UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2002

OR

	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                 to                .

Commission File No. 0-121
 

KULICKE AND SOFFA INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

PENNSYLVANIA	23-1498399
(State or other jurisdiction of incorporation)	(IRS Employer Identification No.)
2101 BLAIR MILL ROAD, WILLOW GROVE, PENNSYLVANIA	19090
(Address of principal executive offices)	(Zip Code)

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

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

         As of May 1, 2002, there were 49,267,515 shares of the Registrant’s Common Stock, without par value outstanding.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	Item 1 — Financial Statements
	CONDENSED CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF OPERATIONS
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES

KULICKE AND SOFFA INDUSTRIES, INC.

FORM 10-Q

MARCH 31, 2002

INDEX

		Page No.
PART I	FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets September 30, 2001 and March 31, 2002	3
	Condensed Consolidated Statements of Operations Three and Six Months Ended March 31, 2001 and 2002	4
	Condensed Consolidated Statements of Cash Flows Six Months Ended March 31, 2001 and 2002	5
	Notes to Condensed Consolidated Financial Statements	6-11
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12-32
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33
PART II	OTHER INFORMATION
Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	33
Item 6.	EXHIBITS AND REPORTS ON FORM 8-K	33
	SIGNATURES	34

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

KULICKE AND SOFFA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

					(Unaudited)
		September 30,			March 31,
		2001			2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	155,036		$	126,332
Short-term investments			47,892			39,775
Accounts and notes receivable (less allowance for doubtful accounts: 9/30/01 - $6,242; 3/31/02 - $6,245)			79,305			75,470
Inventories, net			74,364			53,354
Prepaid expenses and other current assets			9,013			12,121
Deferred income taxes			15,282			17,061
	TOTAL CURRENT ASSETS		380,892			324,113
Property, plant and equipment, net			127,952			117,731
Intangible assets, (net of accumulated amortization:
	9/30/01 - - $9,416; 3/31/02 - $14,378)		103,525			81,500
Goodwill			150,474			167,655
Deferred income taxes			—			18,957
Other assets			14,583			14,010
	TOTAL ASSETS	$	777,426		$	723,966
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt		$	753		$	746
Accounts payable			51,420			62,500
Accrued expenses			48,965			49,894
Income taxes payable			14,399			14,970
	TOTAL CURRENT LIABILITIES		115,537			128,110
Long term debt			301,511			301,025
Other liabilities			13,736			13,943
Deferred taxes			8,054			—
Minority interest			41			31
	TOTAL LIABILITIES		438,879			443,109
Commitments and contingencies			—			—
SHAREHOLDERS’ EQUITY:
Common stock, without par value			193,058			198,170
Retained earnings			155,012			94,004
Accumulated other comprehensive loss			(9,523	)		(11,317	)
	TOTAL SHAREHOLDERS’ EQUITY		338,547			280,857
	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	777,426		$	723,966

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

3

KULICKE & SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

		Three months ended						Six months ended
		March 31,						March 31,
		2001			2002			2001			2002
Net revenue		$	149,425		$	106,917		$	302,854		$	210,072
Cost of sales			107,404			96,285			207,229			174,053
Gross profit			42,021			10,632			95,625			36,019
Selling, general and administrative			39,681			35,409			75,021			66,923
Research and development, net			18,472			13,030			36,065			25,954
Resizing			1,709			11,283			1,709			11,283
Asset Impairment			—			4,890			—			4,890
Amortization of goodwill and intangibles			6,717			2,481			9,318			4,962
Purchased in-process research and development			—			—			11,709			—
Loss from operations			(24,558	)		(56,461	)		(38,197	)		(77,993	)
Interest income			1,790			994			5,690			2,436
Interest expense			(3,446	)		(4,336	)		(6,110	)		(9,186	)
Other income			8,016			—			8,016			—
Loss before income taxes			(18,198	)		(59,803	)		(30,601	)		(84,743	)
Benefit for income taxes			(6,418	)		(16,244	)		(6,580	)		(23,725	)
Loss before minority interest and cumulative effect of change in accounting principle			(11,780	)		(43,559	)		(24,021	)		(61,018	)
Cumulative effect of change in accounting principle, net of tax			—			—			(8,163	)		—
Minority interest in net loss of joint venture			86			4			328			10
Net loss		$	(11,694	)	$	(43,555	)	$	(31,856	)	$	(61,008	)
Net loss excluding cumulative effect of change in accounting principle per share:
	Basic	$	(0.24	)	$	(0.89	)	$	(0.48	)	$	(1.24	)
	Diluted	$	(0.24	)	$	(0.89	)	$	(0.48	)	$	(1.24	)
Cumulative effect of change in accounting principle, net of tax per share:
	Basic	$	—		$	—		$	(0.17	)	$	—
	Diluted	$	—		$	—		$	(0.17	)	$	—
Net loss per share:
	Basic	$	(0.24	)	$	(0.89	)	$	(0.65	)	$	(1.24	)
	Diluted	$	(0.24	)	$	(0.89	)	$	(0.65	)	$	(1.24	)
Weighted average shares outstanding
	Basic		48,797			49,137			48,773			49,081
	Diluted		48,797			49,137			48,773			49,081

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

4

KULICKE AND SOFFA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

				Six months ended
				March 31,
				2001			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss			$	(31,856	)	$	(61,008	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation and amortization			24,985			23,493
		Purchased in-process research and development			11,709			—
		Resizing costs			1,709			11,283
		Asset impairment			—			4,890
		Minority interest in net loss of subsidiary			(328	)		(10	)
		Deferred taxes			(11,026	)		(28,790	)
		Changes in components of working capital, net			64,979			25,341
		Other, net			3,865			(3,040	)
			Net cash provided by (used in) operating activities		64,037			(27,841	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Proceeds from sales of investments classified as available for sale				81,915			33,634
	Purchase of investments classified as available for sale				(18,505	)		(25,647	)
	Purchases of property, plant and equipment				(38,509	)		(9,855	)
	Proceeds from sale of fixed assets				—			233
	Purchase of Flip Chip equity units				(5,000	)		—
	Purchase of Cerprobe Corp., net of cash				(216,409	)		—
	Purchase of Probe Technology Corp., net of cash				(62,512	)		—
			Net cash used in investing activities		(259,020	)		(1,635	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from borrowings				58,000			—
	Proceeds from issuance of common stock				594			1,265
	Payments on borrowings				(5,349	)		(493	)
			Net cash provided by financing activities		53,245			772
Changes in cash and cash equivalents					(141,738	)		(28,704	)
Cash and cash equivalents at beginning of period					211,489			155,036
Cash and cash equivalents at end of period				$	69,751		$	126,332
CASH PAID DURING THE PERIOD FOR:
Interest				$	5,852		$	8,099
Income Taxes				$	2,529		$	4,147

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

5

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 March 31, 2002, and the results of its operations for the three and six month periods ended March 31, 2001 and 2002 and its cash flows for the six month periods ended March 31, 2001 and 2002. These financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2001.

NOTE 2 — ACCOUNTING PRONOUNCEMENTS

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

The Company has completed the required transitional impairment testing of intangible assets, and based upon those analyses, the Company did not identify any impairment charges as a result of adoption of this standard. The Company has reviewed its business and determined that there are five reporting units which will be reviewed for impairment in accordance with the standard – the reporting units are included within three of the Company’s business segments, the packaging materials segment, the advanced packaging technology segment and the test segment. Included within the packaging materials segment are two reporting units, the bonding wire and saw blade businesses, and included in the advanced packaging technology segment are two reporting units, the substrate and flip chip businesses. The test segment is the Company’s final reporting unit.

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

					Advanced
			Packaging		Packaging
			Materials		Technology		Test
			Segment		Segment		Segment		Total
			(in thousands)
Goodwill			$	31,980	$	5,570	$	130,105	$	167,655
Intangible Assets
	Customer accounts			—		—		35,619		35,619
	Complete technology			—		1,378		44,503		45,881
		Intangible assets, net of amortization		—		1,378		80,122		81,500
Balance, March 31, 2002			$	31,980	$	6,948	$	210,227	$	249,155

Upon adoption of the standard, the Company reclassified $17.2 million of intangibles relating to an acquired workforce in the test segment into goodwill. During the six month period ended March 31, 2002, other than the adoption reclassification above, there were no changes in the carrying value of goodwill.

6

Kulicke & Soffa Industries Inc.
Notes to Consolidated Financial Statements
March 31, 2002

The gross carrying amount and accumulated amortization of the intangible assets at March 31, 2002 are as follows:

		Gross Carrying		Accumulated		Total Net
		Amount		Amortization		Book Value
		(in thousands)
Customer Accounts		$	41,100	$	5,481	$	35,619
Acquired Technology			54,778		8,897		45,881
	Total	$	95,878	$	14,378	$	81,500

The aggregate amortization expense related to these intangible assets for the three months and six months ended March 31, 2002 was $2.5 million and $5.0 million, respectively ($2.5 million and $3.4 million for the three and six months ended March 31, 2001). The aggregate amortization expense for the fiscal years ending September 30 is estimated to be as follows: $9.9 million in fiscal 2002 and 2003, $9.6 million in fiscal 2004 and $9.2 million in fiscal 2005 and 2006.

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:

			Six Months Ended
			March 31,			March 31,
			2001			2002
			(in thousands,
			except per share data)
Reported net loss, before adoption of SFAS 142			$	(31,856	)	$	(61,008	)
	Addback:
		Goodwill amortization, net of tax of $1,418		3,918			—
Pro forma net loss			$	(27,938	)	$	(61,008	)
Net loss per share, as reported
	Basic		$	(0.65	)	$	(1.24	)
	Diluted		$	(0.65	)	$	(1.24	)
Goodwill amortization, net of tax per share
	Basic		$	0.08		$	—
	Diluted		$	0.08		$	—
Pro forma net loss per share
	Basic		$	(0.57	)	$	(1.24	)
	Diluted		$	(0.57	)	$	(1.24	)

The Company’s annual earnings per share is expected to increase by approximately $.35 per share as a result of the adoption of this standard.

7

Kulicke & Soffa Industries Inc.
Notes to Consolidated Financial Statements
March 31, 2002

SFAS 143. In August 2001, the FASB issued SFAS 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets which is effective for fiscal years beginning after June 15, 2002. The standard provides guidance for financial reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessors. We are currently reviewing the provisions of this Statement but do not expect that the adoption of SFAS 143 will have a significant impact on our financial position and results of operations.

SFAS 144. In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets which supersedes FASB 121, Accounting for the Impairment of Long-Lived Assets and for Assets to Be Disposed Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The Statement is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. This Statement applies to all long-lived assets and requires that the assets to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. We are currently reviewing the provisions of this Statement but do not expect that the adoption of SFAS 144 will have a significant impact on our financial position and results of operations.

NOTE 3 — INVENTORIES

Inventories consist of the following:

	September 30,			March 31,
	2001			2002
	(in thousands)
Raw materials and supplies	$	60,870		$	45,408
Work in process		21,185			18,122
Finished goods		21,418			18,242
		103,473			81,772
Inventory reserves		(29,109	)		(28,418	)
	$	74,364		$	53,354

NOTE 4 — 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 per share if convertible securities are assumed to be converted to common shares the after-tax amount of interest expense recognized in the period associated with the convertible securities is added back to net income. For the three and six months ended March 31, 2001 and 2002, the exercise of stock options and the conversion of the convertible subordinated notes were not assumed since their conversion to common shares would have an anti-dilutive effect on net loss per share.

Due to the Company’s net loss for the three and six months ended March 31, 2001 and 2002, potentially dilutive securities are deemed to be anti-dilutive. The weighted average number of shares for potentially dilutive securities (convertible notes and employee and director stock options) was 8,666,000 and 8,501,000 for the three and six months ended March 31, 2001 and 15,786,000 and 15,433,000 for the three and six months ended March 31, 2002, respectively.

8

Kulicke & Soffa Industries Inc.
Notes to Consolidated Financial Statements
March 31, 2002

NOTE 5 – ACQUISITIONS

In fiscal 2001, the Company acquired Cerprobe Corporation and Probe Technology Corporation. The businesses of Cerprobe and Probe Tech have been combined to form the Test Division. Refer to Note 2 of the Company’s Form 10-K for the year ended September 30, 2001 for a description of the businesses acquired and the allocation of the purchase price.

NOTE 6 – RESIZING AND ASSET IMPAIRMENT

In the second quarter of fiscal 2002, the Company announced a resizing plan and recorded a charge of $11.3 million associated with the plan. The charge includes severance and benefits of $9.7 million for 372 positions which are being eliminated as a result of the functional realignment of the organization and the consolidation of certain facilities. The resizing charge also includes a charge of $1.6 million for the continuing lease costs of facilities to be exited as part of the facility consolidation plan. At March 31, 2002, 201 positions remain to be terminated through the first quarter of fiscal 2003. The severance accrual will be paid out during the remainder of fiscal 2002 and the first half of fiscal 2003, and the commitments will be substantially completed in the second quarter of fiscal 2003, but will continue into future years as a result of contractual agreements.

In fiscal 2001, the Company implemented resizings in the second and fourth quarters and incurred charges for the elimination of a total of 511 positions, of which 55 remained to be terminated at September 30, 2001. As of March 31, 2002, 30 positions remain to be terminated in the third quarter of fiscal 2002 in accordance with the plans. The severance accrual will be paid out during the remainder of fiscal 2002, and the commitments will be substantially completed in fiscal 2002 but will continue into future years as a result of contractual agreements.

The table below details the spending and activity related to these programs.

	Severance and
	Benefits			Commitments			Total
		(in thousands)
Balance, September 30, 2001	$	2,149		$	1,189		$	3,338
Provision for resizing		9,733	(1)		1,550			11,283
Satisfaction of obligations		(4,841	)(1)		(247	)		(5,088	)
Balance, March 31, 2002	$	7,041		$	2,492		$	9,533

(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 the Company’s annual grant of stock options to employees.

In the second quarter of fiscal 2002, the Company recorded an asset impairment of $4.9 million related to the cost of certain software which was made redundant by a new company-wide integrated information system and the write-off of other assets that were associated with the leased facilities to be exited as a result of the facility consolidation.

9

Kulicke & Soffa Industries Inc.
Notes to Consolidated Financial Statements
March 31, 2002

NOTE 7 – COMPREHENSIVE LOSS

For the three and six month periods ended March 31, 2002 and 2001, the components of total comprehensive loss are as follows:

	Three months ended						Six months ended
	March 31,						March 31,
	2001			2002			2001			2002
	(in thousands)						(in thousands)
Net Loss	$	(11,694	)	$	(43,555	)	$	(31,856	)	$	(61,008	)
Foreign currency translation adjustment		(1,904	)		51			(2,971	)		(1,538	)
Unrealized gain (loss) on investments, net of taxes		163			(179	)		158			(256	)
Other comprehensive loss		(1,741	)		(128	)		(2,813	)		(1,794	)
Comprehensive loss	$	(13,435	)	$	(43,683	)	$	(34,669	)	$	(62,802	)

NOTE 8 — OPERATING RESULTS BY BUSINESS SEGMENT

Operating results by business segment for the three and six-month periods ended March 31, 2002 and 2001 were as follows:

							Advanced
				Packaging			Packaging
	Equipment			Materials			Technology			Test (1)
	Segment			Segment			Segment			Segment			Corporate			Consolidated
	(in thousands)
Fiscal 2002:
Quarter ended March 31, 2002:
Net revenue	$	37,216		$	35,408		$	5,688		$	28,605		$	—		$	106,917
Cost of sales		43,938			27,545			6,444			18,358			—			96,285
Gross profit		(6,722	)		7,863			(756	)		10,247			—			10,632
Operating costs		22,106			5,973			5,125			13,762			3,954			50,920
Resizing costs		6,064			736			1,104			2,796			583			11,283
Asset impairment		2,165			1,480			—			1,245			—			4,890
Loss from operations	$	(37,057	)	$	(326	)	$	(6,985	)	$	(7,556	)	$	(4,537	)	$	(56,461	)
Six months ended March 31, 2002:
Net revenue	$	72,900		$	69,523		$	12,228		$	55,421		$	—		$	210,072
Cost of sales		70,541			53,765			13,001			36,746			—			174,053
Gross profit		2,359			15,758			(773	)		18,675			—			36,019
Operating costs		41,564			12,209			10,700			25,968			7,398			97,839
Resizing costs		6,064			736			1,104			2,796			583			11,283
Asset impairment		2,165			1,480			—			1,245			—			4,890
Income (loss) from operations	$	(47,434	)	$	1,333		$	(12,577	)	$	(11,334	)	$	(7,981	)	$	(77,993	)
Segment Assets at March 31, 2002	$	130,161		$	88,580		$	33,978		$	260,596		$	210,651		$	723,966

10

Kulicke & Soffa Industries Inc.
Notes to Consolidated Financial Statements
March 31, 2002

						Advanced
				Packaging		Packaging
	Equipment			Materials		Technology			Test (1)
	Segment			Segment		Segment			Segment			Corporate			Consolidated
	(in thousands)
Fiscal 2001:
Quarter ended March 31, 2001: (2)
Net revenue	$	57,529		$	39,932	$	9,380		$	42,584		$	—		$	149,425
Cost of sales		41,839			28,733		8,441			28,391			—			107,404
Gross profit		15,690			11,199		939			14,193			—			42,021
Operating costs		28,852			7,896		6,796			17,204			4,122			64,870
Resizing costs		1,424			254		—			—			31			1,709
Income (loss) from operations	$	(14,586	)	$	3,049	$	(5,857	)	$	(3,011	)	$	(4,153	)	$	(24,558	)
Six months ended March 31, 2001: (2)
Net revenue	$	140,171		$	88,139	$	17,661		$	56,883		$	—		$	302,854
Cost of sales		88,360			63,224		16,469			39,176			—			207,229
Gross profit		51,811			24,915		1,192			17,707			—			95,625
Operating costs		60,363			16,152		13,295			22,857			7,737			120,404
Resizing costs		1,424			254		—			—			31			1,709
Purchased in-process research and development		—			—		—			11,709			—			11,709
Income (loss) from operations	$	(9,976	)	$	8,509	$	(12,103	)	$	(16,859	)	$	(7,768	)	$	(38,197	)
Segment Assets at September 30, 2001	$	155,220		$	86,113	$	38,260		$	270,506		$	227,327		$	777,426

(1)

Comprised of the activities of Cerprobe Corporation and Probe Technology Corporation. The Company acquired Cerprobe in November 2000 and Probe Technology in December 2000. The results of both companies, from the date of acquisition through March 31, 2001 are included in loss from operations for the three and six month periods ended March 31, 2001 but are not included in the operating results of the Company for any period preceding their respective dates of acquisition.

(2)

Restated for the adoption of SAB 101.

NOTE 9 – INTELLECTUAL PROPERTY CONTINGENCY

Occasionally, third parties assert that the Company is, or may be, infringing or misappropriating their intellectual property rights. In these cases, the Company will defend against claims or negotiate licenses where it considers these actions 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 of the Company’s 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, management believes the Company would have valid defenses to assert and also would have rights to contribution and claims against its 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 its 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 others that the resolution of any such claim will not materially and adversely affect it’s business, financial condition and operating results.

11

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

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

• the projected growth rates in the overall semiconductor industry, the semiconductor assembly equipment market and the market for semiconductor packaging materials and test interconnect solutions;

• the anticipated development, production and licensing of our advanced packaging technology;

• the projected continuing demand for wire bonders; and

• the anticipated growing importance of the flip chip assembly process in high-end market segments.

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

Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements. These risks and uncertainties include, without limitation, those described below and under the heading “Risk Factors” within this section and in our reports and registration statements filed from time to time with the Securities and Exchange Commission. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes on pages 3 to 11 of this Form 10-Q for a full understanding of our financial position and results of operations for the three month period ended March 31, 2002.

INTRODUCTION

We design, manufacture and market capital equipment, packaging materials and a broad range of fixtures used to test semiconductor wafers and devices, as well as, apply solder bumps to silicon wafers (referred to as flip chip bumping) for sale to companies that manufacture and assemble semiconductor devices. We also service, maintain, repair and upgrade assembly equipment, license our flip chip bumping process technology and manufacture and market advanced substrates. These substrates consist of multiple layers of laminate applied to a core substrate which enables dense electrical connections (referred to as high density interconnect substrates).

We sell our products to semiconductor device manufacturers and contract manufacturers, which are primarily located in or have operations in the Asia/Pacific region. Sales to customers outside of the United States accounted for 62% of net sales for fiscal 2001 and 67% for the six months ended March 31, 2002, and are expected to continue to represent a substantial portion of our future revenues. To support our international sales, we currently have significant manufacturing operations in the United States, Israel and Singapore, sales facilities in the United States, France, Germany, Hong Kong, Japan, Korea, Malaysia, the Philippines, Scotland, Singapore, Taiwan and Thailand, and applications labs in Japan, Singapore and Taiwan.

Due to a weak economy and a worldwide decline in demand for semiconductors, the semiconductor industry has experienced excess capacity and a severe contraction in demand for semiconductor manufacturing equipment. As a result, our net sales for the first quarter of fiscal 2002 were significantly below the sales reported for the same period in fiscal 2001. Our backlog of customer orders at March 31, 2002 was $63.0 million, as compared to $49.0 million at September 30, 2001. Recent ordering patterns have been quite encouraging, leading us to believe that the worst of this current downturn in the semiconductor industry is passed, and that our business will improve in the remainder of fiscal 2002.

In February 2002, we implemented a functional organizational structure with certain disciplines combined across product lines. This replaces the traditional product-focused organization and will allow better integration of the our various product offerings. Under this model, marketing, engineering, manufacturing, and customer operations will

12

Kulicke & Soffa Industries Inc.
Management’s Discussion and Analysis
March 31, 2002

operate with responsibility for all equipment, packaging materials, and test interconnect products. Excluded from this model are the flip chip and substrate divisions, which will continue to operate as separate business units.

This functional realignment supports a parallel decision to establish a supply chain in China for our equipment products and to shift a portion of the manufacturing of capillaries, saw blades and selected test products to a facility outside of Shanghai. In addition, the manufacturing for our microelectronics products will be moved from Willow Grove, Pennsylvania to the ball bonder manufacturing facility in Singapore. The transfer of microelectronics products is expected to be completed later this year; the China facility is expected to be fully operational by late 2003.

In the second quarter, we recorded a resizing charge of $11.3 million related to the organizational change and the consolidation of facilities. The charge consisted of severance and employee benefits provided to employees affected by these programs and the continuing lease costs at certain facilities affected by the facility consolidation. In addition, we recorded an asset impairment charge of $4.9 million related to the cost of certain software which was made redundant by a new company-wide integrated information system and the write-off of other assets that were associated with the leased facilities affected by the facility consolidation.

As a result of the organizational changes and the consolidation of facilities, we are in the process of eliminating approximately 372 positions throughout all levels of the organization. At March 31, 2002, 171 of the positions identified in the plans have been terminated, and 201 positions remain to be terminated in accordance with the resizing plans.

Our business is currently divided into four segments:

•	Equipment
	We design, manufacture and market semiconductor assembly equipment. Our principal product line is our family of wire bonders, which are used to connect extremely fine wires, typically made of gold, aluminum or copper, between the bonding pads on the die and the leads on the IC package to which the die has been bonded. We are the world’s largest manufacturer of wire bonders, according to VLSI Research, Inc. In fiscal 2001, we began selling the Models 8028-S and 8028-PPS automatic ball bonders which, with their improved technical performance and productivity, accounted for the majority of ball bonders we sold in fiscal 2001. In fiscal 2001, we also introduced the Max µm, our latest generation IC ball bonder, which offers up to 20% more productivity than the Model 8028-PPS ball. In the second quarter of fiscal 2002, we began shipping the Max µm, which has been tested and qualified by several of our customers.
•	Packaging Materials
	We design, manufacture and market a range of packaging materials to semiconductor device assemblers including very fine (typically 0.001 inches in diameter) gold, aluminum and copper wire, capillaries, wedges, die collets and saw blades, all of which are used in the semiconductor packaging process. Our packaging materials are optimized for use with our wire bonders, to provide leading edge efficiencies and capabilities, as well as with our competitors assembly equipment.
•	Test Interconnect
	Our test interconnect solutions provide a broad range of fixtures used to temporarily connect automatic test equipment to the semiconductor device under test during wafer fabrication (wafer probing) and after they have been assembled and packaged (package or final testing). Our products include probe cards, automatic test equipment (ATE) interface assemblies, ATE test boards, and test socket/contractors. Most of the test interconnect products we offer are custom designed or customized for a specific semiconductor or application.

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Kulicke & Soffa Industries Inc.
Management’s Discussion and Analysis
March 31, 2002

•	Advanced Packaging Technology
	This business segment reflects the operating results of our strategic initiative to develop new technologies for advanced semiconductor packaging. It is comprised of our flip chip business unit and our high-density substrate business unit.
	Through our flip chip business unit we license flip chip technology and provide wafer bumping services and market a wafer level chip scale package (UltraCSP).
	We established our substrate business unit to develop, manufacture and market high density interconnect substrates using either flip chip or advanced wire bonding interconnection schemes. We purchased advanced substrate technology for $8.0 million in fiscal 1999 and operate a research/manufacturing facility in Milpitas, California to fully develop and market the technology.
	Neither our flip chip nor our substrate business units have been profitable to date and we do not expect them to be profitable in fiscal 2002.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. 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 in low stock 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.

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Kulicke & Soffa Industries Inc.
Management’s Discussion and Analysis
March 31, 2002

• 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 prior to 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.

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

Prior to the adoption of 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.

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

We believe the following accounting policies require 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 may be required. We are also subject to concentrations of customers and sales to a few geographic locations, which may also impact the collectability of certain receivables. If economic or political conditions were to change in the countries were 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 .1% of net sales.

Inventory Reserves. We generally provide reserves for equipment inventory considered to be in excess of 6 months of forecasted future demand and we provide reserves for spare part and consumable inventories considered to be in excess of 18 months of forecasted future demand. The forecasted demand is based upon internal projections, historical sales volumes, customer order activity and a review of consumable inventory levels at our customers’ facilities. We communicate forecasts of our future demand to our suppliers and adjust commitments to those suppliers accordingly. If required, we reduce the carrying value of our inventory to the lower of cost or market value, based upon assumptions about future demand, market conditions and the next cyclical market upturn. If actual market conditions are less favorable than our projections, additional inventory write-downs may be required. We review and dispose of excess and obsolete inventory on a regular basis.

Valuation of Long-lived Assets. Our long-lived assets include property, plant and equipment, goodwill and intangible assets. Long-lived assets are depreciated over the estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying amount of these assets may not be recoverable. The fair value of our goodwill and intangible assets is based upon our estimates of future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record an impairment charge in accordance with SFAS 142.

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Kulicke & Soffa Industries Inc.
Management’s Discussion and Analysis
March 31, 2002

Deferred Taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the 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.

RESULTS OF OPERATIONS

Bookings and Backlog

During the three months ended March 31, 2002 we reported bookings of $126.0 million, up 27.2% from the $99.0 million recorded in the quarter ended December 31, 2001, and up 14.5% from the $110.0 million reported for the quarter ended March 31, 2001. At March 31, 2002, we had a backlog of customer orders totaling $63.0 million, an increase of 43.1% as compared to the backlog of $44.0 million at December 31, 2001. Our backlog as of any date may not be indicative of sales for any period, since the timing of deliveries may vary and orders generally are subject to delay or cancellation.

Sales

Net sales for the three months ended March 31, 2002 were $106.9 million, a decrease of 28.4% from the $149.4 million reported for the same period in fiscal 2001, due principally to the weakness in the semiconductor industry. Sales in the Equipment segment declined 35.3% from the same period in the prior year to $37.2 million for the quarter ended March 31, 2002, due primarily to lower average selling prices of our automatic ball bonders and lower unit sales of manual wire bonders and dicing saws, partially offset by higher unit sales of automatic ball bonders. The lower average selling prices of our automatic ball bonders resulted from competitive pressures and our decision to lower prices in order to reduce our inventory levels. The lower sales of manual wire bonders and dicing saws was due to lower demand for these products. Sales in the Packaging Materials segment declined 11.3% to $35.4 million in the current quarter due to weakness in demand for our bonding wire and capillaries. Sales in the Advanced Packaging segment declined 39.4% from the same quarter in the prior year to $5.7 million in fiscal 2002 due to lower bumping and license revenues at our Flip Chip division. In the Test segment, sales declined 32.8% from the same period in the prior year due primarily to lower unit volume and average selling prices of wafer test products.

Net sales for the six months ended March 31, 2002 were $210.1 million, a decrease of 30.6% from the $302.9 million reported in the six months ended March 31, 2001 due principally to the weakness in the semiconductor industry. Sales for the Equipment segment declined 48.0% in the six months ended March 31, 2002, as compared to the comparable period in the prior year, due principally to lower average selling prices of our automatic ball bonders resulting from competitive pressures and our decision to lower sales prices to reduce inventory levels and lower unit sales of dicing saws and manual wire bonders. The lower sales of dicing saws and manual wire bonders was due to lower demand for these products. In the Packaging Materials segment, sales were 21.1% lower in fiscal 2002 as compared to fiscal 2001 due to the slowed demand for our capillaries and bonding wire. In the Advanced Packaging segment, sales were down 30.8% for the six months ended March 31, 2002, as compared with the same period in the prior year, principally due to lower bumping revenue and license revenue at Flip Chip. In the Test segment, sales were down 2.6% from the same period in the prior year; however, the six month period ended March 31, 2001 included only the four months of Test segment results following the acquisitions of the businesses in November and December 2000. The Test segment, like all of our operating segments, has been negatively impacted by the weakness in the semiconductor industry.

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Kulicke & Soffa Industries Inc.
Management’s Discussion and Analysis
March 31, 2002

For the three and six months ended March 31, 2001 and 2002, the breakdown of shipments to major geographic regions is as follows:

	Three months ended						Six months ended
	March 31,						March 31,
	2001			2002			2001			2002
North America		45.0	%		31.9	%		41.3	%		33.2	%
Asia Pacific (1)		38.5	%		60.0	%		44.2	%		58.5	%
Europe		13.1	%		5.6	%		10.2	%		5.7	%
Japan		3.4	%		2.5	%		4.3	%		2.6	%
		100.0	%		100.0	%		100.0	%		100.0	%

(1) Includes sales to customers in Taiwan which accounted for 24% of our sales in the three and six months ended March 31, 2002, and approximately 10% of our sales in the three and six months ended March 31, 2001, respectively.

Gross Profit

Gross profit decreased to $10.6 million for the quarter ended March 31, 2002 from $42.0 million for the comparable period in the prior year. In the six months ended March 31, 2002, the gross profit also decreased from $95.6 million to $36.0 million. Included in the results for the three and six months ended March 31, 2002 are inventory write-offs of $13.3 million, $5.2 million of which is due to the discontinuance of a product. Included in the results for the three and six months ended March 31, 2001 are inventory write-offs of $6.5 million and $7.9 million, respectively, for excess and obsolete ball bonder and spare parts inventory, which resulted primarily from the severe and continued downtown in the semiconductor industry. The decline in gross profit in the quarter was due primarily to the lower average selling prices of automatic ball bonders and lower unit volume of dicing saws in the equipment segment and lower unit volume of capillaries and bonding wire in the Packaging Materials segment and lower unit volume and average selling price of wafer test products at our Test segment. The decline in gross profit in the six months ended March 31, 2002 was due primarily to the lower average selling prices of automatic ball bonders and lower unit volume of dicing saws in the equipment segment and lower unit volume of capillaries and bonding wire in the Packaging Materials segment.

Gross margin (gross profit as a percentage of sales) was 9.9% for the current quarter, as compared to 28.1% for the same period in the prior year. Gross margin for the six months ended March 31, 2002 was 17.1% as compared to 31.6% for the same period in the prior year. Gross margin for the same periods, excluding the inventory write-offs would have been 22.4% and 23.5% for the three and six months ended March 31, 2002, and 32.5% and 34.1% for the three and six months ended March 31, 2001, respectively. The decline in gross margin from the prior year in both the quarter and year-to-date results was due primarily to lower average selling prices for automatic ball bonders and the lower unit volume of sales of our packaging materials, which created inefficient factory utilization by allocating fixed factory costs over a low level of units in production.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses decreased $4.3 million or 10.8% and $8.1 million or 10.8%, respectively, for the three and six months ended March 31, 2002. The lower SG&A expenses resulted from ongoing cost saving initiatives which began in fiscal 2001, principally reductions in headcount and salary reductions, and elimination of redundant facilities at our Test segment.

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Kulicke & Soffa Industries Inc.
Management’ Discussion and Analysis
March 31, 2002

Research and Development

Net research and development (“R&D”) expense for the three and six months ended March 31, 2002 decreased $5.4 million and $10.1 million, respectively, to $13.0 million for the quarter and $26.0 million for the six months then ended. The reduction of 29.5% for the quarter, and 28.0% for the six months ended March 31, 2002 is principally due to the reduction in R&D spending in our equipment segment. The lower R&D spending was primarily due to a shift in certain engineering functions to lower cost foreign subsidiaries, and the ‘push-out’ of certain future product development initiatives. R&D expense includes internally developed software costs which are expensed as incurred.

Resizing Costs

In the second quarter of fiscal 2002, we announced a resizing plan and recorded a charge of $11.3 million associated with the plan. The charge includes severance and benefits of $9.7 million for 372 positions which are being eliminated as a result of the functional realignment of the organization and the consolidation of certain facilities. The resizing charge also includes a charge of $1.6 million for the continuing lease costs of facilities to be exited as a result of the facility consolidation plan. At March 31, 2002, 201 positions remain to be terminated through the first quarter of fiscal 2003 in accordance with the plan. The severance accrual will be paid out during the remainder of fiscal 2002 and the first half of fiscal 2003, and the commitments will be substantially completed in the second quarter of fiscal 2003, but will continue into future years as a result of contractual agreements.

In the second quarter of fiscal 2001, we recorded a resizing charge of $1.7 million for severance associated with the elimination of 296 positions. In the fourth quarter of fiscal 2001, we recorded a resizing charge of $2.5 million for severance associated with the elimination of 215 positions. The charges in fiscal 2001 included the elimination of a total of 511 positions, of which 55 remained to be terminated at September 30, 2001. As of March 31, 2002, 30 positions remain to be terminated in the third quarter of fiscal 2002 in accordance with the plans. The severance accrual will be paid out during the remainder of fiscal 2002, and the commitments will be substantially completed in fiscal 2002 but will continue into future years as a result of contractual agreements.

The table below details the activity related to these programs:

	Severance and
	Benefits			Commitments			Total
	(in thousands)
Balance, September 30, 2001	$	2,149		$	1,189		$	3,338
Provision for resizing		9,733	(1)		1,550			11,283
Satisfaction of obligations		(4,841	)(1)		(247	)		(5,088	)
Balance, March 31, 2002	$	7,041		$	2,492		$	9,533

(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.

Amortization of Goodwill and Intangibles

Amortization expense was $2.5 million and $5.0 million for the three and six months ended March 31, 2002, down 63.1% and 46.7% from the comparable periods in the prior year. 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 standard also requires that an impairment test be performed to support the carrying value of goodwill and intangible assets at least annually.

We have completed the required transitional impairment testing of intangible assets, and based upon those analyses, we did not identify any impairment charges as a result of adoption of this standard. We have reviewed our business and

18

Kulicke & Soffa Industries Inc.
Management’ Discussion and Analysis
March 31, 2002

determined that there are five reporting units which will be reviewed for impairment in accordance with the standard – the reporting units are included within three of the our business segments, the packaging materials segment, the advanced packaging technology segment and the test segment. Included within the packaging materials segment are two reporting units, our bonding wire and saw blade businesses, and included in the advanced packaging technology segment are two reporting units, the substrate and flip chip businesses. The test segment is our final reporting unit.

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:

			Six Months Ended
			March 31,			March 31,
			2001			2002
			(in thousands,
			except per share data)
Reported net loss, before adoption of SFAS 142			$	(31,856	)	$	(61,008	)
	Addback:
		Goodwill amortization, net of tax of $1,418		3,918			—
Pro forma net loss			$	(27,938	)	$	(61,008	)
Net loss per share, as reported
	Basic		$	(0.65	)	$	(1.24	)
	Diluted		$	(0.65	)	$	(1.24	)
Goodwill amortization, net of tax per share
	Basic		$	0.08		$	—
	Diluted		$	0.08		$	—
Pro forma net loss per share
	Basic		$	(0.57	)	$	(1.24	)
	Diluted		$	(0.57	)	$	(1.24	)

Our annual earnings per share is expected to increase by approximately $.35 per share as a result of the adoption of this standard.

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, but Siegel-Robert has sought to modify, and may also appeal, the award. The purchase price allocation will be finalized when Siegel-Robert’s challenges are finalized. Any reduction in the purchase price will be reflected as a reduction of goodwill.

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 sixteen 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

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Kulicke & Soffa Industries Inc.
Management’ Discussion and Analysis
March 31, 2002

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 sixteen ongoing R&D projects at the time of the acquisition; four have been completed, seven are still in progress, four have been cancelled due to overlapping technology with our Cobra line of vertical test products, and one was cancelled due to nonproductive results. We believe that the expected returns of the completed and in-progress 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 one project that was cancelled due to lack of productive results is immaterial to 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:

						Estimated
						Cost to		Projected
	Value		Percentage			Complete		Project		Current
	Assigned		Complete			Project		Launch		Status of
R&D project	at Purchase		at Purchase			at Purchase		Date		Project
	(dollars in thousands)
Next generation contact technology	$	2,700		10	%	$	290		Q3 2002	In process
Socket testing capability for CSP and BGA packages	$	2,000		50	%	$	65		Q3 2001	Complete
ViProbe pitch reduction	$	1,600		40	%	$	89		4Q 2001	Cancelled(1)
Vertical space transformer	$	1,500		25	%	$	278		3Q 2001	Cancelled(1)
Extension of P4 technology to vertical test configurations	$	1,300		40	%	$	229		Q1 2002	Cancelled(1)
Low-force, high-density interface using P4 technology	$	1,300		30	%	$	138		Q4 2001	Cancelled
									Q1 2001 -
All other projects combined	$	1,300		10-90	%	$	576		Q3 2001	Various stages

(1) 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

20

Kulicke & Soffa Industries Inc.
Management’ Discussion and Analysis
March 31, 2002

technology. The Company expects 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.

Asset Impairment

In the second quarter of fiscal 2002, we recorded an asset impairment of $4.9 million related to the cost of certain software which was made redundant by a new company-wide integrated information system and the write-off of other assets that were associated with the leased facilities to be exited as a result of the facility consolidation.

Loss from Operations

The loss from operations for the three months ended March 31, 2002 was $56.5 million as compared to $24.6 million for the comparable period in the prior year. The loss from operations for the six months ended March 31, 2002 was $78.0 million as compared to $38.2 million for the same period in fiscal 2001. The operating loss in the three and six months ended March 31, 2002 was due primarily to the lower sales and associated gross profit, principally in the equipment segment, the inventory write-off of $13.3 million, the asset impairment of $4.9 million and the resizing charge of $11.3 million. The operating loss for the three months ended March 31, 2001 was due primarily to weakness in the semiconductor industry and the resizing charge of $1.7 million, inventory write-off of $6.5 million and the write-off of the inventory step-up of $2.4 million. The operating loss for the six months ended March 31, 2001 was due primarily to weakness in the semiconductor industry and the write-off of in process research and development of $11.7 million, the resizing charge of $1.7 million, the inventory write-off of $7.9 million and the write-off of the inventory step-up of $4.2 million.

Interest

Interest income in the second quarter of fiscal 2002 was $1.0 million, a decline of $0.8 million from the $1.8 million reported for the same period in the prior year. Year-to-date interest income was $2.4 million as compared to $5.7 million in the prior year. The lower interest income for the three and six months ended March 31, 2002 was due primarily to lower interest rates on our short-term investments in fiscal 2002 as compared to fiscal 2001. Interest expense for the quarter ended March 31, 2002 increased to $4.3 million from $3.4 million in fiscal 2001, and for the six months ended March 31, 2002 increased to $9.2 million from $6.1 million for the same period in fiscal 2001. The increase in interest expense is due principally to the issuance of the $125.0 million principal 5 1/4% Convertible Subordinated Notes due 2006 in the fourth quarter of fiscal 2001.

Other Income

In fiscal 2000, we experienced a fire in our bonding tools facility which resulted in a temporary shutdown of the facility and subsequent lower production levels. We subsequently filed a claim under our property insurance policy for the damages suffered from the fire. In fiscal 2001, we recorded other income of $8.0 million in the three months ended March 31, 2001 as the result of a cash settlement of this claim which represents a the portion of the $13.0 million settlement that we determined was associated with the temporary closure of the facility and subsequent lower production levels.

Cumulative Effect of Change in Accounting Principle

We adopted SAB 101, Revenue Recognition in Financial Statements, in the first quarter of fiscal 2001, resulting in a cumulative effect of a change in accounting principle of $8.2 million, net of taxes of $4.4 million. The cumulative effect reflects sales that were deferred upon adoption of the standard. In the quarter and six months ended March 31, 2002, $1.0 million and $4.2 million, respectively, of sales were recognized that were included in our cumulative effect adjustment.

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Kulicke & Soffa Industries Inc.
Management’ Discussion and Analysis
March 31, 2002

Tax Benefit

Our effective tax rate for fiscal 2002 is expected to approximate 28.0%, up slightly from the 27.3% effective tax rate in fiscal 2001. The fiscal 2002 effective rate is higher than the effective rate in fiscal 2001 due primarily to the impact of the 2001 write-off of in-process research and development for which no benefit was recorded. Our effective tax rate in fiscal 2002 is also favorably impacted by tax incentives in Singapore and Israel.

Minority Interest in Net Loss of Subsidiary

In the three and six months ended March 31, 2002, we recorded minority interest of $4 thousand and $10 thousand, respectively reflecting the minority interest in certain foreign investments in the Test division, compared to the $86 thousand and $328 thousand for the three and six months ended March 31, 2001, respectively. The minority interest was higher in fiscal 2001 due primarily to our former joint venture partner’s share of the loss incurred at Flip Chip which was recorded in the same periods in the prior year.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

SFAS 143. In August 2001, the FASB issued SFAS 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets which is effective for fiscal years beginning after June 15, 2002. The standard provides guidance for financial reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessors. We are currently reviewing the provisions of this Statement but do not expect that the adoption of SFAS 143 will have a significant impact on our financial position and results of operations.

SFAS 144. In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets which supersedes FASB 121, Accounting for the Impairment of Long-Lived Assets and for Assets to Be Disposed Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The Statement is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. This Statement applies to all long-lived assets and requires that the assets to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. We are currently reviewing the provisions of this Statement but do not expect that the adoption of SFAS 144 will have a significant impact on our financial position and results of operations.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2002, cash, cash equivalents and investments totaled $166.1 million, compared to $202.9 million at September 30, 2001.

Cash used by operating activities totaled $27.8 million in the six months ended March 31, 2002, compared with cash provided by operating activities totaling $64.0 million during the same period in fiscal 2001. The cash used in operating activities in fiscal 2002 was primarily due to the net loss reported in the period.

Cash used by investing activities totaled $1.6 million in the six months ended March 31, 2002, compared to $259.0 million in the same period in the prior year. In fiscal 2002, the investing activities consisted principally of proceeds from sale of investments, offset by purchases of investments and capital expenditures. In the second quarter of fiscal 2002, $7.2 million of our $9.5 million of capital expenditures was for software licenses for the installation of a company-wide information system that will complete our state-of-the-art e-commerce capabilities as well as integrate all of our facilities and businesses into one unified management information system. We expect to spend an additional $30.0 million for capital over the next three years to fully implement this integrated information system. In addition, we announced plans to build a facility in China to manufacture capillaries, saw blades and selected test products. We expect to spend approximately $13.5 million to build and outfit the facility over the next year. In

22

Kulicke & Soffa Industries Inc.
Management's Discussion and Analysis
March 31, 2002

fiscal 2001, we acquired Cerprobe and Probe Tech and invested $38.5 million in additional manufacturing capacity at Flip Chip and in our packaging material businesses, and information technology to develop corporate wide e-business capabilities. In November 2000, we completed a tender offer for 100% of the 9,575,270 outstanding shares of Cerprobe for $20 per share resulting in a cash purchase price (before the assumption of liabilities and transaction costs) of $191.5 million. In December 2000, we purchased for cash all the outstanding shares of Probe Tech (before the assumption of liabilities and transaction costs) for $64.0 million. Cash used for the acquisitions of Cerprobe and Probe Tech was $217.4 million and $62.5 million, respectively, net of cash acquired and the payment of certain acquisition related liabilities.

Net cash provided by financing activities was $772 thousand in fiscal 2002, principally due to proceeds from issuance of common stock resulting from employee stock option exercises. In fiscal 2001, we borrowed $58.0 million under our then existing revolving credit agreement, using $55.0 million of the proceeds of that borrowing to partially fund our acquisition of Probe Tech.

At March 31, 2002, the fair value of our $175.0 million 4 3/4% Convertible Subordinated Notes was $189.2 million, and the fair value of our $125.0 million 5 1/4% Convertible Subordinated Notes was $159.0 million. The fair values were determined using quoted market prices at the balance sheet date. The fair value of our other assets and liabilities approximates the book value of those assets and liabilities.

In February 2002, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission, 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. The SEC has not yet declared the registration statement effective.

We have certain obligations and contingent payments under various arrangements at March 31, 2002 as follows:

				Amounts						Amounts
				due in		Amounts		Amounts		due in
				less than		due in		due in		more than
		Total		1 year		2-3 years		4-5 years		5 years
		(in thousands)
Contractual Obligations:
	Long-term debt	$	300,000	$	—	$	—	$	300,000	$	—
	Capital Lease obligations		2,135		1,042		827		76		190
	Operating Lease obligations*		48,161		10,310		17,009		10,382		10,460
	Inventory Purchase obligations*		53,917		53,917		—		—		—
Commercial Commitments:
	Accounts Receivable Securitization*		20,000		20,000		—		—		—
	Standby Letters of Credit*		2,966		1,256		1,710		—		—
Total contractual obligations and commercial commitments		$	427,179	$	86,525	$	19,546	$	310,458	$	10,650

* Represents contractual amounts not reflected in the consolidated balance sheet at March 31, 2002.

Long-term debt includes the amounts due under our 4 3/4% Convertible Subordinated Notes due 2006 and our 5 1/4% Convertible Subordinated Notes due 2006. The capital lease obligations principally relate to equipment leases. The operating lease obligations at March 31, 2002 represent obligations due under various facility and capital 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.

23

Kulicke & Soffa Industries Inc.
Management's Discussion and Analysis
March 31, 2002

In fiscal 2001, we entered into a receivable securitization program in which all domestic account receivables were transferred to KSI Funding Corporation, a “bankruptcy remote” special purpose corporation and our 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 can sell up to a $40.0 million interest in all of our domestic receivables. This facility was structured as a revolving securitization, whereby an interest in additional account receivables can be sold as collections reduce the previously sold interest. We entered into the receivable securitization program to generate additional cash flow to more closely match the cash requirements needed to manufacture our products with the cash generated from the sale of our products. The program enables us to sell a portion of our trade accounts receivables to generate cash sooner than would be expected in the normal course of our business, due to the extension of payment terms to our customers.

We account for the sale of our receivables under the provisions of SFAS 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This transfer of financial assets without recourse qualifies as a sale under the provisions of SFAS 140. Upon the sale of the receivables, the receivables are removed from our consolidated balance sheet, and the cash received from the participating bank is recorded. We pay a fee to the participating bank at the bank’s A-1/P-1 commercial paper rate plus a program fee of 0.625%.

At March 31, 2002, KSI Funding Corporation had sold receivables under this agreement amounting to $20.0 million and the subordinated retained interest in its receivables was $48.0 million. Accordingly, $20.0 million of account receivables were removed from our consolidated balance sheet at March 31, 2002. Net proceeds from the transaction totaled $19.6 million in fiscal 2001. Costs associated with the securitization arrangement totaled $382 thousand, net of servicing revenues associated with the program in the six months ended March 31, 2002. Such amounts are recorded as operating expenses in the consolidated statement of operations and are primarily related to the discount and loss on sale of accounts receivables, partially offset by servicing revenue.

The standby letters of credit represent obligations of the company for security under various facility leases and employee benefit programs.

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

RISK FACTORS

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

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

Historically, the semiconductor industry has been volatile, with sharp periodic downturns and slowdowns. These downturns have been characterized by, among other things, diminished product demand, excess production capacity and accelerated erosion of selling prices. This has severely and negatively affected the industry’s demand for capital

24

Kulicke & Soffa Industries Inc.
Management's Discussion and Analysis
March 31, 2002

equipment, including the assembly equipment that we manufacture and market and, to a lesser extent, the packaging materials and test interconnect solutions that we sell.

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

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

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

• market downturns;

• the mix of products that we sell because, for example:

- -	some packaging materials have lower margins than assembly equipment and test interconnect solutions;
- -	some lines of equipment are more profitable than others; and
- -	some sales arrangements have higher margins than others;

• the volume and timing of orders for our products and any order postponements and cancellations by our customers;

• the cancellation, deferral or rescheduling of orders, because virtually all orders are subject to cancellation, deferral or rescheduling by the customer without prior notice and with limited or no penalties;

• adverse changes in our pricing, or that of our competitors;

• higher than anticipated costs of development or production of new equipment models;

• the availability and cost of key components for our products;

• market acceptance of our new products and upgraded versions of our products;

• our announcement, or perception by others, that we will introduce new or upgraded products, which could cause customers to delay purchasing our products;

• the timing of acquisitions; and

• our competitors’ introduction of new products.

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

• the timing and extent of our research and development efforts;

• severance, resizing and other costs of relocating facilities;

• inventory write-offs due to obsolescence; and

25

Kulicke & Soffa Industries Inc.
Management's Discussion and Analysis
March 31, 2002

• inflationary increases in the cost of labor or materials.

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

Our business depends on attracting and retaining management, marketing and technical employees who are in great demand

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

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

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

We may not be able to accurately forecast demand for our product lines

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

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

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

26

Kulicke & Soffa Industries Inc.
Management's Discussion and Analysis
March 31, 2002

One component of our strategy is to develop next-generation technologies to allow us to prepare for any eventual decline in the use of wire bonding technology. There are a number of risks associated with our strategy to diversify into new technologies:

• the technologies that we have invested in represent only some of the advanced technologies that may one day supersede wire bonding;

• other companies are developing similar or alternative advanced technologies;

• wire bonding may continue as the dominant technology for longer than we anticipate;

• the cost of developing advanced technologies may be significantly greater than we expect; and

• we may not be able to develop the necessary technical, research, managerial and other related skills to develop, produce, market and support these advanced technologies.

As a result of these risks, we cannot assure you that any of our attempts to develop alternative technologies will be profitable or that we will be able to realize the benefits that we anticipate from them.

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

Our wire bonders comprised over 50% of our net sales. If demand for, or pricing of, our wire bonders, advanced packaging technology or test interconnect solutions declines because our competitors introduce superior or lower cost systems, the semiconductor industry changes or because of other events beyond our control, our business, financial condition and operating results could be materially and adversely affected.

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

The semiconductor manufacturing industry is highly concentrated, with a relatively small number of large semiconductor manufacturers and their subcontract assemblers and vertically integrated manufacturers of electronic systems purchasing a substantial portion of semiconductor assembly equipment, packaging materials, test interconnect solutions and flip chip bumping services and technology. Sales to a relatively small number of customers account for a significant percentage of our net sales. In fiscal 2001, no customer accounted for more than 10% of our net sales. In fiscal 2000, sales to Advanced Semiconductor Engineering and Amkor Technologies accounted for 15% and 10% of our net sales, respectively. In fiscal 1999, no customer accounted for more than 10% of total net sales.

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

27

Kulicke & Soffa Industries Inc.
Management's Discussion and Analysis
March 31, 2002

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

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

• loss of control over the manufacturing process;

• changes in our manufacturing processes, dictated by changes in the market, that may delay our shipments;

• our inadvertent use of defective or contaminated raw materials;

• the relatively small operations and limited manufacturing resources of some of our contractors and suppliers, which may limit their ability to manufacture and sell subassemblies, components or parts in the volumes we require and at quality levels and prices we can accept;

• reliability and quality problems we experience with certain key subassemblies provided by single source suppliers;

• the exposure of our suppliers and subcontractors to disruption for a variety of reasons, including work stoppage, fire, earthquake, flooding or other natural disasters;

• delays in the delivery of raw materials or subassemblies, which, in turn, may cause delays in some of our shipments; and

• the loss of suppliers as a result of the consolidation of suppliers in the industry.

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

We are expanding and diversifying our operations, and if we fail to manage our expanding and more diverse operations successfully, our business and financial results may be materially and adversely affected

In recent years, we have broadened our product offerings to include significantly more packaging materials and advanced packaging services and technology. Additionally, during fiscal 2001, we acquired two companies that design and manufacture test interconnect solutions, Cerprobe Corporation and Probe Technology Corporation, and we have combined their operations to create our test division. Although our strategy is to diversify and expand our products and services, we may not be able to develop, acquire, introduce or market new products in a timely or cost-effective manner and the market may not accept any new or improved products we develop, acquire, introduce or market.

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

As we expand our operations, we expect to encounter a number of risks, which will include:

• risks associated with hiring additional management and other critical personnel;

28

Kulicke & Soffa Industries Inc.
Management’s Discussion and Analysis
March 31, 2002

• risks associated with adding equipment and capacity; and

• risks associated with increasing the scope, geographic diversity and complexity of our operations.

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

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

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

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

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

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

Approximately 67% of our sales for the six months ended March 31, 2002, 62% of our net sales for fiscal 2001 and 91% of our net sales for fiscal 2000 were attributable to sales to customers for delivery outside of the United States. The lower percentage of international sales in fiscal 2002 and 2001 was due primarily to the sales of the test interconnect products which are more concentrated in the United States. We expect our sales outside of the United States to continue to represent a large portion of our future revenues. Our future performance will depend, in significant part, on our ability to continue to compete in foreign markets, particularly in Asia. Asian economies have been highly volatile, resulting in significant fluctuation in local currencies, and political and economic instability. These conditions may continue or worsen, which could materially and adversely affect our business, financial condition and operating results. We also rely on non-United States suppliers for materials and components used in the equipment that we sell and we maintain substantial manufacturing operations in countries other than the United States, including operations in Israel and Singapore. We manufacture substantially all of our automatic ball bonders in Singapore, and we are planning to build a facility in China to manufacture capillaries, saw blades and selected test fixtures. In addition, we rely on independent foreign distribution channels for certain product lines. As a result, a major portion of our business is subject to the risks associated with international commerce, such as risks of war and civil disturbances or other events that may limit or disrupt markets; expropriation of our foreign assets; longer payment cycles in foreign markets; international exchange restrictions; the difficulties of staffing and managing dispersed international operations; tariff

29

Kulicke & Soffa Industries Inc.
Management’s Discussion and Analysis
March 31, 2002

and currency fluctuations; changing political conditions; foreign governments’ monetary policies; and less protective foreign intellectual property laws.

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

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

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

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

• our competitors may independently develop technology that is similar to or better than ours;

• employees, vendors, consultants and customers may not abide by their contractual agreements, and the cost of enforcing those agreements may be prohibitive, or those agreements may prove to be unenforceable or more limited than we anticipate;

• foreign intellectual property laws may not adequately protect our intellectual property rights; and

• our patent and copyright claims may not be sufficiently broad to effectively protect our technology; patents or copyrights may be challenged, invalidated or circumvented; and we may otherwise be unable to obtain adequate protection for our technology.

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

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

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

30

Kulicke & Soffa Industries Inc.
Management’s Discussion and Analysis
March 31, 2002

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

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

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

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

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

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

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

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

• classify our board of directors into four classes, with one class being elected each year;

• permit our board to issue ‘‘blank check’’ preferred stock without shareholder approval; and

• prohibit us from engaging in some types of business combinations with a holder of 20% or more of our voting securities without super-majority board or shareholder approval.

31

Kulicke & Soffa Industries Inc.
Management’s Discussion and Analysis
March 31, 2002

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

We may be unable to generate enough cash to service our debt

Our ability to make payments on our indebtedness, and to fund planned capital expenditures and other activities will depend on our ability to generate cash in the future. This, to some extent, is subject to the volatile nature of our business, and general economic, competitive and other factors that are beyond our control. If our current convertible debt is not converted to our common shares, we will be required to make annual cash interest payments of $14.9 million through fiscal 2005, $14.1 million in fiscal 2006 and $1.7 million in fiscal 2007 on our $300.0 million of convertible subordinated notes. Principal payments of $175.0 million and $125.0 million in fiscal 2006 and fiscal 2007, respectively. Accordingly, we cannot assure you that our business will generate sufficient cash flow to service our debt. In addition, our gold supply agreement contains restrictions on the ability of certain of our subsidiaries to declare and pay dividends to us.

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

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

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

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

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

• quarter to quarter variations in our operating results;

• shortfalls in our revenue or earnings from levels expected by securities analysts;

• announcements of technological innovations or new products by us or other companies; and

• slowdowns or downturns in the semiconductor industry.

32

Kulicke & Soffa Industries Inc.
March 31, 2002

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At March 31, 2002, we had a non-trading investment portfolio, excluding those classified as cash and cash equivalents, of $39.8 million. Due to the short term nature of the investment portfolio, if market interest rates were to increase immediately and uniformly by 100 basis points, there would be no material or adverse affect on our business, financial condition or operating results.

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

The 2002 Annual Meeting of Shareholders of the Company was held on February 12, 2002. At this meeting, Messrs. John A. O’Steen and MacDonell Roehm, Jr. were reelected to the Board of Directors of the Company for terms expiring at the 2006 annual meeting. In such election, 46,898,256 votes were cast for Messrs. O’Steen and Roehm, Jr. Under Pennsylvania Law, votes cannot be cast against a candidate. Proxies filed by the holders of 160,818 shares at the 2002 Annual Meeting withheld authority to vote for Messrs. O’Steen and Roehm, Jr.

Lastly, 46,648,681 shares were voted in favor of the reappointment of PricewaterhouseCoopers LLP as independent accountants of the Company to serve until the 2003 Annual Meeting, and 328,420 shares were voted against such proposal. Proxies filed by the holders of 90,561 shares at the 2002 Annual Meeting instructed the proxy holders to abstain from voting in such proposal.

There were no ‘broker non votes’ received at the 2002 Annual Meeting.

Item 6. Exhibits and Reports on Form 8-K

The Company filed a current report on Form 8-K on February 15, 2002 making an Item 5 disclosure announcing the Company’s filing of a shelf registration statement on Form S-3 which would permit the Company, 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 million. A copy of the press release announcing the Company’s intention to file this registration statement was filed as Exhibit 99.1 and incorporated in this report by reference.

The Company filed a current report on Form 8-K on April 18, 2002 making an Item 5 disclosure regarding the Company’s financial results for the second fiscal quarter ended March 31, 2002. A copy of the Company’s earnings press release was filed as exhibit 99.1 and incorporated in this report by reference.

33

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 thereunto duly authorized.

KULICKE AND SOFFA INDUSTRIES, INC.

Date: May 15, 2002	By: CLIFFORD G. SPRAGUE
	Clifford G. Sprague Senior Vice President, Chief Financial Officer (Principal Financial Officer)

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