debt	$	300,000	$	—	$	125,000	$	175,000	$	—
Capital Lease obligations		374		36		78		84		176
Operating Lease obligations*		45,821		12,444		16,408		5,896		11,073
Inventory Purchase obligations*		45,791		44,981		574		78		158
Commercial Commitments:
Standby Letters of Credit*		2,694		2,694		—		—		—
Total Contractual Obligations and Commercial Commitments	$	394,680	$	60,155	$	142,060	$	181,058	$	11,407

* Represents contractual amounts not reflected in the consolidated balance sheet at September 30, 2003.

- 39 -

Long-term debt includes the amounts due under our 4 ³/4% Convertible Subordinated Notes due December 2006 and our 5 ¹/4% Convertible Subordinated Notes due August 2006. The capital lease obligations principally relate to a building and equipment lease. The operating lease obligations at September, 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.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

- 40 -

EX-99.2

Exhibit 99.2

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Auditors	F-2
Financial Statements:
Consolidated Balance Sheets as of September 30, 2003 and 2002	F-3
Consolidated Statements of Operations for the fiscal years ended September 30, 2003, 2002 and 2001	F-4
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2003, 2002 and 2001	F-5
Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended September 30, 2003, 2002 and 2001	F-6
Notes to Consolidated Financial Statements	F-7
Condensed Consolidated Balance Sheets as of June 30, 2004 and 2003 (unaudited)	F-41
Condensed Consolidated Statements of Operations for the Nine Months ended June 30, 2004 and 2003 (unaudited)	F-42
Condensed Consolidated Statements of Cash Flows for the Nine Months ended June 30, 2004 and 2003 (unaudited)	F-43
Notes to Condensed Consolidated Financial Statements (unaudited)	F-44

F-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of Kulicke and Soffa Industries, Inc.:

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Kulicke and Soffa Industries, Inc. and its subsidiaries at September 30, 2003 and September 30, 2002, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule presents fairly in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, in fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” and in fiscal 2001, the Company adopted Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial Statements”.

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

November 19, 2003, except for

Note 2, Note 4 and Note 13,

which are as of May 6, 2004

F-2

KULICKE AND SOFFA INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30, 2002			September 30, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	85,986		$	65,725
Restricted cash		3,180			2,836
Short-term investments		22,134			4,490
Accounts and notes receivable, (net of allowance for doubtful accounts: 9/30/02 - $6,033; 9/30/03 - $5,929)		89,132			94,144
Inventories, net		50,887			37,906
Prepaid expenses and other current assets		10,508			11,187
Deferred income taxes		16,072			10,700
TOTAL CURRENT ASSETS		277,899			226,988
Property, plant and equipment, net		89,742			61,238
Intangible assets, (net of accumulated amortization: 9/30/02 - $16,927; 9/30/03 - $26,187)		75,509			66,249
Goodwill		87,107			81,440
Other assets		8,425			6,946
TOTAL ASSETS	$	538,682		$	442,861
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long term debt	$	186		$	36
Accounts payable		55,659			45,844
Accrued expenses		52,581			41,885
Income taxes payable		9,660			13,394
TOTAL CURRENT LIABILITIES		118,086			101,159
Long term debt		300,393			300,338
Other liabilities		14,106			9,865
Deferred taxes		36,774			31,402
TOTAL LIABILITIES		469,359			442,764
Commitments and contingencies
SHAREHOLDERS’ EQUITY:
Preferred stock, without par value: Authorized - 5,000 shares; issued - none		—			—
Common stock, without par value: Authorized - 200,000 shares; issued and outstanding: 2002 - 49,414; 2003 - 50,092		199,886			203,607
Retained earnings (deficit)		(119,103	)		(195,792	)
Accumulated other comprehensive loss		(11,460	)		(7,718	)
TOTAL SHAREHOLDER’S EQUITY		69,323			97
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	538,682		$	442,861

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

F-3

KULICKE AND SOFFA INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Fiscal Year Ended September 30,
	2001			2002			2003
Net revenue	$	518,382		$	441,565		$	477,935
Cost of sales		361,330			340,745			349,727
Gross profit		157,052			100,820			128,208
Selling, general and administrative		136,907			135,054			102,327
Research and development, net		61,370			51,929			38,121
Resizing		4,166			18,768			(475	)
Asset impairment		800			31,594			3,629
Goodwill impairment		—			74,295			—
Amortization of intangibles		22,127			9,864			9,260
Purchased in-process research and development		11,709			—			—
Loss on sale of product lines		—			—			5,257
Operating expense		237,079			321,504			158,119
Loss from operations		(80,027	)		(220,684	)		(29,911	)
Interest income		8,398			3,758			940
Interest expense		(13,940	)		(18,699	)		(17,431	)
Other income and minority interest		8,022			2,010			—
Loss from continuing operations before income taxes		(77,547	)		(233,615	)		(46,402	)
Provision (benefit) for income taxes for continuing operations		(21,468	)		32,561			7,594
Loss from continuing operations before cumulative effect of change in accounting principle		(56,079	)		(266,176	)		(53,996	)
Loss from discontinued operations, net of tax		(1,009	)		(7,939	)		(22,693	)
Cumulative effect of change in accounting principle, net of tax		(8,163	)		—			—
Net loss	$	(65,251	)	$	(274,115	)	$	(76,689	)
Net loss per share from continuing operations before cumulative effect of change in accounting principal:
Basic	$	(1.15	)	$	(5.41	)	$	(1.09	)
Diluted	$	(1.15	)	$	(5.41	)	$	(1.09	)
Loss per share from discontinued operations:
Basic	$	(0.02	)	$	(0.16	)	$	(0.46	)
Diluted	$	(0.02	)	$	(0.16	)	$	(0.46	)
Cumulative effect of change in accounting principal, net of tax per share:
Basic	$	(0.17	)	$	—		$	—
Diluted	$	(0.17	)	$	—		$	—
Net income (loss) per share:
Basic	$	(1.34	)	$	(5.57	)	$	(1.54	)
Diluted	$	(1.34	)	$	(5.57	)	$	(1.54	)
Weighted average shares outstanding:
Basic		48,877			49,217			49,695
Diluted		48,877			49,217			49,695

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

F-4

KULICKE AND SOFFA INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Fiscal Year Ended September 30,
	2001			2002			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(65,251	)	$	(274,115	)	$	(76,689	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		53,849			44,315			37,852
Tax benefit from exercise of stock options		248			329			89
Provision for doubtful accounts		1,406			158			519
Impairment of fixed and intangible assets		800			31,594			10,502
Impairment of goodwill		—			74,295			5,667
Loss on sale of product lines		—			—			5,257
Deferred taxes		(37,556	)		32,808			—
Provision for inventory valuations		18,095			14,362			3,490
Minority interest in net loss of subsidiary		(352	)		(10	)		—
Purchased in-process research and development		11,709			—			—
Non-cash employee benefits		1,942			5,061			2,230
Changes in working capital accounts, net of effect of acquired and sold businesses:
Accounts receivable		110,469			(10,188	)		(5,531	)
Inventories		2,572			9,076			2,454
Prepaid expenses and other assets		(1,734	)		(1,853	)		(1,138	)
Accounts payable and accrued expenses		(30,918	)		7,855			(18,142	)
Taxes payable		3,226			(4,739	)		3,734
Other, net		3,364			(951	)		604
Net cash provided by (used in) operating activities		71,869			(72,003	)		(29,102	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments classified as available for sale		214,766			59,224			26,287
Purchase of investments classified as available for sale		(158,126	)		(33,850	)		(8,603	)
Purchases of plant and equipment		(48,636	)		(20,385	)		(10,975	)
Purchase of Flip Chip		(5,000	)		(96	)		—
Purchase of Probe Tech, net of cash acquired		(62,512	)		1,472			—
Purchase of Cerprobe, net of cash acquired		(217,415	)		—			—
Proceeds from sale of property and equipment		8,338			—			1,643
Net cash provided by (used in) investing activities		(268,585	)		6,365			8,352
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from debt offering		120,749			—			—
Proceeds from sale of receivables		20,000			—			—
Payments on borrowings, including capitalized leases		(1,652	)		(1,685	)		(205	)
Restricted cash		—			(3,180	)		344
Proceeds from issuances of common stock		1,102			1,438			424
Net cash provided by (used in) financing activities		140,199			(3,427	)		563
Effect of exchange rate changes on cash and cash equivalents		64			15			(74	)
Change in cash and cash equivalents		(56,453	)		(69,050	)		(20,261	)
Cash and cash equivalents at:
Beginning of year		211,489			155,036			85,986
End of year	$	155,036		$	85,986		$	65,725
Supplemental Disclosures:
Cash payments for interest	$	11,300		$	15,400		$	15,700
Cash payments for income taxes	$	7,800		$	9,200		$	4,800

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

F-5

KULICKE AND SOFFA INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands)

	Common Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Shareholders’ Equity
	Shares	Amount
Balances at September 30, 2000	48,716	$	189,766	$	220,263		$	(4,687	)	$	405,342
Employer contribution to the Company’s 401K plan	153		1,942		—			—			1,942
Exercise of stock options	165		1,102		—			—			1,102
Tax benefit from exercise of stock options	—		248		—			—			248
Components of comprehensive income:
Net loss	—		—		(65,251	)		—			(65,251	)
Translation adjustment	—		—		—			(2,226	)		(2,226	)
Unrealized gain on investments, net	—		—		—			280			280
Minimum pension liability (net of taxes of $1,556)	—		—		—			(2,890	)		(2,890	)
Total comprehensive loss											(70,087	)
Balances at September 30, 2001	49,034	$	193,058	$	155,012		$	(9,523	)	$	338,547
Employer contribution to the Company’s 401K plan	214		2,478								2,478
Exercise of stock options	166		1,438								1,438
Tax benefit from exercise of stock options			329								329
Modification of stock options for terminated employees			2,583								2,583
Components of comprehensive income:
Net loss					(274,115	)					(274,115	)
Translation adjustment								730			730
Unrealized loss on investments, net								(264	)		(264	)
Minimum pension liability (net of taxes of $1,294)								(2,403	)		(2,403	)
Total comprehensive loss											(276,052	)
Balances at September 30, 2002	49,414	$	199,886	$	(119,103	)	$	(11,460	)	$	69,323
Employer contribution to Company’s 401K plan	429		2,230								2,230
Employer contribution to Company’s pension plan	150		987								987
Exercise of stock options	99		415								415
Tax benefit from exercise of stock options			89								89
Components of comprehensive income:
Net loss					(76,689	)					(76,689	)
Translation adjustment								2,953			2,953
Unrealized loss on investments, net								51			51
Minimum pension liability (net of taxes of $397)								738			738
Total comprehensive loss											(72,947	)
Balances at September 30, 2003	50,092	$	203,607	$	(195,792	)	$	(7,718	)	$	97

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

F-6

KULICKE AND SOFFA INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements include the accounts of Kulicke and Soffa Industries, Inc. and its subsidiaries (the “Company”), with appropriate elimination of intercompany balances and transactions.

Nature of Business – The Company designs, manufactures and markets capital equipment, packaging materials and test interconnect solutions and service, maintain, repair and upgrade assembly equipment. The Company’s operating results depend upon the capital and operating expenditures of semiconductor manufacturers and subcontract assemblers worldwide which, in turn, depend on the current and anticipated market demand for semiconductors and products utilizing semiconductors. The semiconductor industry is highly volatile and experiences periodic downturns and slowdowns which have a severe negative effect on the semiconductor industry’s demand for semiconductor capital equipment, including assembly equipment manufactured and marketed by the Company and, to a lesser extent, packaging materials and test interconnect solutions such as those sold by the Company. These downturns and slowdowns have also adversely affected the Company’s operating results. The Company believes such volatility will continue to characterize the industry and the Company’s operations in the future.

Management Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make 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, deferred tax liabilities for undistributed earnings of certain foreign subsidiaries, self insurance reserves, pension benefit liabilities, resizing, warranty and litigation. Actual results could differ from those estimated.

Vulnerability to Certain Concentrations - Financial instruments which may subject the Company to concentration of credit risk at September 30, 2003 and 2002 consist primarily of investments and trade receivables. The Company manages credit risk associated with investments by investing its excess cash in investment grade debt instruments of the U.S. Government, financial institutions and corporations. The Company has established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company’s trade receivables result primarily from the sale of semiconductor equipment, related accessories and replacement parts, packaging materials and test interconnect products to a relatively small number of large manufacturers in a highly concentrated industry. The Company continually assesses the financial strength of its customers to reduce the risk of loss. Accounts receivable at September 30, 2003 and 2002 included notes receivable of $920 thousand and $50 thousand, respectively. Write-offs of uncollectible accounts have historically not been significant.

Cash Equivalents - The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.

Investments - Investments, other than cash equivalents, are classified as “trading,” “available-for-sale” or “held-to-maturity”, in accordance with SFAS 115, and depending upon the nature of the investment, its ultimate maturity date in the case of debt securities, and management’s intentions with respect to holding the securities. Investments classified as “trading” are reported at fair market value, with unrealized gains or losses included in earnings. Investments classified as available-for-sale are reported at fair market value, with net unrealized gains

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or losses reflected as a separate component of shareholders’ equity (accumulated other comprehensive income (loss)). The fair market value of trading and available-for-sale securities are determined using quoted market prices at the balance sheet date. Investments classified as held-to-maturity are reported at amortized cost. Realized gains and losses are determined on the basis of specific identification of the securities sold.

Inventories - Inventories are stated at the lower of cost (determined on the basis of first-in, first-out) or market. The Company generally provides reserves for equipment inventory and spare parts and consumable inventories considered to be in excess of 18 months of forecasted future demand.

Property, Plant and Equipment - Property, plant and equipment are carried at cost. The cost of additions and those improvements which increase the capacity or lengthen the useful lives of assets are capitalized while repair and maintenance costs are expensed as incurred. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives as follows: buildings 25 to 40 years; machinery and equipment 3 to 10 years; and leasehold improvements are based on the shorter of the life of lease or life of asset. Purchased computer software costs related to business and financial systems are amortized over a five year period on a straight-line basis.

Property is tested for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Such events include significant adverse changes in the business climate, current period operating or cash flow losses, forecasted continuing losses or a current expectation that an asset group will be disposed of before the end of its useful life. Recoverability of property is evaluated by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the asset exceeds the estimated fair value.

Goodwill and Intangible Assets - 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 Company amortizes its intangible assets with determinable lives on a straight-line basis over the estimated period to be benefited by the intangible assets which it estimates to be 10 years. The Company performs its annual impairment test at the end of the fourth quarter of each fiscal year, which coincides with the completion of its annual forecasting process. The Company also tests for impairment between its annual tests if a “trigger” event occurs that may have the effect of reducing the fair value of a reporting unit below its carrying value. When conducting its goodwill impairment analysis, the Company calculates its potential impairment charges based on the two-step test identified in SFAS 142 and using the implied fair value of the respective reporting units. The Company uses the present value of future cash flows from the respective reporting units to determine the implied fair value. The Company’s intangible assets are comprised of customer accounts and complete technology in its test interconnect business segment. The Company manages and values its complete technology in the aggregate as one asset group.

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 cumulative

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effect of adoption was not material. The adoption did not have a material impact on the Company’s financial position and results of operations, however this standard could impact the Company’s financial position and results of operations in future periods.

In August 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes SFAS No. 121. This standard provides a single accounting model for long-lived assets to be disposed of by sale and establishes additional criteria that would have to be met to classify an asset as held for sale. The carrying amount of an asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. Estimates of future cash flows used to test the recoverability of a long-lived asset or asset group must incorporate the entity’s own assumptions about its use of the asset or asset group and must factor in all available evidence. SFAS No. 144 requires that long-lived assets be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Such events include significant under-performance relative to the expected historical or projected future operating results; significant changes in the manner of use of the assets; significant negative industry or economic trends and significant changes in market capitalization.

In the fourth quarter of Fiscal 2003, the Company completed the sale of its sawing and hard material blade product lines as well as its polymer product line. As a result of these transaction, the Company recorded a loss of $5.3 million made up of asset write-offs of $6.5 million offset by cash proceeds of $1.2 million.

As of September 30, 2003, the Company recognized a $6.9 million impairment charge associated with its flip chip business unit in discontinued operations. The present value of flip chip’s future cash flows was less than the remaining carrying value. As a result, an asset impairment charge was recorded to reduce the carrying value of flip chip to its fair value.

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 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company has adopted this standard and the adoption did not have a material impact on the Company’s financial position and results of operations, however, this standard will in certain circumstances change the timing of recognition of restructuring (resizing) costs.

Foreign Currency Translation – The functional currency of each of the Company’s subsidiaries is the currency in which the majority of their transactions occur. However, the majority of the Company’s business is transacted in U.S. dollars. For the Company subsidiaries that have a functional currency other than the U.S. dollar, gains and losses resulting from the translation of the functional currency into U.S. dollars for financial statement presentation are not included in determining net income but are accumulated in the cumulative translation adjustment account as a separate component of shareholders’ equity (accumulated other comprehensive income (loss)), in accordance with SFAS No. 52. Cumulative translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. Gains and losses resulting from foreign currency transactions are included in the determination of net income. Net exchange and transaction gains (losses) were $(1.4) million, $120 thousand and $700 thousand, for the fiscal years ended September 30, 2003, 2002 and 2001, respectively.

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Revenue Recognition – The Company changed its revenue recognition policy in the fourth quarter of fiscal 2001, effective October 1, 2000, based upon guidance provided in the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements . The Company recognizes 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 it has completed its equipment installation obligations and received customer acceptance, or is otherwise released from its installation or customer acceptance obligations. In the event terms of the sale provide for a lapsing customer acceptance period, revenue is recognized based upon the expiration of the lapsing acceptance period or customer acceptance, whichever occurs first. The Company’s standard terms are Ex Works (K&S factory), with title transferring to its customer at the Company’s loading dock or upon embarkation. The Company does 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 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.

In accordance with the guidance provided in SAB 101, the deferred revenue balance as of October 1, 2000 was $26.5 million. This amount consists of equipment that was shipped and recorded as revenue in fiscal 2000 but had not met the customer acceptance criteria required by SAB 101. In fiscal 2001, the Company recorded an after-tax non-cash charge of $8.2 million or $0.17 per fully diluted share, associated with the $26.5 million of deferred revenue, to reflect the cumulative effect of the accounting change as of the beginning of the fiscal year.

In fiscal 2001, the Company received customer acceptances for $19.3 million of the $26.5 million that was deferred as of the beginning of the fiscal year and accordingly recognized $19.3 million of revenue. Also in fiscal 2001, the Company recorded after-tax non-cash profit of $5.7 million or $0.12 per fully diluted share associated with the $19.3 million of deferred revenue. At September 30, 2001, deferred revenue was approximately $7.2 million, which would be recognized in future periods as the revenue recognition criteria was met. In fiscal 2002, the Company recognized net sales of $6.3 million of the $26.5 million of sales deferred upon adoption and $2.1 million of associated after-tax profit. No additional revenue was deferred during fiscal 2002. At September 30, 2003, deferred revenue was approximately $300 thousand.

Research and Development Arrangements - The Company receives funding from certain customers and government agencies pursuant to contracts or other arrangements for the performance of specified research and development activities. Such amounts are recognized as a reduction of research and development expense when specified activities have been performed. During fiscal 2003, 2002 and 2001, reductions to research and development expense related to such funding totaled $383 thousand, $426 thousand and $1.0 million, respectively. It is the Company’s policy to expense all internally funded R & D spending as incurred.

Income Taxes - Deferred income taxes are determined using the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. No provision is made for U.S. income taxes on the portion of undistributed earnings of foreign subsidiaries which are indefinitely reinvested in foreign operations. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.

Environmental Expenditures – Future environmental remediation expenditures are recorded in operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accrued liabilities do not include claims against third parties and are not discounted.

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Earnings Per Share - Earnings per share is calculated in accordance with SFAS No. 128, Earnings Per Share. Basic earnings per share include only the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the weighted average number of common shares and the dilutive effect of stock options and other potentially dilutive securities outstanding during the period, when such instruments are dilutive.

Accounting for Stock-based Compensation – The Company accounts for stock option grants using the “intrinsic value method” prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and discloses the pro forma effect on net income and earnings per share as if the fair value method had been applied to stock option grants, in accordance with SFAS 123, Accounting For Stock-Based Compensation. (see Note 9).

Reporting Comprehensive Income – The Company reports comprehensive income and its components in accordance with SFAS 130, Reporting Comprehensive Income (“SFAS 130”), which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. The comprehensive income and related cumulative equity impact of comprehensive income items are required to be reported in a financial statement that is displayed with the same prominence as other financial statements. The impact of foreign currency translation adjustments, minimum pension liability adjustments and unrealized gains or losses on securities available-for-sale are considered to be components of the Company’s comprehensive income under the requirements of SFAS 130.

Derivative Instruments and Hedging Activities – In fiscal 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS No. 138. The standard requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in earnings or other comprehensive income, based on whether the instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. The cumulative effect of adoption was not material. The impact of SFAS No. 133 on the Company’s future results will be dependent upon the fair values of the Company’s derivatives and related financial instruments and could result in increased volatility. The effect in fiscal 2003 was not material.

In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. In rescinding FASB Statement No. 4 and FASB No. 64, FASB 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect, however, an entity would not be prohibited from classifying such gains and losses as extraordinary items so long as they meet the criteria of paragraph 20 of APB 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. Further, the Statement amends SFAS 13 to eliminate an inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The Company adopted this standard and the adoption did not have a material impact on its financial position and results of operations.

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 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

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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 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 ( See Note 15).

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 has identified a business enterprise that qualifies as a variable interest entity and will consolidate the entity into the Company’s financial statements in accordance with the new requirements beginning with the quarter ending December 31, 2003. The impact of this change will increase the Company’s assets and liabilities by approximately $6.0 million.

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. The Company has adopted the disclosure provisions of this standard.

Pro forma information regarding net income and earnings per share is required by SFAS 123 for options granted after October 1, 1995 as if the Company had accounted for its stock option grants to employees under the fair value method of SFAS 123. The fair value of the Company’s weighted averages of stock option grants to employees was estimated using a Black-Scholes option pricing model.

The following assumptions were employed to estimate the fair value of stock options granted to employees:

	Fiscal Year Ended September 30,
	2001		2002		2003
Expected dividend yield	—		—		—
Expected stock price volatility	76.90	%	82.95	%	84.78	%
Risk-free interest rate	5.99	%	5.40	%	2.89	%
Expected life (years)	7		7		5

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For pro forma purposes, the estimated fair value of the Company’s stock options to employees and directors is amortized over the options’ vesting period. The Company’s pro forma information follows:

	(net loss in thousands)
	Fiscal Year Ended September 30,
	2001			2002			2003
Net loss, as reported	$	(65,251	)	$	(274,115	)	$	(76,689	)
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(13,713	)		(17,227	)		(8,828	)
Pro forma net loss	$	(78,964	)	$	(291,342	)	$	(85,517	)
Loss per share:
Basic-as reported	$	(1.34	)	$	(5.57	)	$	(1.54	)
Basic-pro forma	$	(1.62	)	$	(5.92	)	$	(1.72	)
Diluted - as reported	$	(1.34	)	$	(5.57	)	$	(1.54	)
Diluted - pro forma	$	(1.62	)	$	(5.92	)	$	(1.72	)

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS No. 149). SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company does not expect the adoption of the standard will have a material impact on its financial position and results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the adoption of the standard will have a material impact on its financial position and results of operations.

Reclassifications - Certain amounts in the Company’s financial statements have been reclassified pursuant to the requirements of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment of Long Lived Assets”, to reflect the Company’s Flip Chip business unit as a discontinued operation. The 2003 loss on sale of product lines, as further discussed in Note 4, has been reclassified to be included in the operating expenses section of the consolidated statement of operations, from its prior presentation outside of the operating results.

NOTE 2: DISCONTINUED OPERATIONS

In February 1996, the Company entered into a joint venture agreement with Delco Electronics Corporation (“Delco”) providing for the formation and management of Flip Chip Technologies, LLC (“FCT”). FCT was formed to license related technologies and to provide wafer bumping services on a contract basis. In March 2001, the Company purchased the remaining interest in the joint venture owned by Delco for $5.0 million and included FCT in its Advanced Packaging business segment. FCT was not profitable.

In February 2004, the Company sold the assets of FCT for approximately $3.4 million in cash and notes, the agreement by the buyer to satisfy approximately $5.2 million of the Company’s lease liabilities and the assumption of certain other liabilities. The sale included fixed assets, inventories, and intellectual

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property of the Company’s flip chip business. The major classes of FCT assets and liabilities sold included: $3.6 million in accounts receivable, $119 thousand in inventory, $2.5 million in property, plant and equipment, $119 thousand in other long term assets, $1.5 million in accounts payable and $603 thousand in accrued liabilities. The Company recorded a net loss on the sale of FCT of $380 thousand. FCT has been recorded as a discontinued operation in these financial statements.

The Company recorded revenue and pre-tax loss associated with FCT of $16.4 million and $22.7 million in fiscal 2003, $23.1 million and $7.9 million in fiscal 2002 and $36.6 million and $1.2 million in fiscal 2001. The Company recorded an income tax benefit from the loss at FCT in fiscal 2001 of $175 thousand and recorded no income tax provision or benefit in fiscal 2002 and 2003.

NOTE 3: RESIZING COSTS

The semiconductor industry has been volatile, with sharp periodic downturns and slowdowns. The industry experienced excess capacity and a severe contraction in demand for semiconductor manufacturing equipment during our fiscal 2001, 2002 and most of 2003. The Company developed formal resizing plans in response to these changes in its business environment with the intent to align its cost structure with anticipated revenue levels. Accounting for resizing activities requires an evaluation of formally agreed upon and approved plans. The Company documented and committed to these plans to reduce spending that included facility closings/rationalizations and reductions in workforce. The Company recorded the expense associated with these plans in the period that it committed to carry-out the 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 fiscal 2003, the Company reversed $475 thousand ($205 thousand in the first half of 2003) of these resizing charges due to the actual severance cost associated with the terminated positions being less than the cost originally estimated. The Company recorded resizing charges of $19.7 million in fiscal 2002 and $4.2 million in fiscal 2001.

In addition to the formal resizing costs identified below, the Company continued (and is continuing) to downsize its operations in fiscal 2002 and 2003. These downsizing efforts resulted in workforce reduction charges of $5.6 million in fiscal 2003 and $5.0 million in fiscal 2002. In contrast to the resizing plans discussed above, these workforce reductions were not related to formal or distinct restructurings, but rather, the normal and recurring management of employment levels in response to business conditions and the Company’s ongoing effort to reduce its cost structure. In addition, during fiscal 2003, if the business conditions were to have improved, the Company was prepared to rehire some of these terminated individuals. These recurring workforce reduction charges were recorded as Selling, General and Administrative expenses.

A summary of the formal resizing plans initiated in fiscal 2002 and 2001 and acquisition restructuring plans initiated in fiscal 2001 appears below:

	(in thousands)
	Severance and Benefits			Commitments			Total
Fiscal 2001 and 2002 Resizing Plans and Acquisition Restructurings
Provision for resizing plans in fiscal 2001	$	4,166		$	—		$	4,166
Acquisition restructurings		84			1,402			1,486
Payment of obligations in fiscal 2001		(2,101	)		(213	)		(2,314	)
Balance, September 30, 2001		2,149			1,189			3,338
Provision for resizing plans in fiscal 2002:
Continuing operations		9,486			9,282			18,768
Discontinued operations		893			—			893
Payment of obligations in fiscal 2002		(7,551	)		(1,470	)		(9,021	)
Balance, September 30, 2002		4,977			9,001			13,978
Change in estimate		(475	)					(475	)
Payment of obligations in fiscal 2003		(3,590	)		(3,211	)		(6,801	)
Balance, September 30, 2003	$	912		$	5,790		$	6,702

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The remaining balance of the resizing costs are included in accrued liabilities.

The individual resizing plans and acquisition restructuring plans initiated in fiscal 2002 and 2001 are identified below:

Charges in Fiscal Year 2002

Fourth Quarter 2002

In January 1999, the Company acquired the advanced substrate technology of MicroModule Systems, a Cupertino, California company, to enable production of high density substrates. While showing some progress in developing the substrate technology, the business was not profitable and would have required additional capital and operating cash to complete development of the technology. In light of the business downturn that was affecting the semiconductor industry at the time, in the fourth quarter of fiscal 2002, the Company announced that it could not afford further development of the substrate technology and would close its substrate operations. 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. By June 30, 2003, all the positions had been eliminated. The plans have been completed 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. This substrate business was included in the Company’s then existing Advanced Packaging business segment.

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 thousands)
	Severance and Benefits			Commitments			Total
Fourth Quarter 2002 Charge
Provision for resizing	$	1,231		$	7,280		$	8,511
Balance, September 30, 2002		1,231			7,280			8,511
Change in estimate		(102	)		—			(102	)
Payment of obligations		(1,051	)		(2,401	)		(3,452	)
Balance, September 30, 2003	$	78		$	4,879		$	4,957

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Third Quarter 2002

As a result of the continuing downturn in the semiconductor industry and the Company’s desire to improve the performance of its test business segment, the Company decided to move towards a 24 hour per-day manufacturing model in its major U.S. wafer test facility, which would provide its customers with faster turn-around time and delivery of orders and economies of scale in manufacturing. As a result, in the third quarter of fiscal 2002, the Company announced a resizing plan to reduce headcount and consolidate manufacturing in its test business segment. As part of this plan, the Company moved manufacturing of wafer test products from its facilities in Gilbert, Arizona and Austin, Texas to its facilities in San Jose, California and Dallas, Texas and from its Kaohsuing, Taiwan facility to its Hsin Chu, Taiwan facility. The resizing plan included a severance charge of $1.6 million for the elimination of 149 positions as a result of the manufacturing consolidation. The resizing plan also included 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. All of the positions have been eliminated and both facilities have been closed. The plans have been completed but cash payments for the severance are expected to continue through 2005 and cash payments for facility and contractual obligations are expected to continue through 2004, or such earlier 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 thousands)
	Severance and Benefits			Commitments			Total
Third Quarter 2002 Charge
Provision for resizing	$	1,652		$	452		$	2,104
Payment of obligations		(547	)		(219	)		(766	)
Balance, September 30, 2002		1,105			233			1,338
Payment of obligations		(800	)		(72	)		(872	)
Balance, September 30, 2003	$	305		$	161		$	466

Second Quarter 2002

As a result of the continuing downturn in the semiconductor industry and the Company’s desire to more efficiently manage its business, 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 ($10.4 million in continuing operations and $0.9 million in discontinued operations), 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 the Company’s 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.

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In the second quarter of fiscal 2002, 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 dates that are associated with these closed test facilities.

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 the Company reduced its expected annual savings from this resizing plan for payroll related expenses by approximately $4.7 million.

Also in the fourth quarter of fiscal 2002, the Company reversed $600 thousand ($590 thousand in continuing operations and $10 thousand in discontinued operations) of the severance resizing expenses and in the fourth quarter of fiscal 2003 the Company reversed $353 thousand of resizing expenses, previously recorded in the second quarter of fiscal 2002, 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.

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.

The plans have been completed but cash payments for the severance charges and the facility and contractual obligations are expected to continue into 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 thousands)
	Severance and Benefits			Commitments			Total
Second Quarter 2002 Charge
Provision for resizing - Continuing operations	$	8,830	(1)	$	1,550		$	10,380
Provision for resizing - Discontinued operations		903			—			903
Change in estimate - Continuing operations		(2,227	)		—			(2,227	)
Change in estimate - Discontinued operations		(10	)		—			(10	)
Payment of obligations		(5,367	)(1)		(81	)		(5,448	)
Balance, September 30, 2002		2,129			1,469			3,598
Change in estimate		(353	)		—			(353	)
Payment of obligations		(1,284	)		(719	)		(2,003	)
Balance, September 30, 2003	$	492		$	750		$	1,242

(1) Includes $2.6 million non-cash charge for modifications of stock option awards that were granted prior to December 31, 2001 to the employees affected by the resizing plans in accordance with our annual grant of stock options to employees.

F-17

Charges in Fiscal Year 2001

Fourth Quarter 2001

In the quarter ended September 30, 2001, the Company announced a resizing plan in its packaging materials segment to close its bonding wire facility in the United States and move this production capacity to its Singapore facility. As a result, the Company 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 thousands)
	Severance and Benefits			Commitments			Total
Fourth Quarter 2001 Charge
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
Change in estimate		(20	)					(20	)
Payment of obligations		(455	)		—			(455	)
Balance, September 30, 2003	$	37		$	—		$	37

Second Quarter 2001

As part of its efforts to reduce operating costs, 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 June 30, 2002. In connection with the Company’s acquisition of Probe Tech, it also recorded an increase to goodwill of $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 are no additional cash obligations related to this program.

F-18

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 thousands)
	Severance and Benefits			Commitments			Total
Second Quarter 2001 Charge
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, September 30, 2003	$	—		$	—		$	—

NOTE 4: ASSET IMPAIRMENT

In addition to resizing costs (see Note 3), the Company terminated several of its major initiatives in its effort to more closely align its cost structure with expected revenue levels and wrote-down certain assets to their estimated fair market value. As a result, the Company recorded asset impairment charges of $10.5 million ($3.6 in continuing operation and $6.9 million in discontinued operations) in fiscal 2003, $31.6 million in fiscal 2002 and $800 thousand in fiscal 2001.

Fiscal 2003

In fiscal 2003, the Company recorded an asset impairment charge in continuing operations of $3.6 million. The charge included; $1.7 million associated with manufacturing equipment for a discontinued test product; $1.2 million associated with manufacturing equipment in a downsized test facility in Dallas, Texas; and $730 thousand resulting from the write-down of assets that were sold and assets that became obsolete. In fiscal 2003, the Company also recorded an asset impairment charge in discontinued operations of $6.9 million to write-down assets in its flip chip business unit to their estimated fair market value. In the fourth quarter of fiscal 2003, the Company completed the sale of its sawing and hard material blades product lines as well as its polymer product line. As a result of these transactions, the Company recorded a loss of $5.3 million made up of asset write-offs of $6.5 million offset by cash proceeds of $1.2 million.

Fiscal 2002

In fiscal 2002, the Company recorded an asset impairment of $31.6 million. The charge included: $16.9 million due to the cancellation of a company-wide integrated information system; $8.4 million due to the write-off of assets associated with the closure of the substrates operation; $3.6 million for the write-off of development and license costs of certain engineering and manufacturing software; $1.4 million of write-offs associated with a closed wire facility in Taiwan; and $1.3 million related to leasehold improvements at the leased probe card manufacturing facilities in Malaysia and the United States, which were closed.

F-19

Fiscal 2001

In the fourth quarter of fiscal 2001, the Company recorded an asset impairment of $0.8 million related to the closure of a wire facility in the United States and the disposition of the associated equipment.

NOTE 5: GOODWILL AND INTANGIBLE ASSETS

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 Company performs its annual impairment test at the end of the fourth quarter of each fiscal year, which coincides with the completion of its annual forecasting process. The Company also tests for impairment between its annual tests if a “trigger” event occurs that may have the effect of reducing the fair value of a reporting unit below its carrying value. When conducting its goodwill impairment analysis, the Company calculates its potential impairment charges based on the two-step test identified in SFAS 142 and using the implied fair value of the respective reporting units. The Company uses the present value of future cash flows from the respective reporting units to determine the implied fair value. The Company’s intangible assets other than goodwill are tested for impairment based on undiscounted cash flows, and if impaired, written-down to fair value based on either discounted cash flows or appraised values. The Company’s intangible assets are comprised of customer accounts and complete technology in its test interconnect business segment. The Company manages and values its complete technology in the aggregate as one asset group.

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 business is included in the Company’s advanced packaging segment and the test business comprises the Company’s test segment and the flip chip business unit is included in discontinued operations. 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 in fiscal 2002, 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. Also 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 and increased goodwill associated with its flip chip reporting unit by $96 thousand reflecting an increase in the cost to purchase the former joint venture partner’s equity share.

In fiscal 2001, 2002 and 2003, the semiconductor industry experienced a severe industry downturn. Due to the prolonged nature of the industry downturn, the Company continually recalibrated its businesses and projections of future operating activities. The Company saw an up-tick in its business in the spring of 2002 and at that time believed in was emerging from the effects of an industry down turn. However, this up-tick in business was not sustained and the Company’s business turned back down in the second half of fiscal 2002. By the end of its fiscal 2002, the Company’s recalibrated forecasts of future cash flows from its test, hub blades and substrate reporting units were substantially lower than in the beginning of that fiscal year, which lead to the closing of the substrate business and an associated wrote-off all the substrate

F-20

intangible assets of $1.1 million and goodwill impairment charges in the test business of $72.0 million and in its hub blades business of $2.3 million. Likewise, by the end of fiscal 2003, the Company’s forecast of future cash flows from its flip chip business unit were lower than previous forecasts and resulted in goodwill and assets impairment charges of $5.7 million and the subsequent sale of the assets of this business. The Company recorded goodwill impairment charges in the period in which its analysis of future business conditions indicated that the reporting unit’s fair value, and the implied value of goodwill, was less than its respective carrying values.

Due to the amount of goodwill associated with the Company’s test reporting unit, the Company retained a third party valuation firm to assist management in estimating the test reporting unit’s fair value at September 30, 2002. The appraisal was based on discounted cash flows of this reporting unit. The estimated fair value was determined using the Company’s weighted average cost of capital. The estimated fair value was then corroborated by comparing the implied multiples applicable to the test reporting unit’s projected earning to “guideline” companies’ forward earnings and based on this it was determined that they were within the range of the “guideline” companies. The fair value of the Company’s test reporting unit at September 30, 2003 was determined in the same manner, however, as it was greater than the carrying value of the reporting unit, there was no goodwill impairment.

The Company also recorded a goodwill impairment charge at September 30, 2002 in its hub blade reporting unit. The Company calculated the fair value of this reporting unit based on the present value of its projected future cash. The estimated fair value was determined using the Company’s weighted average cost of capital. The triggering event for this impairment charge was the recalibrated forecasts, in the fourth quarter of fiscal 2002, when the Company first determined that the fair value of the hub blade reporting unit was less then its carrying value.

In September 2003, the Company recorded a goodwill impairment charge at its flip chip business unit. The fair value of this reporting unit was determined using quoted prices from potential purchasers of this reporting unit. The quoted prices were subsequently confirmed upon the sale of the assets of the flip chip reporting unit in February of 2004. The triggering event for this impairment charge was also recalibrated forecasts in the fourth quarter of fiscal 2003, when the Company first determined that the fair value of its flip chip reporting unit was less then its carrying value.

The changes in the value of goodwill from September 30, 2001 to September 30, 2003 appear below:

	(in thousands)
	Packaging Materials Segment			Flip Chip			Test Segment			Book Value September 30,
Goodwill balance as of September 30, 2001	$	31,980		$	5,570		$	112,924		$	150,474
Reclassifications of intangibles upon adoption of SFAS 142, net of deferred tax liability of $4.9 million)		—			—			12,304			12,304
Goodwill impairment		(2,295	)		—			(72,000	)		(74,295	)
Adjustment of purchase price related to Probe Tech and Flip Chip		(1	)		97			(1,472	)		(1,376	)
Goodwill balance as of September 30, 2002	$	29,684		$	5,667		$	51,756		$	87,107
Goodwill impairment - included in discontinued operations		—			(5,667	)		—			(5,667	)
Goodwill balance as of September 30, 2003	$	29,684		$	—		$	51,756		$	81,440

F-21

The changes in the value of intangible assets from September 30, 2001 to September 30, 2003 appear below:

	(in thousands)
	Customer Accounts			Complete Technology			Acquired Workforce			Total Intangible Assets
Intangible balance at September 30, 2001	$	37,675		$	48,669		$	17,181		$	103,525
Reclassifications of intangibles upon adoption of SFAS 142		—			—			(17,181	)		(17,181	)
Write-off of substrate intangible assets		—			(1,091	)		—			(1,091	)
Adjustment to complete technology					142						142
Amortization		(4,112	)		(5,774	)		—			(9,886	)
Intangible balance at September 30, 2002		33,563			41,946			—			75,509
Amortization		(4,112	)		(5,148	)		—			(9,260	)
Intangible balance at September 30, 2003	$	29,451		$	36,798		$	—		$	66,249

At September 30, 2003 all intangible assets are recorded in the test business segment. The aggregate amortization expense related to these intangible assets for the twelve months ended September 30, 2003 was $9.3 million compared to $9.2 million in fiscal 2002 and $7.7 million in fiscal 2001. The aggregate amortization expense for each of the next five fiscal years is expected to be $9.3 million.

F-22

The following table presents pro forma net earnings and earnings per share data reflecting the impact of adoption of SFAS 142 as of the beginning of the first quarter of fiscal 2001:

	(in thousands, except per share data)
	Fiscal Year Ended September 30,
	2001			2002			2003
Reported net loss, before adoption of SFAS 142	$	(65,251	)	$	(274,115	)	$	(76,689	)
Addback:
Goodwill amortization, net of tax		9,587			—			—
Pro forma net loss	$	(55,664	)	$	(274,115	)	$	(76,689	)
Net loss per share, as reported:
Basic	$	(1.34	)	$	(5.57	)	$	(1.54	)
Diluted	$	(1.34	)	$	(5.57	)	$	(1.54	)
Goodwill amortization, net of tax per share:
Basic	$	0.20		$	—		$	—
Diluted	$	0.20		$	—		$	—
Pro forma net loss per share:
Basic	$	(1.14	)	$	(5.57	)	$	(1.54	)
Diluted	$	(1.14	)	$	(5.57	)	$	(1.54	)

NOTE 6: COMPREHENSIVE LOSS

At September 30, 2003, the components of Accumulated Other Comprehensive Loss, reflected in the Consolidated Statement of Changes in Shareholders’ Equity, net of related taxes, consisted of the following:

	(in thousands)
	September 30,
	2001			2002			2003
Loss from foreign currency translation adjustments	$	(4,644	)	$	(3,914	)	$	(961	)
Unrealized gain (loss) on investments, net of taxes		212			(52	)		(1	)
Minimum pension liability, net of tax		(5,091	)		(7,494	)		(6,756	)
Other comprehensive loss	$	(9,523	)	$	(11,460	)	$	(7,718	)

NOTE 7: INVESTMENTS

At September 30, 2003 and 2002, no short-term investments were classified as held-to-maturity. Investments, excluding cash equivalents, classified as available-for-sale, consisted of the following at September 30, 2003 and 2002:

	(in thousands)
	September 30, 2002							September 30, 2003
Available-for-sale:	Fair Value		Unrealized Gains/ (Losses)			Cost Basis		Fair Value		Unrealized Gains/ (Losses)		Cost Basis
Government and Corporate debt securities	$	18,950	$	22		$	18,928	$	4,200	$	—	$	4,200
Adjustable rate notes		2,242		(105	)		2,347		290		—		290
Equity securities		942		(127	)		1,069		—				—
Short-term investments classified as available for sale	$	22,134	$	(210	)	$	22,344	$	4,490	$	—	$	4,490

F-23

An after-tax unrealized loss of $52 thousand (net of taxes of $31 thousand) was recorded as a direct adjustment to shareholders’ equity at September 30, 2002. In fiscal 2003, the Company purchased $8.6 million of securities it classified as available-for-sale and sold $26.3 million of available-for-sale securities.

NOTE 8: BALANCE SHEET COMPONENTS

	(in thousands)
	September 30,
	2002			2003
Inventories
Raw materials and supplies	$	39,477		$	29,654
Work in process		18,549			11,788
Finished goods		17,708			12,279
		75,734			53,721
Inventory reserves		(24,847	)		(15,815	)
	$	50,887		$	37,906
	(in thousands)
	September 30,
	2002			2003
Property, Plant and Equipment
Land	$	1,602		$	1,602
Buildings and building improvements		34,314			32,914
Machinery and equipment		173,998			151,674
Leasehold improvements		12,745			15,362
		222,659			201,552
Accumulated depreciation		(132,917	)		(140,314	)
	$	89,742		$	61,238
	(in thousands)
	September 30,
	2002			2003
Accrued Expenses
Wages and benefits	$	16,171		$	17,537
Contractural commitments on closed facilities		10,586			5,777
Severance		4,942			3,365
Customer advances		4,616			2,549
Interest on long term debt		3,057			3,155
Other		13,209			9,502
	$	52,581		$	41,885

F-24

The Company had restricted cash balances of $2.8 million at September 30, 2003 and $3.2 million at September 30, 2002. These restricted cash balances were used to support letters of credit.

NOTE 9: DEBT OBLIGATIONS

At September 30, 2003, the Company had capital lease debt obligations of $374 thousand, of which $36 thousand was due within one year. The capital lease obligations, including interest are payable as follows: $50 thousand each year from fiscal 2004 through fiscal 2008 and $188 thousand thereafter. At September 30, 2002, the Company had capital lease obligations of $579 thousand, of which $186 thousand was due within one year.

In August 2001, the Company issued $125.0 million of convertible subordinated notes. The notes are general obligations of the Company and are subordinated to all senior debt. The notes rank equally with the convertible notes issued in December 1999. The notes bear interest at 5 ¹/4%, are convertible into the Company’s common stock at $19.75 per share and mature on August 15, 2006. There are no financial covenants associated with the notes and there are no restrictions on paying dividends, incurring additional debt or issuing or repurchasing our securities. Interest on the notes is payable on February 15 and August 15 each year. The Company may redeem the notes in whole or in part at any time on or after August 19, 2004 at prices ranging from 102.1% at August 19, 2004 to 100.0% at August 15, 2006. At September 30, 2003, the fair value of the $125.0 million 5 ¹/4% Convertible Subordinated Notes was $115.6 million.

In December 1999, the Company issued $175.0 million of convertible subordinated notes. The notes are general obligations of the Company and subordinated to all senior debt. The notes bear interest at 4 ³/4%, are convertible into the Company’s common stock at $22.8997 per share and mature on December 15, 2006. There are no financial covenants associated with the notes and there are no restrictions on paying dividends, incurring additional debt or issuing or repurchasing the Company’s securities. Interest on the notes will be paid on June 15 and December 15 of each year. The Company may redeem the notes in whole or in part at any time after December 18, 2002 at prices ranging from 102.714% at December 19, 2002 to 100.0% at December 15, 2006. At September 30, 2003, the fair value of the $175.0 million 4 ³/4% Convertible Subordinated Notes was $154.9 million.

The Company is obligated 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 and principal payments of $125.0 million in fiscal 2006 and $175.0 million in fiscal 2007 on the $300.0 million of convertible subordinated notes.

In April 2001, the Company entered into a receivable securitization program in which the Company transferred all domestic account receivables to KSI Funding Corporation, a “bankruptcy remote” special purpose corporation and a wholly-owned subsidiary. Bankruptcy remote refers to a subsidiary that is operated and structured so that transfers of assets to it from a parent are characterized as true sales and are not available to creditors in the event of a bankruptcy of the parent until the obligations of the bankruptcy remote subsidiary are satisfied. Under the facility, KSI Funding Corporation could sell up to a $40.0 million interest in all of the Company’s domestic receivables. This facility was structured as a revolving securitization, whereby an interest in additional account receivables could be sold as collections reduced the previously sold interest. At September 30, 2001, the Company had sold receivables under this agreement amounting to $20.0 million. The Company terminated this agreement in July 2002. The Company accounted for its sale of receivables under the provision of SFAS 140 “Accounting for

F-25

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This transfer of financial assets without recourse qualified as a sale under the provisions of SFAS 140. Upon the sale of the receivables, the receivables were removed from the Company’s balance sheet, and the cash received from the participating bank was recorded. The Company paid a fee to the participating bank at the bank’s A-1/P-1 commercial paper rate plus a program fee of 0.625%.

NOTE 10: SHAREHOLDERS’ EQUITY

Common Stock

In fiscal 2003, the Company’s common stock increased by $415 thousand reflecting the proceeds from the exercise of employee and director stock options and increased by $89 thousand due to a tax benefit associated with the exercise of the stock options. The Company’s common stock also increased due to the issuance of common stock as matching contributions to the Company’s 401(k) saving plan by $2.2 million, $2.5 million and $1.9 million in fiscal 2003, 2002 and 2001, respectively.

Stock Option Plans

The Company has five employee stock option plans (the “Employee Plans”) pursuant to which options have been or may be granted at 100% of the market price of the Company’s Common Stock on the date of grant. Options granted under the Employee Plans are exercisable at such dates as are determined in connection with their issuance, but not later than ten years after the date of grant. No compensation expense has been recognized related to our employee stock based plans.

The following summarizes all employee stock option activity for the three years ended September 30, 2003:

	(Option amounts in thousands)
	September 30,
	2001				2002				2003
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Options outstanding at beginning of period	4,109		$	10.82	5,832		$	12.16	7,320		$	12.91
Granted	2,544			14.23	2,519			14.64	2,459			3.45
Exercised	(141	)		7.26	(160	)		9.21	(91	)		4.41
Terminated or canceled	(680	)		12.84	(871	)		13.52	(1,101	)		10.48
Options outstanding at end of period	5,832			12.16	7,320			12.92	8,587			10.57
Options exercisable at end of period	1,915			10.09	2,922			11.02	4,453			11.84

F-26

The following table summarizes information concerning currently outstanding and exercisable employee options at September 30, 2003:

Range of Exercise Prices	Options Outstanding	Options Outstanding	(Option amounts in thousands)		Options Exercisable
		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$   1.44 - $ 3.21	1,941	8.6	$	2.95	68	$	2.95
$   3.22 - $ 6.41	562	3.0		5.51	500		5.50
$   6.42 - $ 9.62	866	4.4		6.72	866		6.72
$   9.63 - $ 12.03	465	7.0		10.24	255		10.20
$ 12.04 - $ 16.03	2,785	5.9		13.76	1,762		13.67
$ 16.04 - $ 19.24	1,916	6.2		16.57	965		17.00
$ 19.25 - $ 22.44	7	3.6		19.44	5		19.48
$ 22.45 - $ 28.86	33	4.1		28.50	25		28.50
$ 28.87 - $ 32.06	12	6.4		32.06	7		32.06
	8,587	6.3		10.57	4,453		11.86

The Company also maintains two stock option plans for non-officer directors (the “Director Plans”) pursuant to which options to purchase shares of the Company’s Common Stock at an exercise price of 100% of the market price on the date of grant are issued to each non-officer director each year. Options to purchase 452,240 shares at an average exercise price of $15.30 were outstanding under the Director Plans at September 30, 2003, of which options to purchase 269,240 shares were exercisable. In fiscal 2003, 2002 and 2001, there were 8,000, 6,000 and 24,000 options, respectively, exercised under the Director Plans at an average exercise price of $2.75, $1.69 and $4.21, respectively. No compensation expense has been recognized related to our Director stock based plans.

At September 30, 2003, 14.2 million shares were reserved for issuance and 4.4 million shares were available for grant in connection with the Employee Plans and 942,000 shares were reserved for issuance and 480,000 shares were available for grant in connection with a Director Plan.

NOTE 11: EMPLOYEE BENEFIT PLANS

The Company has a non-contributory defined benefit pension plan covering substantially all U.S. employees who were employed on September 30, 1995. The benefits for this plan were based on the employees’ years of service and the employees’ compensation during the three years before retirement. The Company’s funding policy is consistent with the funding requirements of U.S Federal employee benefit and tax laws. Effective December 31, 1995, the benefits under the Company’s pension plan were frozen. As a consequence, accrued benefits no longer change as a result of an employee’s length of service or compensation.

F-27

Detailed information regarding the Company’s defined benefit pension is as follows:

	(in thousands)
	Fiscal Year Ended September 30,
	2001			2002			2003
Change in benefit obligation:
Benefit obligations at beginning of year:	$	13,763		$	15,359		$	17,587
Interest cost		1,051			1,094			1,122
Benefit paid		(548	)		(636	)		(678	)
Actuarial (gain) loss		1,093			1,770			1,336
Benefit obligation at end of year	$	15,359		$	17,587		$	19,367
Change in plan assets:
Fair value of plan assets at beginning of year:	$	12,394		$	11,181		$	9,084
Actual return on plan assets		(2,520	)		(1,612	)		2,357
Employer contributions		1,855			151			1,635
Benefits paid		(548	)		(636	)		(678	)
Fair value of assets at end of year	$	11,181		$	9,084		$	12,398
Reconciliation of funded status:
Funded status	$	(4,178	)	$	(8,503	)	$	(6,968	)
Unrecognized actuarial loss		7,832			11,530			10,395
Net amount recognized at year-end	$	3,654		$	3,027		$	3,427
Amount recognized in the statement of financial position consists of:
Accrued benefit liability	$	(4,178	)		(8,503	)	$	(6,968	)
Accumulated other comprehensive income/ Unrecognized net loss		7,832			11,530			10,395
Net amount recognized at year-end	$	3,654		$	3,027		$	3,427
Components of net periodic benefit cost:
Interest Cost	$	1,051			1,094		$	1,122
Expected return on plan assets		(1,018	)		(875	)		(751	)
Recognized actuarial loss		186			560			865
Net periodic benefit cost	$	219		$	779		$	1,236
Weighted-average assumptions as of September 30:
Discount rate		7.25	%		6.50	%		6.00	%
Expected long-term rate of return on plan assets		8.00	%		8.00	%		8.00	%
Rate of compensation increase			*			*			*

* Not applicable due to the December 31, 1995 benefit freeze

Plan assets include equity and fixed-income securities. At September 30, 2003, 150,000 shares of the Company’s common stock with a fair value of $1.6 million was included in the Plan assets.

The Company’s foreign subsidiaries have retirement plans that are integrated with and supplement the benefits provided by laws of the various countries. They are not required to report nor do they determine the actuarial present value of accumulated benefits or net assets available for plan benefits. On a consolidated basis, pension expense was $2.5 million, $1.4 million and $1.2 million, in fiscal 2003, 2002 and 2001, respectively.

The Company has a 401(k) Employee Incentive Savings Plan. This plan allows for employee contributions and matching Company contributions in varying percentages, depending on employee age and years of service, ranging from 50% to 175% of the employees’ contributions. The Company’s contributions under this plan totaled $2.2 million, $2.5 million and $1.9 million in fiscal 2003, 2002 and 2001, respectively, and were satisfied by contributions of shares of Company common stock, valued at the market price on the date of the matching contribution.

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NOTE 12: INCOME TAXES

Income (loss) before income taxes from continuing operations consisted of the following:

	Fiscal Year Ended September 30,
	2001			2002			2003
United States operation	$	(114,929	)	$	(270,008	)	$	(56,385	)
Foreign operations		37,382			36,393			9,983
	$	(77,547	)	$	(233,615	)	$	(46,402	)
The provision (benefit) for income taxes included the following:
	(in thousands)
	Fiscal Year Ended September 30,
	2001			2002			2003
Current:
Federal	$	9,017		$	(7,376	)	$	—
State		300			20			—
Foreign		6,596			7,109			7,594
Deferred:
Federal		(37,381	)		32,808			—
Foreign		—			—			—
	$	(21,468	)	$	32,561		$	7,594
The provision (benefit) for income taxes for continuing operations differed from the amount computed by applying the statutory federal income tax rate as follows:
	(in thousands)
	Fiscal Year Ended September 30,
	2001			2002			2003
Computed income tax expense (benefit) based on U.S. statutory rate	$	(27,142	)	$	(84,544	)	$	(24,183	)
Effect of earnings of foreign subsidiaries subject to different tax rates		3,263			708			(1,565	)
Benefits from Israeli and Singapore Approved Enterprise Zones		(2,870	)		(5,890	)		706
Tax credit write-offs		—			12,167			—
Benefits of net operating loss and tax credit carryforwards and change in valuation allowance		(178	)		65,327			12,059
Non-deductible goodwill impairment and amortization		3,260			22,475			—
Foreign dividends		1,137			24,968			19,600
Write off of In-Process Research and Development		3,953			(343	)		—
Effect of revisions of permanent items		(2,015	)		(2,456	)		—
State income tax benefit		(1,488	)		—			—
Other, net		612			149			977
	$	(21,468	)	$	32,561		$	7,594

In fiscal 2001, the Company recorded a cumulative effect of a change in accounting principle associated with the adoption of SAB 101, resulting in a charge to earnings of $8.2 million, net of taxes of $4.4 million.

Undistributed earnings of certain foreign subsidiaries for which taxes have not been provided approximate $125.5 million at September 30, 2003. Such undistributed earnings are considered to be indefinitely reinvested in foreign operations.

F-29

Undistributed earnings approximating $58.9 million are not considered to be indefinitely reinvested in foreign operations. Accordingly, as of September 30, 2003, deferred tax liabilities of $23.4 million including withholding taxes have been provided. The Company expects to repatriate approximately $24.0 million of the $58.9 million of above-mentioned foreign earnings in fiscal 2004.

Deferred income taxes are determined based on the differences between the financial reporting and tax basis of assets and liabilities as measured by the current tax rates. The net deferred tax balance is composed of the tax effects of cumulative temporary differences, as follows:

	(in thousands)
	September 30,
	2002			2003
Inventory reserves	$	3,570		$	3,343
Warranty accrual		279			339
Other accruals and reserves		11,986			6,893
Revenue recognition		237			125
Total short-term deferred tax asset	$	16,072		$	10,700
Intangible assets	$	7,924		$	7,901
Domestic tax credit carryforwards		5,706			4,847
Foreign tax credit carryforwards		0			0
Domestic NOL carryforwards		79,592			89,811
Foreign NOL carryforwards		12,090			14,435
		105,312			116,994
Valuation allowance		(86,749	)		(100,728	)
Total long-term deferred tax asset	$	18,563		$	16,266
Repatriation of foreign earnings, including foreign withholding taxes	$	26,611		$	23,441
Depreciable assets		2,658			(24	)
Intangible assets		23,383			20,845
Prepaid expenses and other		2,685			3,406
Total long-term deferred tax liability	$	55,337		$	47,668
Net long-term deferred liability	$	36,774		$	31,402

The Company has U.S. net operating loss carryforwards, state net operating loss carryforwards, and tax credit carryforwards of approximately $217.9 million, $102.4 million, and $4.8 million, respectively, that will reduce future taxable income. These carryforwards can be utilized in the future, prior to expiration of certain carryforwards in 2009 through 2022.

During the year ended September 30, 2001, the Company through the acquisition of Cerprobe, acquired additional federal tax loss carryforwards of approximately $5.5 million which expire in 2020. Additionally, as part of the Cerprobe acquisition, the Company acquired approximately $3.9 million in state loss carryforwards. As utilization of these losses is not assured, more likely than not, the Company has provided a full valuation allowance on the benefit associated with them. In the event the tax benefits related to these acquired net operating losses are realized, such benefit would reduce the recorded amount of goodwill.

F-30

In the fourth quarter of fiscal 2002, as part of the income tax provision for the period, the Company recorded a charge of $65.3 million through the establishment of a valuation allowance against its deferred tax asset consisting primarily of U.S. net operating loss carryforwards. The Company determined that the valuation allowance was required based on its recent losses, which are given substantially more weight than forecasts of future profitability in the evaluation. No tax benefits were recorded in respect of U.S. net operating losses incurred during fiscal 2003. The Company established a valuation allowance of $12.1 million is fiscal 2003 against U.S and foreign net operating losses. Until the Company utilizes these U.S. operating loss carryforwards, its income tax provision will reflect only foreign taxation.

The Company also has generated losses in certain foreign jurisdictions totaling approximately $46.0 million. Similar to the situation with the U.S., realization of the benefit associated with these foreign loss carryforwards cannot be assured and a full valuation allowance has been provided against the deferred tax assets associated with these carryforwards.

NOTE 13: SEGMENT INFORMATION

In February 2004 the Company sold the remaining assets of its former advanced packaging technologies business segment, which consisted solely of its flip chip business unit which licensed flip chip technology and provided flip chip bumping and wafer level packaging services. As a result, the Company reflected the flip chip business unit as a discontinued operation and eliminated the advanced packaging technologies segment. The below segment information presents the Company’s continuing business segments.

The Company evaluates performance of its segments and allocates resources to them based on income from operations before interest, allocations of corporate expenses and income taxes.

The Company’s continuing operations consist of three industry segments: equipment, packaging materials and test interconnect solutions. The equipment business segment designs, manufactures and markets capital equipment and related spare parts for use in the semiconductor assembly process. The equipment segment also services, maintains, repairs and upgrades assembly equipment. The packaging materials business segment designs, manufactures and markets consumable packaging materials for use on the equipment the Company markets as well as on competitors’ equipment. The packaging materials products have different manufacturing processes, distribution channels and a less volatile revenue pattern than the Company’s capital equipment. The test interconnect business segment was established in fiscal 2001, following the acquisitions of Cerprobe and Probe Tech. The business provides a broad range of products used to test semiconductors during wafer fabrication and after they have been assembled and packaged.

The products and services of all segments are for sale to semiconductor device manufacturers.

The table below presents information about reported segments:

	(in thousands)
Fiscal Year Ended September 30, 2003	Equipment Segment			Packaging Materials Segment			Test Segment			Corporate, Other and Eliminations			Consolidated
Net revenue	$	198,447		$	174,471		$	104,882		$	135		$	477,935
Cost of sales		129,092			132,779			87,856			—			349,727
Gross profit		69,355			41,692			17,026			135			128,208
Operating costs		67,490			25,408			41,223			15,587			149,708
Resizing		(175	)		(20	)		(103	)		(177	)		(475	)
Asset impairment		17			385			3,098			129			3,629
Loss on sale of product lines		5,257			—			—			—			5,257
Income (loss) from operations	$	(3,234	)	$	15,919		$	(27,192	)	$	(15,404	)	$	(29,911	)
Segment Assets	$	86,650		$	94,466		$	166,467		$	95,278		$	442,861
Captial Expenditures		1,433			4,604			4,067			871			10,975
Depreciation expense		7,797			5,879			9,038			4,045			26,759

F-31

Fiscal Year Ended September 30, 2002	Equipment Segment			Packaging Materials Segment		Test Segment			Corporate, Other and Eliminations			Consolidated
Net revenue	$	169,469		$	157,176	$	114,698		$	222		$	441,565
Cost of sales		142,965			118,080		79,686			14			340,745
Gross profit		26,504			39,096		35,012			208			100,820
Operating costs		85,020			27,242		52,117			32,468			196,847
Resizing		4,781			167		4,715			9,105			18,768
Asset impairment		2,165			2,874		1,245			25,310			31,594
Goodwill impairment		—			2,295		72,000						74,295
Income (loss) from operations	$	(65,462	)	$	6,518	$	(95,065	)	$	(66,675	)	$	(220,684	)
Segment Assets	$	119,831		$	87,689	$	175,480		$	155,682		$	538,682
Captial Expenditures		5,237			6,020		1,452			7,676			20,385
Depreciation expense		8,898			5,564		10,210			7,671			32,343
Fiscal Year Ended September 30, 2001	Equipment Segment			Packaging Materials Segment		Test Segment			Corporate, Other and Eliminations			Consolidated
Net revenue	$	249,952		$	150,945	$	116,890		$	595		$	518,382
Cost of sales		166,359			110,570		84,401			—			361,330
Gross profit		83,593			40,375		32,489			595			157,052
Operating costs		103,386			28,667		54,169			34,182			220,404
Resizing		2,223			1,621		270			52			4,166
Asset impairment		—			800		—			—			800
Purchased in-process research and development		—			—		11,709			—			11,709
Income (loss) from operations	$	(22,016	)	$	9,287	$	(33,659	)	$	(33,639	)	$	(80,027	)
Segment Assets	$	155,220		$	86,113	$	270,506		$	265,587		$	777,426
Captial Expenditures		24,754			8,028		6,458			9,396			48,636
Depreciation expense		10,760			3,973		7,302			8,057			30,092

Intersegment sales are immaterial. Corporate, Other and Eliminations include sales and expenses from the Company’s former high density substrate business. Assets identified as Corporate, Other and Eliminations consist of all cash and short-term investments of the Company and corporate income tax assets along with the assets of its form high density substrate business and discontinued operation.

F-32

The Company’s market for its products is worldwide. The table below presents destination sales from continuing operations to unaffiliated customers and long-lived assets by country:

	(in thousands)
Fiscal year ended September 30, 2003	Destination Sales		Long-Lived Assets(1)
United States	$	94,790	$	181,589
Taiwan		97,378		1,823
Malaysia		59,641		9
Singapore		46,389		6,473
Korea		40,933		5
Japan		24,107		497
Philippines		19,870		2
Hong Kong		15,060		23
China		13,296		7,358
Israel		2,641		7,316
All other		63,830		3,832
	$	477,935	$	208,927
Fiscal year ended September 30, 2002	Long-Lived Destination Sales		Long-Lived Assets(1)
United States	$	115,133	$	221,624
Taiwan		110,962		2,198
Malaysia		45,923		31
Singapore		40,389		11,366
Korea		17,846		10
Japan		17,294		846
Philippines		15,167		16
Hong Kong		11,222		40
Israel		3,135		11,054
All other		64,494		5,173
	$	441,565	$	252,358
Fiscal year ended September 30, 2001	Long-Lived Destination Sales		Long-Lived Assets(1)
United States	$	176,565	$	345,179
Taiwan		64,319		4,565
Singapore		59,429		12,830
Malaysia		42,656		507
Japan		31,749		1,059
Philippines		29,613		60
Hong Kong		15,690		418
Korea		11,041		20
Israel		3,504		14,056
All other		83,816		3,257
	$	518,382	$	381,951

(1) Goodwill, Intangible Assets and Property, Plant and Equipment, net

NOTE 14: ACQUISITIONS AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT

In November 2000, the Company completed a tender offer for 100.0% of the outstanding shares of Cerprobe Corporation (“Cerprobe”) for $20 per share. The total purchase price of Cerprobe, including transaction costs, the assumption of acquisition related liabilities and debt repayment, was approximately

F-33

$225.0 million, payable in cash. In December 2000, the Company purchased all the outstanding shares of Probe Technology Corporation (“Probe Tech”) for approximately $65.0 million, including transaction costs and the assumption of acquisition related liabilities, payable in cash. Both Cerprobe and Probe Tech design and manufacture semiconductor test interconnect solutions. The operations of these two companies have been combined to create a test division, which is disclosed as a separate business segment for financial reporting purposes. The acquired assets of Probe Tech included a minority interest in a foreign subsidiary.

The acquisitions were recorded using the purchase method of accounting and accordingly, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their fair values on the acquisition dates. The Company allocated a portion of the purchase price for each acquisition to intangible assets valued using a discount rate of 25.0% for Cerprobe and 18.0% for Probe Tech. The portion of the purchase price allocated to in-process R&D projects that did not have future alternative use and to which technological feasibility had not been established totaled $11.3 million for Cerprobe and $0.4 million for Probe Tech. These amounts were charged to expense as of the acquisition dates. The Company received a waiver of a bank covenant under its then existing bank revolving credit facility, which limited the amount the Company could spend on acquisitions, in order to complete the Cerprobe and Probe Tech acquisitions. The Company borrowed $55.0 million under its bank revolving credit facility to partially fund the purchase of Probe Tech.

Pro forma operating results for the year ended September 30, 2001 assuming the acquisitions of Cerprobe and Probe Tech were consummated on October 1, 1999 appears below. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated at the date indicated, nor is it necessarily indicative of the future operating results of the combined businesses.

	(unaudited) (in thousands, except per share data)
	Fiscal year ended September 30, 2001
Net Sales	$	582,426
Net Income (loss)	$	(67,732	)
Diluted net income (loss) per share	$	(1.39	)

The components of the purchase price allocation for the acquisitions of Cerprobe and Probe Tech are as follows:

	(in thousands)
	Cerprobe			Probe Tech
Current assets	$	44,223		$	12,180
Property, plant, equipment and other long term assets		27,241			8,948
Acquired intangibles		80,800			30,253
Acquired in-process research and development		11,295			414
Goodwill		105,510			16,298
Less: Liabilities assumed		(75,573	)		(3,432	)
Total	$	193,496		$	64,661

F-34

The intangible assets resulting from the acquisitions are being amortized on a straight-line basis over a 10-year period.

A lawsuit between Cerprobe and the former president, director and shareholder of Silicon Valley Test & Repair, Inc. (a company acquired by Cerprobe Corporation in January 1997) was settled and dismissed in June 2001, with Cerprobe paying $280 thousand in attorney’s fees to opposing counsel. This amount was allocated to goodwill in the opening balance sheet, as a cost of the Cerprobe acquisition.

In fiscal 2001, the Company recorded a charge of $11.7 million for in-process R&D associated with the acquisitions of Cerprobe and Probe Tech representing the appraised value of products still in the development stage that did not have a future alternative use and which had not reached technological feasibility. As part of the acquisition, the Company acquired 16 ongoing R&D projects, all aimed at increasing the technological features of the existing probe cards and therefore the number of test applications for which they could be marketed. The R&D projects ranged from researching the feasibility of producing multi-die testing probes to researching the feasibility of producing probes for specialized semiconductor package (CSP and BGA) configurations. The project stage of completion ranged from 10% to 90% and all projects were due for completion and product launch by the third quarter of 2002 at prices and costs similar to the existing probe cards marketed by Cerprobe and Probe Tech.

In the valuation of in-process technology, the Company utilized a variation of the income approach. The Company forecasted revenue, earnings and cash flow for the products under development. Revenues were projected to extend out over the expected useful lives for each project. The technology was then valued through the application of the Discounted Cash Flow method. Values were calculated using the present value of their projected future cash flow at discount rates of between 28.4% and 49.1%. The Company anticipated that some of these projects might take longer to develop than originally thought and that some of these projects may never be marketable and there is a risk that the anticipated future cash flows might not be achieved. Of the 16 ongoing R&D projects at the time of the acquisition five have been completed, one is still in progress, four have been cancelled due to overlapping technology with our Cobra line of vertical test products, and six were cancelled due to nonproductive results. The Company believes that the expected returns of the completed and in-process R&D projects will be realized. The Company also believes that future revenues from existing Cobra products will offset the expected future revenues from the R&D projects that were cancelled due to the overlapping technology and that there will be no adverse material impact on the Company’s future operating results or the expected return on its investment in the acquired companies. The six projects that were cancelled due to lack of productive results will not have a material impact on our future operating results and expected return on our investment in the acquired companies.

F-35

The major R&D projects in process at the time of the acquisition, along with their current status and estimated time for completion are as follows:

(dollars in thousands)
R&D project	Value Assigned at Purchase(2)		Percentage Complete at Purchase		Estimated Cost to Complete Project at Purchase		Current Projected Product Launch Date	Current Status of Project
Next generation contact technology	$	2,700	10	%	$	290	N/A	Cancelled
Socket testing capability for CSP and BGA packages	$	2,000	50	%	$	65	N/A	Complete
ViProbe pitch reduction	$	1,600	40	%	$	89	N/A	Cancelled (1)
Vertical space transformer	$	1,500	25	%	$	278	N/A	Cancelled (1)
Extension of P4 technology to vertical test configurations	$	1,300	40	%	$	229	N/A	Cancelled (1)
Low-force, high-density interface using P4 technology	$	1,300	30	%	$	138	N/A	Cancelled
All other projects combined (total of ten projects)	$	1,300	10-90	%	$	576	Q2 2004	4 complete; 1 in process; 5 cancelled

The Company purchased two companies; Cerprobe Corporation (“Cerprobe”) and Probe Technology Corporation (“Probe Tech”) that design and manufacture semiconductor test interconnect solutions, in its fiscal year 2001. Subsequent to the acquisitions, the Company determined that the vertical probe technology designed and marketed by Probe Tech was superior to the vertical probe technology of Cerprobe. The Company then shifted its R&D efforts to further enhancement of the Probe Tech vertical probe technology and cancelled the R&D projects at Cerprobe that were enhancing the Cerprobe vertical probe technology. The R&D projects identified by (1) in the above table were Cerprobe projects that were cancelled due to the shift in focus to the Probe Tech vertical probe technology. The Company expect the future revenue from the Probe Tech vertical probe technology will replace the anticipated revenue from the Cerprobe vertical probe R&D projected that have been cancelled.

The Value Assigned at Purchase reflects the present value of the anticipated future cash flow generated from each R&D project from its launch date through the expected life of the product.

NOTE 15: OTHER FINANCIAL DATA

The Company recorded other income of $2.0 million in fiscal 2002 and $8.0 million in fiscal 2001 as the result of a cash settlement of an insurance claim associated with a fire in the Company’s expendable tool facility.

Maintenance and repairs expense from continuing operations totaled $3.6 million, $4.2 million and $3.8 million for fiscal 2003, 2002 and 2001, respectively. Warranty and retrofit expense was $2.5 million, $3.4 million and $3.5 million for fiscal 2003, 2002 and 2001, respectively. Rent expense for fiscal 2003, 2002 and 2001 was $11.2 million, $11.6 million and $6.9 million, respectively.

The Company’s basic and diluted weighted average share outstanding were the same in fiscal 2003, 2002 and 2001 due to the Company’s net loss in each of those fiscal years which caused all potentially dilutive securities to be deemed antidilutive. The weighted average number of shares for potentially dilutive securities (convertible notes and employee and director stock options) was 14,907,000 in fiscal 2003, 15,217,000 in fiscal 2002 and 9,382,000 in fiscal 2001.

F-36

NOTE 16: GUARANTOR OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

Guarantor Obligations

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 table below identifies the guarantees under the standby letters of credit:

		(in thousands) Maximum obligation under guarantee
Nature of guarantee	Term of guarantee
Security deposit for payment of employee health benefits	Expires June 2004	$	1,710
Security deposit for payment of employee worker compensation benefits	Expires July and October 2004		684
Security deposit for a facility lease	Expires July 2004		300
		$	2,694

The table below details the activity related to the Company’s reserve for product warranties which is included in accrued expenses in the balance sheet at September 30, 2003:

	(in thousands)
	Reserve for Product Warranty
Reserve for product warranty at September 30, 2002	$	837
Provision for product warranty		2,477
Product warranty		(2,306	)
Reserve for product warranty at September 30, 2003	$	1,008

Commitments and Contingencies

The Company has obligations under various operating leases, primarily for manufacturing and office facilities, which expire periodically through 2012. Minimum rental commitments under these leases (excluding taxes, insurance, maintenance and repairs, which are also paid by the Company), are as follows: $12.4 million in fiscal 2004; $11.4 million in fiscal 2005; $5.0 million in fiscal 2006; $3.4 million in fiscal 2007; $2.5 million in 2008 and $11.1 million thereafter.

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 it 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.

F-37

Concentrations

Sales to a relatively small number of customers account for a significant percentage of the Company’s net sales from continuing and discontinued operations. In both fiscal 2003 and 2002, sales to Advanced Semiconductor Engineering accounted for 13%, of the Company’s sales. In fiscal 2001, no customer accounted for more than 10% of sales The Company expects that sales of its products to a limited number of customers will continue to account for a high percentage of net sales for the foreseeable future. At September 30, 2003 and 2002, Advanced Semiconductor Engineering accounted for 10% and 17%, respectively, of total accounts receivable. No other customer accounted for more than 10% of total accounts receivable at September 30, 2003 and 2002. The reduction or loss of orders from a significant customer could adversely affect the Company’s business, financial condition, operating results and cash flows.

The Company relies on subcontractors to manufacture to the Company’s specifications many of the components or subassemblies used in its products. Certain of the Company’s products require components or parts of an exceptionally high degree of reliability, accuracy and performance for which there are only a limited number of suppliers or for which a single supplier has been accepted by the Company as a qualified supplier. If supplies of such components or subassemblies were not available from any such source and a relationship with an alternative supplier could not be promptly developed, shipments of the Company’s products could be interrupted and re-engineering of the affected product could be required. Such disruptions could have a material adverse effect on the Company’s results of operations.

NOTE 17: SELECTED QUARTERLY FINANCIAL DATA (unaudited)

Financial information pertaining to quarterly results of operations follows:

	(in thousands, except per share amounts)
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Fiscal Year ended September 30, 2003:
Net sales	$	107,259		$	122,280		$	123,782		$	124,614		$	477,935
Gross profit		28,637			34,231			32,103			33,237			128,208
Loss from operations(1)(2)		(9,696	)		(8,079	)		(4,105	)		(2,774	)		(29,911	)
Loss from operations before income taxes		(13,705	)		(12,314	)		(8,279	)		(12,104	)		(46,402	)
Provision (benefit) for income tax		1,026			3,318			1,350			1,900			7,594
Loss from discontinued operations, net of tax		(2,924	)		(3,659	)		(1,723	)		(14,387	)		(22,693	)
Net loss	$	(17,655	)	$	(19,291	)	$	(11,352	)	$	(28,391	)	$	(76,689	)
Net loss per share:
Basic	$	(0.36	)	$	(0.39	)	$	(0.23	)	$	(0.57	)	$	(1.54	)
Diluted	$	(0.36	)	$	(0.39	)	$	(0.23	)	$	(0.57	)	$	(1.54	)
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Fiscal Year ended September 30, 2002:
Net sales	$	96,748		$	101,245		$	126,397		$	117,175		$	441,565
Gross profit		25,537			11,390			35,192			28,701			100,820
Loss from operations(1)(3)		(20,143	)		(53,534	)		(15,603	)		(131,404	)		(220,684	)
Loss from operations before income taxes		(23,551	)		(56,876	)		(19,188	)		(134,000	)		(233,615	)
Provision (benefit) for income tax		(7,481	)		(16,244	)		(2,645	)		58,931			32,561
Loss from discontinued operations, net of tax		(1,383	)		(2,923	)		(1,559	)		(2,074	)		(7,939	)
Net loss	$	(17,453	)	$	(43,555	)	$	(18,102	)	$	(195,005	)	$	(274,115	)
Net loss per share:
Basic	$	(0.36	)	$	(0.89	)	$	(0.37	)	$	(3.95	)	$	(5.57	)
Diluted	$	(0.36	)	$	(0.89	)	$	(0.37	)	$	(3.95	)	$	(5.57	)

F-38

(1) Represents net sales less costs and expenses from continuing operations but before net interest expense and other income.

(2) Results for fiscal 2003 include: a reversal of prior year resizing charges in the first and fourth quarters of $205 thousand and $270 thousand, respectively (See Note 3); asset impairment charges (reversals) in the first, second, third and fourth quarters of $121 thousand, $1.7 million, $1.2 million and $0.7 million, respectively (See Note 4); severance associated with workforce reductions in our continuing businesses in the first, second, third and fourth quarters of $1.6 million, $2.6 million, $1.0 million and $500 thousand, respectively; and inventory write-downs of in the second, third and fourth quarters of $1.0 million, $3.2 million and $900 thousand, respectively.

(3) Results for fiscal 2002 include: resizing charges in the second, third and fourth quarters of $11.3 million, $2.1 million and $6.3 million, respectively (See Note 3); asset impairment charges in the second and fourth quarters of $4.9 million and $26.7 million, respectively (See Note 4); goodwill impairment in the fourth quarter of $74.3 million (See Note 5); $5.0 million of severance associated with workforce reductions in our continuing businesses in the fourth quarter; and inventory write-downs of $13.3 million (to costs of goods sold) in the second quarter and $1.1 million in the fourth quarter.

NOTE 18: SUBSEQUENT EVENTS (Unaudited)

Note Offering

In the first quarter of fiscal 2004, the Company issued $205.0 million of five-year convertible subordinated notes. The notes are general obligations of the Company and are subordinated to all senior debt. The notes rank equally with the convertible notes issued in December 1999 and August 2001. The notes bear interest at 0.5%, are convertible into the Company’s common stock at $20.33 per share and mature on November 30, 2008. There are no financial covenants associated with the notes and there are no restrictions on incurring additional debt or issuing or repurchasing our securities. Interest on the notes is payable on May 30 and November 30 each year.

In November 2003, the Company notified the holders of its $175.0 million 4.75% convertible subordinated notes due December 15, 2006 that the notes will be redeemed in their entirety on December 26, 2003 at a redemption price equal to 102.036% of the principal amount plus interest accrued through the date of redemption. The Company intends to use the majority of the proceeds from the above mentioned $205 million note offering to fund the redemption of these notes.

F-39

KULICKE AND SOFFA INDUSTRIES, INC.

Schedule II – Valuation and Qualifying Accounts

(in thousands)

	Balance at beginning of period		Charged to costs and expenses			Other Additions (describe)			Deductions (describe)			Balance at end of period
Year ended September 30, 2001
Allowance for doubtful accounts	$	4,355	$	1,406		$	816	(3)	$	335	(1)	$	6,242
Inventory reserve	$	16,241	$	18,095		$	1,003	(3)	$	6,230	(2)	$	29,109
Valuation allowance for deferred taxes	$	12,724	$	7,926	(4)	$	1,929	(3)	$	1,855	(5)	$	20,724
Year ended September 30, 2002
Allowance for doubtful accounts	$	6,242	$	158		$	—		$	367	(1)	$	6,033
Inventory reserve	$	29,109	$	14,362		$	—		$	18,624	(2)	$	24,847
Valuation allowance for deferred taxes	$	20,724	$	66,025	(6)	$	—		$	—		$	86,749
Year ended September 30, 2003
Allowance for doubtful accounts	$	6,033	$	519		$	—		$	623	(1)	$	5,929
Inventory reserve	$	24,847	$	3,490		$	(2,930	)(7)	$	9,592	(2)	$	15,815
Valuation allowance for deferred taxes	$	86,749	$	13,979	(6)	$	—		$	—		$	100,728

(1) Bad debts written off.

(2) Disposal of excess and obsolete inventory.

(3) Reflects adjustment for reserves acquired.

(4) Reflects the increase in the valuation allowance associated with net operating losses of certain of the Company’s subsidiaries.

(5) Reversal of valuation allowance provided for a domestic subsidiary of the Company.

(6) Reflects the increase in the valuation allowance associated with the Company’s U.S. net operating losses and tax credit carryforwards.

(7) Reflects the sales of the assets of the Company’s sawing and hub blades products lines.

F-40

KULICKE AND SOFFA INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30, 2003			(Unaudited) June 30, 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	65,725		$	120,296
Restricted cash		2,836			3,266
Short-term investments		4,490			17,881
Accounts and notes receivable (less allowance for doubtful accounts: 9/30/03 - $5,929; 6/30/04 - $3,464)		94,144			139,881
Inventories, net		37,906			53,501
Prepaid expenses and other current assets		11,187			12,722
Deferred income taxes		10,700			9,459
TOTAL CURRENT ASSETS		226,988			357,006
Property, plant and equipment, net		61,238			56,892
Intangible assets (net of accumulated amortization: 9/30/03 - $26,187; 6/30/04 - $33,013)		66,249			56,241
Goodwill		81,440			81,440
Other assets		6,946			8,675
TOTAL ASSETS	$	442,861		$	560,254
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt	$	36		$	219
Accounts payable		45,844			71,188
Accrued expenses		41,885			44,146
Income taxes payable		13,394			14,911
TOTAL CURRENT LIABILITIES		101,159			130,464
Long term debt		300,338			329,635
Other liabilities		9,865			7,152
Deferred taxes		31,402			30,161
TOTAL LIABILITIES		442,764			497,412
Commitments and contingencies		—			—
SHAREHOLDERS’ EQUITY:
Common stock, without par value		203,607			213,010
Retained deficit		(195,792	)		(143,243	)
Accumulated other comprehensive loss		(7,718	)		(6,925	)
TOTAL SHAREHOLDERS’ EQUITY		97			62,842
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	442,861		$	560,254

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

F-41

KULICKE AND SOFFA INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three months ended June 30,						Nine months ended June 30,
	2003			2004			2003			2004
Net revenue	$	123,782		$	194,628		$	353,321		$	570,268
Cost of sales		91,679			129,556			258,350			381,300
Gross profit		32,103			65,072			94,971			188,968
Selling, general and administrative		22,947			24,688			77,902			78,055
Research and development, net		9,735			8,887			29,412			25,791
Resizing(recovery) costs		—			—			(205	)		(68	)
Loss (gain) on disposal of assets		4			—			(117	)		(794	)
Asset impairment		1,207			—			2,915			3,293
Amortization of intangible assets		2,315			2,198			6,944			6,828
Operating expense		36,208			35,773			116,851			113,105
Income (loss) from operations		(4,105	)		29,299			(21,880	)		75,863
Interest income		135			275			796			781
Interest expense		(4,309	)		(2,191	)		(13,214	)		(9,052	)
Charge on early extinguishment of debt		—			(1,825	)		—			(8,594	)
Income (loss) from continuing operations before income tax		(8,279	)		25,558			(34,298	)		58,998
Provision for income taxes		1,350			2,877			5,694			5,637
Net income (loss) from continuing operations		(9,629	)		22,681			(39,992	)		53,361
Loss from discontinued FCT operations		(1,723	)		—			(8,306	)		(432	)
Loss on sale of FCT operations		—			—			—			(380	)
Net income (loss)	$	(11,352	)	$	22,681		$	(48,298	)	$	52,549
Net income (loss) per share from continuing operations:
Basic	$	(0.19	)	$	0.45		$	(0.81	)	$	1.05
Diluted	$	(0.19	)	$	0.35		$	(0.81	)	$	0.84
Net loss per share from discontinued operations:
Basic	$	(0.04	)	$	—		$	(0.16	)	$	(0.01	)
Diluted	$	(0.04	)	$	—		$	(0.16	)	$	(0.01	)
Net income (loss) per share:
Basic	$	(0.23	)	$	0.45		$	(0.97	)	$	1.04
Diluted	$	(0.23	)	$	0.35		$	(0.97	)	$	0.83
Weighted average shares outstanding
Basic		49,766			50,873			49,639			50,652
Diluted		49,766			67,943			49,639			69,187

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

F-42

KULICKE AND SOFFA INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine months ended June 30,
	2003			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(48,298	)	$	52,549
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		28,939			23,281
Charge on early extinguishment of debt		—			8,594
Resizing cost recovery		(205	)		(68	)
Asset impairment		2,915			3,293
Changes in components of working capital, net		(30,075	)		(34,123	)
Other, net		1,966			4,185
Net cash provided by (used in) operating activities		(44,758	)		57,711
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments classified as available for sale		20,619			17,072
Purchase of investments classified as available for sale		(7,903	)		(30,526	)
Purchases of property, plant and equipment		(7,917	)		(8,076	)
Proceeds from sale of FCT Division		—			2,000
Proceeds from sale of property and equipment		393			933
Net cash provided by (used in) investing activities		5,192			(18,597	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		98			3,914
Restricted cash		449			(430	)
Proceeds from issuance of 0.5% convertible subordinated notes		—			199,736
Proceeds from issuance of 1.0% convertible subordinated notes		—			63,257
Purchase of 4.75% convertible subordinated notes		—			(178,563	)
Purchase of 5.25% convertible subordinated notes		—			(72,291	)
Payments on borrowings, other		(64	)		(166	)
Net cash provided by financing activities		483			15,457
Changes in cash and cash equivalents		(39,083	)		54,571
Cash and cash equivalents at beginning of period		85,986			65,725
Cash and cash equivalents at end of period	$	46,903		$	120,296
CASH PAID DURING THE PERIOD FOR:
Interest	$	12,366		$	9,516
Income Taxes	$	3,873		$	3,985

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

F-43

KULICKE AND SOFFA INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 - BASIS OF PRESENTATION

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 June 30, 2004, and the results of its operations for the three and nine month periods ended June 30, 2003 and 2004 and its cash flows for the nine month periods ended June 30, 2003 and 2004. In February 2004 we sold the remaining assets of our advanced packaging technology segment, which consisted solely of our flip chip business unit which licensed flip chip technology and provided flip chip bumping and wafer level packaging services. As a result, we have reflected the flip chip business unit as a discontinued operation and do not include the results of its operations in our revenues and expenses from continuing operations as reported in our financial statements and this discussion of our results of operations. We have reclassified our prior period financial statements to coincide with the current year presentation. These financial statements should be read in conjunction with the audited financial statements included as exhibits 99.1, 99.2 and 99.3 to the Company’s Form 10-Q for the period ended March 31, 2004.

NOTE 2 - NEW AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

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. The Company has a 36% ownership interest in a limited liability company that owns a building in Gilbert, Arizona and leases it to the Company. The ownership and lease of this one location comprises the sole activity of this entity. The Company consolidated the following assets and liabilities, associated with this entity, into its financial statements as of June 30, 2004: cash of $287 thousand; fixed assets comprised of land and buildings of $5.8 million; current liabilities comprised primarily of property tax and interest of $122 thousand; and a liability for a mortgage of $5.5 million, which is secured by the property. The other parties, which have 64% interest in this entity, have an interest in the above net assets and liabilities of $289 thousand which has been included in other noncurrent liabilities on the Company’s balance sheet at June 30, 2004.

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 Company has adopted the disclosure provisions of this standard.

F-44

At June 30, 2004, the Company had five 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 earnings (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 thousands)
	Three months ended June 30,						Nine months ended June 30,
	2003			2004			2003			2004
Net income (loss), as reported	$	(11,352	)	$	22,681		$	(48,298	)	$	52,549
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(2,511	)		(2,027	)		(8,589	)		(7,061	)
Pro forma net income (loss)	$	(13,863	)	$	20,654		$	(56,887	)	$	45,488
Net income (loss) per share:
Basic-as reported	$	(0.23	)	$	0.45		$	(0.97	)	$	1.04
Basic-pro forma	$	(0.28	)	$	0.41		$	(1.15	)	$	0.90
Diluted - as reported	$	(0.23	)	$	0.35		$	(0.97	)	$	0.83
Diluted - pro forma	$	(0.28	)	$	0.32		$	(1.15	)	$	0.69

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS No. 149). SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company has adopted this standard and the adoption did not have an impact on its financial position and results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or as an asset in some circumstances). The Company has adopted this standard and the adoption did not have an impact on its financial position and results of operations.

In December 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB 104 updates portions of the interpretive guidance included in Topic 13 of the codification of the Staff Accounting Bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The Company is following the guidance of SAB 104, and the issuance of SAB 104 did not have an impact on the Company’s financial position or results of operations.

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.

F-45

NOTE 3 - GOODWILL AND OTHER INTANGIBLES

At June 30, 2004, the Company had goodwill in two reporting units that it reviews for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The reporting units are: the bonding wire and test businesses. The bonding wire business is included in the Company’s packaging materials segment, while the test business comprises the Company’s test segment.

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. However, the Company also tests for impairment whenever a “triggering” event occurs. The Company performed interim goodwill impairment tests during the quarters ended December 31, 2003 and March 31, 2004 due to the existence of impairment triggers, which were the losses experienced in the Company’s test business. The results of the first step of the goodwill impairment tests, indicated that the fair value of the test reporting unit exceeded its carrying value by approximately $24 million at December 31, 2003 and by $29 million at March 31, 2004. Based on these tests no impairment charge was recorded. Due to the improved profitability of our test business in the June 2004 quarter, no triggering event occurred. The fair value of the test reporting unit was based on discounted cash flows of its projected future cash flows, consistent with the methods used in fiscal 2002 and 2003. When conducting its goodwill impairment analysis, the Company calculates its potential impairment charges based on the two-step test identified in SFAS 142 and using the implied fair value of the respective reporting units. The Company uses the present value of future cash flows from the respective reporting units to determine the implied fair value. In the March 2004 quarter, the Company also tested its intangible assets for impairment based on the sale of certain assets of its test operations and recorded an impairment charge of $3.2 million associated with the reporting unit’s purchased technology intangible asset.

The following table outlines the components of goodwill by business segment at June 30, 2004; there was no change in the components from September 30, 2003.

	(in thousands)
	Packaging Materials Segment		Test Segment		Total
Goodwill	$	29,684	$	51,756	$	81,440

The changes in the carrying value of intangible assets from September 30, 2003 appear below:

				(in thousands)
	Customer Accounts			Purchased Technology			Total Intangible Assets
Net intangible balance at September 30, 2003	$	29,451		$	36,798		$	66,249
Amortization		(3,084	)		(3,742	)		(6,826	)
Impairment charge					(3,182	)		(3,182	)
Net intangible balance at June 30, 2004	$	26,367		$	29,874		$	56,241

The aggregate amortization expense related to these intangible assets for the three and nine months ended June 30, 2003 was $2.2 million and $6.8 million, respectively and for the three and nine months ended June 30, 2004, respectively, was $2.3 million and $6.9 million. The annual amortization expense related to these intangible assets for each of the next five fiscal years is expected to be approximately $8.8 million.

F-46

NOTE 4 - INVENTORIES

Inventories consist of the following:

	(in thousands)
	September 30, 2003			June 30, 2004
Raw materials and supplies	$	29,654		$	44,382	(1)
Work in process		11,788			11,836
Finished goods		12,279			11,768
		53,721			67,986
Inventory reserves		(15,815	)		(14,485	)
	$	37,906		$	53,501

⁽¹⁾ To reduce its cost to procure gold, the Company changed its gold supply financing arrangement in June 2004. As a result, gold is no longer treated as consignment goods and is now reflected and included in the Company’s inventory and accounts payable. Accordingly, raw materials inventory at June 30, 2004 includes $11.8 million of gold inventory and accounts payable includes a corresponding liability of $11.8 million. Prior to the June 2004 change in the Company’s gold supply financing arrangement the Company did not reflect gold in its inventory. This accounted for the majority of the increase in raw materials and supplies inventory from September 2003 to June 2004. The Company’s obligation for payment and the price it pays for gold continues to be at the time and price it ships gold wire to its customers.

NOTE 5 - EARNINGS PER SHARE

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 (loss) 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. In the June 2004 quarter, $1.1 million of after-tax interest expense, related to the convertible subordinated notes, was added to the Company’s net income to determine diluted earnings per share. For the nine months ended June 30, 2004, $4.7 million of after-tax interest expense, related to the convertible subordinated notes was added to the Company’s net income to determine diluted earnings per share. For the three and nine months ended June 30, 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 due to the Company’s net loss position.

F-47

A reconciliation of weighted average shares outstanding – basic to the weighted average shares outstanding-diluted appears below:

	(in thousands)
	Three months ended June 30,		Nine months ended June 30,
	2003	2004	2003	2004
Weighted average shares outstanding - Basic	49,766	50,873	49,639	50,652
Potentially dilutive securities:
Stock options	*	1,692	*	2,179
1 % Convertible subordinated notes	NA	55	NA	18
1/2% Convertible subordinated notes	NA	10,084	NA	7,980
5 1/4% Convertible subordinated notes	*	5,239	*	5,931
4 3/4 % Convertible subordinated notes	*	NA	*	2,427
Weighted average shares outstanding - Diluted	49,766	67,943	49,639	69,187

* Due to the Company’s net loss for the three and nine months ended June 30, 2003, potentially dilutive securities were deemed to be anti-dilutive for the periods. The weighted average number of shares for potentially dilutive securities (convertible notes and employee and director stock options) for the three and nine months ended June 30, 2003 was 14,836,645 and 14,734,346, respectively.

NOTE 6 - RESIZING

The semiconductor industry has been volatile, with sharp periodic downturns and slowdowns. The industry experienced excess capacity and a severe contraction in demand for semiconductor manufacturing equipment during our fiscal 2001, 2002 and most of 2003. The Company developed formal resizing plans in response to these changes in its business environment with the intent to align its cost structure with anticipated revenue levels. Accounting for resizing activities requires an evaluation of formally agreed upon and approved plans. The Company documented and committed to these plans to reduce spending that included facility closings/rationalizations and reductions in workforce. The Company recorded the expense associated with these plans in the period that it committed to carry-out the 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 fiscal 2003, the Company reversed $475 thousand ($205 thousand in the first half of 2003) of these resizing charges due to the actual severance cost associated with the terminated positions being less than the cost originally estimated.

In addition to the formal resizing costs identified below, the Company continued (and is continuing) to downsize its operations in fiscal 2002, 2003 and 2004. These downsizing efforts resulted in workforce reduction charges of $5.2 million and $3.9 million in the nine months ended June 30, 2003 and 2004, respectively. In contrast to the resizing plans discussed above, these workforce reductions were not related to formal or distinct restructurings, but rather, the normal and recurring management of employment levels in response to business conditions and the Company’s ongoing effort to reduce its cost structure. In addition, during fiscal 2003, if the business conditions were to have improved, the Company was prepared to rehire some of these terminated individuals. These recurring workforce reduction charges were recorded as Selling, General and Administrative expenses.

F-48

A summary of the charges, reversals and payments of the formal resizing plans initiated in fiscal 2002 appears below:

	(in thousands)
	Severance and Benefits			Commitments			Total
Fiscal 2002 Resizing Plans
Provision for resizing plans in fiscal 2002
Continuing operations		9,486			9,282			18,768
Discontinued operations		893						893
Payment of obligations in fiscal 2002		(5,914	)		(300	)		(6,214	)
Balance, September 30, 2002		4,465			8,982			13,447
Change in estimate		(455	)		—			(455	)
Payment of obligations in fiscal 2003		(3,135	)		(3,192	)		(6,327	)
Balance, September 30, 2003		875			5,790			6,665
Change in estimate		(68	)		—			(68	)
Payment of obligations		(362	)		(2,058	)		(2,420	)
Balance, June 30, 2004	$	445		$	3,732		$	4,177

The individual resizing plans and acquisition restructuring plans initiated in fiscal 2002 are identified below:

Fourth Quarter 2002

In January 1999, the Company acquired the advanced substrate technology of MicroModule Systems, a Cupertino, California company, to enable production of high density substrates. While showing some progress in developing the substrate technology, the business was not profitable and would have required additional capital and operating cash to complete development of the technology. In light of the business downturn that was affecting the semiconductor industry at the time, in the fourth quarter of fiscal 2002, the Company announced that it could not afford to further develop of the substrate technology and would close its substrate operations. 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. The Company expected, and achieved, annual payroll related savings of approximately $4.2 million and annual facility/operating savings of approximately $3.9 million as a result of this resizing plan. By June 30, 2003, all the positions had been eliminated. The plans have been completed 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. This substrate business was included in the Company’s then existing Advanced Packaging business segment.

Third Quarter 2002

As a result of the continuing downturn in the semiconductor industry and the Company’s desire to improve the performance of its test business segment, the Company decided to move towards a 24 hour per-day manufacturing model in its major U.S. wafer test facility, which would provide its customers with faster turn-around time and delivery of orders and economies of scale in manufacturing. As a result, in the third quarter of fiscal 2002, the Company announced a resizing plan to reduce headcount and consolidate manufacturing in its test business segment. As part of this plan, the Company moved manufacturing of wafer test products from its facilities in Gilbert, Arizona and Austin, Texas to its facilities in San Jose, California and Dallas, Texas and from its Kaohsuing, Taiwan facility to its Hsin Chu, Taiwan facility. The resizing plan included a severance charge of $1.6 million for the elimination of 149 positions as a result of the manufacturing consolidation. The resizing plan also included 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. The Company expected, and achieved, annual payroll related savings of approximately $6.9 million and annual facility/operating savings of approximately $84

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thousand as a result of this resizing plan. All of the positions have been eliminated and both facilities have been closed. The plans have been completed but cash payments for the severance are expected to continue through 2005 and cash payments for facility and contractual obligations are expected to continue through 2004, or such earlier time as the obligations can be satisfied.

Second Quarter 2002

As a result of the continuing downturn in the semiconductor industry and the Company’s desire to more efficiently manage its business, 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 ($10.4 million in continuing operations and $0.9 million in discontinued operations), 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 the Company’s 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.

In the second quarter of fiscal 2002, 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 dates that are associated with these closed test facilities.

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 the Company reduced its expected annual savings from this resizing plan for payroll related expenses by approximately $4.7 million.

Also in the fourth quarter of fiscal 2002, the Company reversed $600 thousand ($590 thousand in continuing operations and $10 thousand in discontinued operations) of the severance resizing expenses and in the fourth quarter of fiscal 2003 the Company reversed $353 thousand of resizing expenses, previously recorded in the second quarter of fiscal 2002, 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.

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.

The Company expected annual payroll related savings of approximately $17.3 million and annual facility/operating savings of approximately $660 thousand as a result of this resizing plan. As a result of the decision not to relocate either its hub blade manufacturing facility or its microelectronics product manufacturing the Company ultimately achieved annual payroll related savings of approximately $12.7 million. The plans have been completed but cash payments for the severance charges and the facility and contractual obligations are expected to continue into 2005, or such time as the obligations can be satisfied.

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NOTE 7 - DEBT

Long term debt at September 30, 2003 and June 30, 2004 consisted of the following:

Long term debt consists of the following:

						(in thousands)
						Outstanding Balance at,
Type	Fiscal Year of Maturity	Conversion Price(1)		Rate		September 30, 2003		June 30, 2004
Convertible Subordinated Notes	2006	$	19.75	5.25	%	$	125,000	$	54,000
Convertible Subordinated Notes	2007	$	22.90	4.75	%		175,000		—
Convertible Subordinated Notes	2009	$	20.33	0.50	%		—		205,000
Convertible Subordinated Notes	2010	$	12.84	1.00	%		—		65,000
Other(2)							338		5,635
						$	300,338	$	329,635

⁽¹⁾ Subject to adjustment.

⁽²⁾ Includes a mortgage of $5.5 million held by a limited liability company which the Company began consolidating into its financial statements at December 31, 2003 in accordance with FIN 46.

In the quarter ended December 31, 2003, the Company issued $205 million of 0.5% Convertible Subordinated Notes in a private placement to qualified institutional investors. The notes mature on November 30, 2008, bear interest at 0.5% per annum and are convertible into common stock of the Company at $20.33 per share, subject to adjustment for certain events. The notes are general obligations of the Company and are subordinated to all senior debt. The notes rank equally with the Company’s 1.0% and 5.25% Convertible Subordinated Notes. There are no financial covenants associated with the notes and there are no restrictions on incurring additional debt or issuing or repurchasing our securities. Interest on the notes is payable on May 30 and November 30 each year.

The Company used the majority of the net proceeds from the issuance of the 0.5% Convertible Subordinated Notes to redeem all of its $175 million of 4.75% Convertible Subordinated Notes at a redemption price equal to 102.036% of the principal amount of the 4.75% notes. The Company recorded a charge of $6.2 million associated with the redemption of these notes, $2.6 million of which was due to the write-off of unamortized note issuance costs and $3.6 million due to the redemption premium.

In the quarter ended March 31, 2004, the Company used the remainder of the net proceeds from the issuance of the 0.5% Convertible Subordinated Notes to redeem $21 million of its 5.25% Convertible Subordinated Notes due 2006. The Company paid a premium of $241 thousand to purchase the $21 million of 5.25% notes.

In the quarter ended June 30, 2004, the Company issued $65 million of 1.0% Convertible Subordinated Notes in a private placement to qualified institutional investors. The Notes mature on June 30, 2010, bear interest at 1.0% per annum and are convertible into common stock of the Company at $12.84 per share, subject to adjustment for certain events. The conversion rights of these Notes may be terminated on or after June 30, 2006 if the closing price of the Company’s common stock has exceeded 140% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days. The notes are general obligations of the Company and are subordinated to all senior debt. The notes rank equally with the Company’s 5.25% and 0.5% Convertible Subordinated Notes. There are no financial

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covenants associated with the 1.0% notes and there are no restrictions on incurring additional debt or issuing or repurchasing our securities. Interest on the notes is payable on June 30 and December 30 each year.

The Company used the majority of the net proceeds from the issuance of the 1.0% Convertible Subordinated Notes to purchase $50 million of its 5.25% Convertible Subordinated Notes at a purchase price equal to 102.1% of the principal amount of the 5.25% notes. The Company recorded a charge of $1.8 million associated with the purchase of these notes, $0.8 million of which was due to the write-off of unamortized note issuance costs and $1.0 million due to the redemption premium.

The Company has called for redemption, on August 19, 2004, the remaining $54 million principal amount of its 5.25% Convertible Subordinated Notes.

NOTE 8 - COMPREHENSIVE LOSS

For the three and nine month periods ended June 30, 2003 and 2004, the components of total comprehensive income (loss) were as follows:

	(in thousands)
	Three months ended June 30,						Nine months ended June 30,
	2003			2004			2003			2004
Net income (loss)	$	(11,352	)	$	22,681		$	(48,298	)	$	52,549
Foreign currency translation adjustment		571			25			1,609			855
Unrealized gain (loss) on investments, net of taxes		(11	)		(92	)		(25	)		(62	)
Other comprehensive income (loss)		560			(67	)		1,584			793
Comprehensive income (loss)	$	(10,792	)	$	22,614		$	(46,714	)	$	53,342

NOTE 9 - OPERATING RESULTS BY BUSINESS SEGMENT

In February 2004 we sold the remaining assets of our advanced packaging technologies segment, which consisted solely of our flip chip business unit which licensed flip chip technology and provided flip chip bumping and wafer level packaging services. As a result, we have reflected the flip chip business unit as a discontinued operation and have eliminated the advanced packaging technologies segment. We have reclassified prior period financial statements to coincide with the current year presentation. The reclassified financial statements for prior fiscal years are included as Exhibit 99.1, 99.2 and 99.3 to the Company’s Form 10-Q for the period ended March 31, 2004.

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Operating results by business segment for the three and nine-month periods ended June 30, 2003 and 2004 were as follows:

Fiscal 2004 (in thousands):

	Equipment Segment		Packaging Materials Segment		Test Segment			Corporate and Other(1)			Consolidated
Quarter ended June 30, 2004:
Net revenue	$	95,732	$	61,740	$	37,156		$	—		$	194,628
Cost of sales		55,940		47,796		25,820			—			129,556
Gross profit		39,792		13,944		11,336			—			65,072
Operating costs		14,889		5,776		10,437			4,671			35,773
Resizing costs		—		—		—			—			—
Asset impairment		—		—		—			—			—
Income (loss) from operations	$	24,903	$	8,168	$	899		$	(4,671	)	$	29,299
Nine months ended June 30, 2004:
Net revenue	$	312,172	$	167,418	$	90,678		$	—		$	570,268
Cost of sales		181,522		129,968		69,810			—			381,300
Gross profit		130,650		37,450		20,868			—			188,968
Operating costs		45,418		16,209		34,559			14,488			110,674
Resizing costs		—		—		—			(68	)		(68	)
Loss (gain) on disposal of assets		—		—		(85	)		(709	)		(794	)
Asset impairment		—		—		3,293			—			3,293
Income (loss) from operations	$	85,232	$	21,241	$	(16,899	)	$	(13,711	)	$	75,863
Segment Assets at June 30, 2004	$	119,073	$	115,186	$	167,920		$	158,075		$	560,254

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Fiscal 2003 (in thousands):

	Equipment Segment			Packaging Materials Segment		Test Segment			Corporate and Other(1)			Consolidated
Quarter ended June 30, 2003:
Net revenue	$	48,416		$	45,828	$	29,538		$	—		$	123,782
Cost of sales		32,240			35,070		24,369			—			91,679
Gross profit		16,176			10,758		5,169			—			32,103
Operating costs		15,402			5,968		9,933			3,694			34,997
Loss (gain) on disposal of assets		—			—		—			4			4
Asset impairment		—			—		1,207			—			1,207
Income (loss) from operations	$	774		$	4,790	$	(5,971	)	$	(3,698	)	$	(4,105	)
Nine months ended June 30, 2003:
Net revenue	$	145,880		$	128,987	$	78,319		$	135		$	353,321
Cost of sales		96,194			97,958		64,198						258,350
Gross profit		49,686			31,029		14,121			135			94,971
Operating costs		51,511			19,777		31,124			11,846			114,258
Resizing costs		—			—		(103	)		(102	)		(205	)
Loss (gain) on disposal of assets		—			—		—			(117	)		(117	)
Asset impairment		17			—		2,898			—			2,915
Income (loss) from operations	$	(1,842	)	$	11,252	$	(19,798	)	$	(11,492	)	$	(21,880	)
Segment Assets at June 30, 2003	$	115,550		$	92,079	$	161,348		$	98,365		$	467,342

⁽¹⁾ Corporate and Other includes the residual activity from our former substrate business unit that was closed in the September quarter of 2002.

NOTE 10 - GUARANTOR OBLIGATIONS AND CONTINGENCIES

Guarantor Obligations

The Company has issued standby letters of credit for employee benefit programs and a facility lease and its wire subsidiary has issued a guarantee for payment under its gold supply financing arrangement. The guarantee for the gold supply financing arrangement is secured by the assets of the Company’s wire manufacturing subsidiary and contains restrictions on that subsidiary’s net worth, ratio of total liabilities to net worth, ratio of EBITDA to interest expense and ratio of current assets to current liabilities.

The table below identifies the guarantees and standby letters of credit at June 30, 2004:

Nature of guarantee	Term of guarantee	(in thousands) Maximum obligation under guarantee
Security for the Company’s gold financing arrangement	Expires June 2006	$	17,000
Security deposit for payment of employee health benefits	Expires June 2005		1,710
Security deposit for payment of employee worker compensation benefits	Expires July and October 2004		1,084
Security deposit for a facility lease	Expires July 2004		300
		$	20,094

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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 its business. The Company establishes 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 for the nine months ended June 30, 2004:

	(in thousands) Reserve for Product Warranty Expense
Reserve for product warranty expense at September 30, 2003	$	1,008
Provision for product warranty expense		2,901
Product warranty expense		(2,547	)
Reserve for product warranty expense at June 30, 2004	$	1,362

Commitments and Contingencies

The Company orders inventory components in the normal course of its business. A portion of these orders are non-cancelable and a portion have varying penalties and charges in the event of cancellation. The total amount of the Company’s inventory purchase commitments, which do not appear on its balance sheet, as of June 30, 2004 was $57.0 million. If business conditions were to change and the Company was unable to cancel purchase commitments without penalty or payment its financial condition and operating results could be adversely affected.

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 it 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 not 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.

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Concentrations

Sales to a relatively small number of customers account for a significant percentage of the Company’s net sales. In the nine months ended June 30, 2003 and 2004, sales to Advanced Semiconductor Engineering accounted for 14.3% and 17.2%, respectively, of the Company’s net sales. No other customer accounted for more than 10% of total net sales during the nine months ended June 30, 2003 and 2004. The Company expects that sales of its products to a limited number of customers will continue to account for a high percentage of net sales for the foreseeable future. At September 30, 2003 and June 30, 2004, Advanced Semiconductor Engineering accounted for 10% and 13% of total accounts receivable, respectively. No other customer accounted for more than 10% of total accounts receivable at September 30, 2003 and June 30, 2004. The reduction or loss of orders from a significant customer could adversely affect the Company’s business, financial condition, operating results and cash flows.

The Company relies on subcontractors to manufacture to the Company’s specifications many of the components or subassemblies used in its products. Certain of the Company’s products require components or parts of an exceptionally high degree of reliability, accuracy and performance for which there are only a limited number of suppliers or for which a single supplier has been accepted by the Company as a qualified supplier. If supplies of such components or subassemblies were not available from any such source and a relationship with an alternative supplier could not be promptly developed, shipments of the Company’s products could be interrupted and re-engineering of the affected product could be required. Such disruptions could have a material adverse effect on the Company’s results of operations.

NOTE 11 - PENSION DISCLOSURES

The Company has a non-contributory defined benefit pension plan covering substantially all U.S. employees who were employed on September 30, 1995. The benefits for this plan were based on the employees’ years of service and the employees’ compensation during the earlier of the three years before retirement or the three years before December 31, 1995. Effective December 31, 1995, the benefits under the Company’s pension plan were frozen. As a consequence, accrued benefits no longer change as a result of an employee’s length of service or compensation. The Company’s funding policy is consistent with the funding requirements of Federal law and regulations.

Net period pension costs for the nine months ended June 30, 2004 for this plan was approximately $903 thousand and included interest costs of $1,253 thousand and amortization of net loss of $829 thousand, offset by expected return on plan assets of $1,179 thousand. The Company contributed approximately $2.8 million (based on the market price at the time of contribution) in Company stock to the Plan in the nine months ended June 30, 2004. Net period pension cost for the nine months ended June 30, 2003 for this plan was approximately $853 thousand and included interest costs of $775 thousand and amortization of net loss of $597 thousand, offset by expected return on plan assets of $519 thousand. Approximately $1.7 million ($1.3 million of which was in Company stock) was funded during the nine months ended June 30, 2003 and the Company funded an additional $78 thousand in cash, in the fourth quarter of fiscal 2003.

NOTE 12 - DISCONTINUED OPERATIONS

In February 1996, the Company entered into a joint venture agreement with Delco Electronics Corporation (“Delco”) providing for the formation and management of Flip Chip Technologies, LLC (“FCT”). FCT was formed to license related technologies and to provide wafer bumping services on a contract basis. In March 2001, the Company purchased the remaining interest in the joint venture owned by Delco for $5.0 million and included FCT in its then existing advanced packaging business segment. In fiscal 2003, the Company’s then existing advanced packaging business segment consisted solely of FCT, which was not profitable.

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In February 2004, the Company sold the assets of FCT for approximately $3.4 million in cash and notes, the agreement by the buyer to satisfy approximately $5.2 million of the Company’s lease liabilities and the assumption of certain other liabilities. The sale included fixed assets, inventories, and intellectual property of the Company’s flip chip business. The major classes of FCT assets and liabilities sold included: $3.6 million in accounts receivable, $119 thousand in inventory, $2.5 million in property, plant and equipment, $119 thousand in other long term assets, $1.5 million in accounts payable and $1.0 million in accrued liabilities. The Company recorded a net loss on the sale of FCT of $380 thousand. Net sales from FCT for the three and nine months ended June 30, 2004 were $2.8 million and $9.4 million, respectively, and for the three and nine months ended June 30, 2003 were $3.9 million and $11.7 million, respectively. As a result of the sale, the Company has reflected the flip chip business unit as a discontinued operation and has reclassified its financial statements to exclude the results of the Flip Chip business unit operations from the Company’s revenues and expenses from continuing operations as reported in these financial statements. The Company has reclassified its prior period financial statements to coincide with the current year presentation. The reclassified financial statements for the prior years are included as Exhibit 99.1, 99.2 and 99.3 to the Company’s Form 10-Q for the period ending March 31, 2004.

NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (unaudited)

Financial information pertaining to quarterly results of operations follows:

	(in thousands, except per share amounts)
	First Quarter		Second Quarter			Third Quarter		Total
Nine months ended June 30, 2004:
Net sales	$	153,869	$	221,771		$	194,628	$	570,268
Gross profit		47,362		76,534			65,072		188,968
Income from operations(1)(2)		12,155		34,409			29,299		75,863
Income from continuing operations before income tax(3)		1,778		31,662			25,558		58,998
Provision for income tax		1,350		1,410			2,877		5,637
Income (loss) from discontinued FCT operations		319		(751	)		—		(432	)
Loss from sale of FCT operations		—		(380	)		—		(380	)
Net income (loss)	$	747	$	29,121		$	22,681	$	52,549
Net income (loss) per share:
Basic	$	0.01	$	0.58		$	0.45	$	1.04
Diluted	$	0.01	$	0.44		$	0.35	$	0.83

⁽¹⁾ Represents net sales less costs and expenses but before net interest expense and other income.

⁽²⁾ Results for the second quarter include an asset impairment charge of $3.3 million associated with exiting our PC board fabrication business and the closure of a probe card production facility in France and a gain on the sale of assets of $794 thousand.

⁽³⁾ Results in the first, second and third quarters include charges for the early extinguishment of debt of $6.2 million, $614 thousand and $1.8 million, respectively.

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