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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended December 31, 2004

OR

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)

(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  x    No  ¨

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

As of January 27, 2005, there were 51,416,416 shares of the Registrant’s Common Stock, without par value, outstanding.

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KULICKE AND SOFFA INDUSTRIES, INC.

FORM 10 - Q

December 31, 2004

INDEX

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PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

KULICKE AND SOFFA INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

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

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KULICKE AND SOFFA INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

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

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KULICKE AND SOFFA INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

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

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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 December 31, 2004, the results of its operations for the three month periods ended December 31, 2003 and 2004, and its cash flows for the three month periods ended December 31, 2003 and 2004. The results of operations for interim periods are not necessarily indicative of the results that may be expected for a full year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004.

In February 2004, the Company sold the remaining assets of its advanced packaging technology segment, which consisted solely of the flip chip business unit which licensed flip chip technology and provided flip chip bumping and wafer level packaging services. As a result, we have reflected the flip chip business unit as a discontinued operation and do not include the results of its operations in our revenues and expenses from continuing operations as reported in our financial statements and this discussion of our results of operations.

During the three months ended December 31, 2004, the Company sold the land and building held through the variable interest entity that was previously consolidated into the Company’s financial statements. The impact of this sale decreased assets and liabilities by approximately $5.8 million and $5.5 million, as of December 31, 2004.

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

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, Inventory Costs – an amendment of ARB 43, chapter 4 (FAS 151). FAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) in the determination of inventory carrying costs. The statement requires such costs be recognized as a current-period expense. FAS 151 also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for fiscal years beginning after July 15, 2005. The Company does not expect the adoption of this standard to have a material impact on its financial condition or results of operations.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (revised 2004), “Share-Based Payment” (FAS 123R). In summary, FAS 123R requires companies to expense the fair value of employee stock options and similar awards as of the date the Company grants the awards to employees. The expense would be recognized over the vesting period for each option and adjusted for actual forfeitures that occur before vesting. The effective date for this standard is interim and annual periods beginning after June 15, 2005, and applies to all outstanding and unvested share-based payment awards at a company’s adoption date. The Company is currently assessing each of the three transition methods offered by FAS 123R and believes adoption of FAS 123R will have a material impact on its consolidated financial statements, regardless of the method selected.

NOTE 3 – ACCOUNTING FOR STOCK-BASED COMPENSATION

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

At December 31, 2004, the Company had five stock-based employee compensation plans and two director compensation plans. No stock-based employee or director compensation cost is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and earning (loss) per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee and director compensation:

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NOTE 4 - GOODWILL AND OTHER INTANGIBLES

The Company’s goodwill and intangible assets relate to two reporting units. The reporting units are the bonding wire, which is included in the Company’s Packaging Materials segment, and test businesses, which comprise the Company’s Test segment.

The intangible assets that are classified as goodwill and those with indefinite lives are not amortized. Intangible assets with determinable lives are amortized over their estimated useful life. The Company performs its annual impairment test at the end of the fourth quarter of each fiscal year, which coincides with the completion of its annual forecasting process. The Company also tests for impairment between its annual tests if a “triggering” event occurs that may have the effect of reducing the fair value of a reporting unit below its carrying value. When conducting its goodwill impairment analysis, the Company calculates its potential impairment charges based on the two-step test identified in SFAS 142 and using the implied fair value of the respective reporting units. The Company uses the present value of future cash flows from the respective reporting units to determine the implied fair value. The Company’s intangible assets other than goodwill are tested for impairment based on undiscounted cash flows, and if impaired, written-down to fair value based on either discounted cash flows or appraised values. The Company’s intangible assets in its Test business segment are comprised of customer accounts and complete technology. The Company manages and values its complete technology in the aggregate as one asset group.

During the three months ended December 31, 2004 and 2003, the Company performed interim impairment tests on our Test segment goodwill due to the existence of an impairment trigger, which was the losses experienced in our test business during these same periods. Based on these test results, no impairment charges were recorded during each of these periods. The fair value of the Test segment was based on discounted cash flows of our projected future cash flows from this segment, consistent with the methods used in past periods. In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-lived Assets, the Company also tested our intangible assets for impairment during these same quarters. Based on these test results, no impairment charges were recorded during each of these periods. The fair value of the intangible assets were based on projected future undiscounted cash flows.

The recorded value of goodwill at September 30, 2004 and December 31, 2004, was $81.4 million.

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The changes in the carrying value of the Company’s identifiable intangible assets for the Test business segment from September 30, 2004 and December 31, 2004 appear below:

The $1.0 million increase in the Test segment’s Technology intangible assets was for a technology license to be used in the development of new products. The aggregate amortization expense related to these intangible assets for the three months ended December 31, 2003 was $2.3 million and for the three months ended December 31, 2004 was $2.2 million. The annual amortization expense related to these intangible assets for each of the next five fiscal years is expected to be approximately $9.0 million.

NOTE 5 - INVENTORIES

Inventories consist of the following:

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

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In October 2004, the company sold the land and building in Arizona amounting to $5.8 million. The company included the gain on sale of assets of $1.5 million in its statement of operations during the quarter ended December 31, 2004.

In November 2004, the company sold land and building housing its corporate headquarters in Willow Grove, Pennsylvania for $11.2 million, resulting in a gain on the sale of $4.5 million. The company subsequently leased the building back from the buyer, requiring deferral of the gain as of the closing date and recognition of such gain ratably over the leaseback period. The remainder of the deferred gain is included in accrued expenses and other long-term liabilities at December 31, 2004.

NOTE 7 - 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 months ended December 31, 2004, the exercise of stock options and conversion of the 1.0% and 0.5% convertible subordinated notes were not assumed since their conversion to common shares would have an anti-dilutive effect due to the Company’s net loss position. For the three months ended December 31, 2003, $63 thousand dollars of after-tax interest expense, related to the 0.5% Convertible Subordinated Notes, was added to the Company’s net income to determine diluted earnings per share. Also, for the three months ended December 31, 2003 conversion of the 5.25% and 4.75% (for the period of time this security was outstanding) convertible subordinated notes were not assumed since their conversion to common shares would have an anti-dilutive effect on net income per share.

A reconciliation between the weighted average number of basic shares outstanding and the weighted average number of fully diluted shares outstanding at December 31, 2003 and December 31, 2004 appears below:

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NOTE 8 – RESIZING

The semiconductor industry experienced excess capacity and a severe contraction in demand for semiconductor manufacturing equipment during our fiscal 2001, 2002 and most of 2003. In response to these changes in the semiconductor industry, the Company developed formal resizing plans to align its cost structure with anticipated revenue levels. Accounting for resizing activities requires an evaluation of formally agreed upon and approved plans. The Company documented and committed to these plans to reduce spending that included facility closings and reductions in workforce. The Company recorded the expense associated with these plans in the period the Company committed to carry out the plans. Although the Company made every attempt to consolidate all known resizing activities into one plan, the extreme cycles and rapidly changing forecasting environment places limitations on achieving this objective. The recognition of a resizing event does not necessarily preclude similar but unrelated actions in future periods.

In summary, provisions for resizing plans were recorded during the second, third and fourth quarters of fiscal 2002. These charges were for:

In fiscal 2004, the Company reversed $68 thousand of these resizing charges and in fiscal 2003 the Company reversed $455 thousand of these resizing charges due to the actual severance cost associated with the terminated positions being less than the cost originally estimated.

A summary of the charges, reversals and payments of the resizing activities during the first quarter of fiscal 2005, fiscal 2004, 2003 and 2002 are as follows:

The remaining severance and benefits obligations are expected to paid out through March 2005. The commitments, which are primarily for lease and related facility obligations, are expected to be paid out through September 2006.

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NOTE 9 – COMPREHENSIVE INCOME (LOSS)

For the three month periods ended December 31, 2003 and 2004, the components of total comprehensive income (loss) are as follows:

NOTE 10 - OPERATING RESULTS BY BUSINESS SEGMENT FOR CONTINUING OPERATIONS

Operating results by business segment for the three month periods ended December 31, 2004 and 2003 were as follows:

Fiscal 2004 (in thousands):

Fiscal 2003 (in thousands):

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NOTE 11 – GUARANTOR OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

Guarantor Obligations

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

The table below identifies the guarantees under the standby letters of credit.

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

The table below details the activity related to the Company’s reserve for product warranty expense for the three months ended December 31, 2004:

Commitments and Contingencies

The Company orders inventory components in the normal course of its business. A portion of these orders are non-cancelable and a portion have varying penalties and charges in the event of cancellation. The total amount of the Company’s inventory purchase commitments, which do not appear on its balance sheet, as of December 31, 2004 was $30.0 million. If business conditions were to continue to change further and the Company was unable to cancel purchase commitments without penalty or payment, its financial condition and operating results could be adversely affected.

In September 2004, the tax authority in Singapore notified the Company that it believes Goods and Services Tax (“GST”) in the amount of $3.1 million is owed on the return of gold scrap to the Company’s former gold supplier

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over the period from 1998 to 2004. The Company does not agree with this assessment and has filed an objection. In event the Company is unsuccessful in its appeal, the Company believes it will recover the cost from its former gold supplier. For these reasons, no accrual for this contingency has been included in the Company’s financial statements. The Company believes that resolution of this matter may take two to three years.

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

Concentrations

Sales to a relatively small number of customers account for a significant percentage of the Company’s net sales. In the three months ended December 31, 2003, sales to Advanced Semiconductor Engineering accounted for 20% of the Company’s net sales. Sales to Advanced Semiconductor Engineering and ST Microelectronics accounted for 17% and 11%, respectively, of the Company’s net sales for the three months ended December 31, 2004. No other customer accounted for more than 10% of total net sales during the three months ended December 31, 2003 or 2004. The Company expects that sales of its products to a limited number of customers will continue to account for a high percentage of net sales for the foreseeable future. At September 30, 2004 and December 31, 2004, Advanced Semiconductor Engineering accounted for 16% and 14%, respectively, of total accounts receivable. No other customer accounted for more than 10% of total accounts receivable at September 30, 2004 or December 31, 2004. The reduction or loss of orders from a significant customer could adversely affect the Company’s business, financial condition, operating results and cash flows.

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

NOTE 12 – EMPLOYEE BENEFIT PLANS

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

Net period pension costs for the three months ended December 31, 2004 for this plan were approximately $169 thousand and included interest costs of $289 thousand and amortization of net loss of $178 thousand, offset by expected return on plan assets of $298 thousand. The Company did not make any contribution to the Plan for the three months ended December 31, 2004. Net period pension cost for the three months ended December 31, 2003 for this plan was approximately $205 thousand and included interest costs of $285 thousand and amortization of net loss of $188 thousand, offset by expected return on plan assets of $268 thousand.

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The Company has a 401(k) Employee Incentive Savings Plan. This plan allows for employee contributions and matching Company contributions in varying percentages, depending on employee age and years of service, ranging from 50% to 175% of the employees’ contributions. The Company’s contributions under this plan totaled $0.5 million for each of the three month periods ended December 31, 2003 and 2004, and were satisfied by contributions of shares of Company common stock, valued at the market price on the date of the matching contribution.

NOTE 13 – SUBSEQUENT EVENTS

On January 12, 2005, the Company announced to the employees of its East Kilbride, Scotland test facility (“Facility”) that the Company is closing the Facility. For competitive reasons, the Company has been reducing its manufacturing capacity in the U.S. and Europe for several years, while expanding its manufacturing in Asia. All manufacturing and other activities at the Facility ceased on January 12, 2005. Production from the Facility is being transferred to other Company facilities. The Company expects to record a charge of approximately $1.2 million during its second fiscal quarter ended March 31, 2005 for this facility closure.

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

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

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

Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements. These risks and uncertainties include, without limitation, those described below under the heading “Risk Factors” within this section and in our reports and registration statements filed from time to time with the Securities and Exchange Commission. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes of this Form 10-Q and the Audited Financial Statements and Notes and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K for the fiscal year ended September 30, 2004 for a full understanding of our financial position and results of operations.

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INTRODUCTION

We design, manufacture and market capital equipment, packaging materials and test products as well as service, maintain, repair and upgrade equipment, all used to assemble or test semiconductor devices. We are currently the world’s leading supplier of semiconductor wire bonding assembly equipment, according to VLSI Research, Inc. Our business is currently divided into three product segments:

In the March 2004 quarter, we sold the remaining assets of our advanced packaging technologies segment, which consisted solely of our flip chip business unit which licensed flip chip technology and provided flip chip bumping and wafer level packaging services. As a result, we have reflected the flip chip business unit as a discontinued operation and have not included the results of its operations in our revenues and expenses from continuing operations as reported in our financial statements or in this discussion of our results of operations. We have reclassified our prior period financial statements to coincide with the current year presentation.

We believe we are the only major supplier to the semiconductor assembly industry that can provide customers with semiconductor wire bonding equipment along with the complementary packaging materials and test products that actually contact the surface of the customer’s semiconductor devices. We believe that the ability to control all of these assembly related products provides us with a significant competitive advantage and should allow us to develop system solutions to the new technology challenges inherent in assembling and packaging next-generation semiconductor devices.

The semiconductor industry historically has been volatile, with periods of rapid growth followed by downturns. One such downturn started in fiscal 2001 and persisted throughout most of fiscal 2003. The industry recovered from this downturn in late fiscal 2003 through the first three quarters of fiscal 2004, with revenues for the Company peaking in the March 2004 quarter. However, during the fourth quarter of fiscal 2004, we experienced a 24.2% fall-off in sales compared to our third quarter. The sales fall-off continued into the first quarter of fiscal 2005 as sales were down 21.2% compared to the fourth quarter of the previous year. Based on the sharp decline in sales in the fourth quarter of fiscal 2004 and first quarter of fiscal 2005, we believe the semiconductor industry has entered another downturn. There can be no assurances regarding the length or severity of the current downturn. Based on customer indications and other factors, we currently expect net sales during the quarter ending March 31, 2005 quarter to be in the $105 million to $125 million range. There can be no assurances regarding levels of demand for our products, and in any case, we believe the historical volatility – both upward and downward – will persist.

We have continued to lower our cost structure by consolidating operations, moving certain of our manufacturing capacity to China, moving a portion of our supply chain to lower cost suppliers and designing better but lower cost equipment. Cost reduction efforts have become an important part of our normal ongoing operations and we believe this will drive down our cost structure below current levels, while not diminishing our product quality. In doing so, we expect to incur additional quarterly charges such as severance and facility closing costs as a result of these cost reduction programs. Our goal is to be both the technology leader and the lowest cost supplier in each of our major lines of business.

We reported a loss from operations of our test business segment of $7.9 million during the first quarter of fiscal 2005. We are continuing with our plan to improve the performance of this segment through new product introductions, consolidation of test facilities, the transfer of a greater portion of test production to our Asia facilities, and outsourcing a greater portion of the test production. We expect this plan will continue through 2005 and will result in future period charges and/or restructuring charges.

Products and Services

We offer a range of wire bonding equipment and spare parts, packaging materials and test products. Set forth below is a table listing the percentage of our total net revenues for each business segment for the three months ended December 31, 2003 and 2004:

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Our equipment sales are highly volatile, based on the semiconductor industry’s need for new capability and capacity, whereas sales at our other business segments tend to follow the trend of total semiconductor unit production.

Equipment

We manufacture and market a line of wire bonders, which are used to connect very fine wires, typically made of gold, aluminum or copper, between the bond pads of a semiconductor die and the leads on the integrated circuit (IC) package to which the die has been attached. We believe that our wire bonders offer competitive advantages by providing customers with high productivity/throughput and superior package quality/process control. In particular, our machines are capable of performing very fine pitch bonding as well as creating the sophisticated wire loop shapes that are needed in the assembly of advanced semiconductor packages.

Packaging Materials

We manufacture and market a range of semiconductor packaging materials and expendable tools for the semiconductor assembly market, including very fine gold, aluminum and copper wire, capillaries, wedges, die collets and saw blades, all of which are used in packaging and assembly processes. Our packaging materials are designed for use on both our own and our competitors’ assembly equipment. A wire bonder uses a capillary or wedge tool and bonding wire much like a sewing machine uses a needle and thread.

Test

We offer a broad range of fixtures used to temporarily contact a semiconductor device while it is still in the wafer format (wafer probing), thereby providing electrical connections to automatic test equipment. We also offer test sockets used to test the final semiconductor package (package or final testing). Our principal test products include probe cards, automatic test equipment (ATE) interface assemblies, ATE test boards, and test socket/contactors. Most of the test products we offer are custom designed or customized for a specific semiconductor or application.

RESULTS OF OPERATIONS

Bookings and Backlog

During the three months ended December 31, 2004, we recorded bookings of $114.0 million compared to $206.0 million in the quarter ended December 31, 2003 and $103.0 million in the quarter ended September 30, 2004. The reduction in bookings during the three months ended December 31, 2004 compared to the same period a year ago was caused by a reduction in bookings within our Equipment segment brought on by the downturn in the semiconductor industry. A booking is recorded when a customer order is reviewed and determination is made that all specifications can be met, production (or service) can be scheduled, a delivery date can be set, and the customer meets the Company’s credit requirements. At December 31, 2004, we had a backlog of customer orders totaling $58.0 million, compared to $114.0 million at December 31, 2003 and $59.7 million at September 30, 2004. Our bookings and backlog as of any date may not be indicative of net revenues for any succeeding period, since the timing of deliveries may vary and orders generally are subject to delay or cancellation.

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Net Revenue

Business segment net revenues during the quarters ended December 31, 2004 and 2003 were as follows:

Overall, net revenue from continuing operations for the December 2004 quarter decreased $37.6 million or 24.4% from the same period in the prior year and $31.2 million, or 21.2% from the quarter ended September 2004. Following is a review of net sales for each of our three business segments.

Our equipment segment was impacted the most by the recent downturn in the semiconductor industry as net revenue during the quarter ended December 31, 2004 declined 63.8% to $29.3 million from $81.1 million in the same period a year ago. The lower net revenues resulted primarily from a 74.1% decrease in unit sales of our automatic ball bonders compared to the same period a year ago. The blended average selling price for our ball bonders increased 4.2%, due primarily to product mix as sales of products with higher average selling prices increased and sales of products with lower average selling prices declined during the quarter ended December 31, 2004, compared to sales levels of these same products during the year ago quarter. The blended average selling price for our ball bonders during the quarter ended December 31, 2004 was unchanged compared to blended average selling prices during the quarter ended September 30, 2004. Average selling prices generally go down over time for any particular model. To mitigate this we introduce new models with additional features that enable us to demand a higher selling price. The blended average selling price varies with the proportion of newer models sold and with customer mix.

Our packaging materials segment net revenue increased 29.3% to $64.0 million during the quarter ended December 31, 2004 from $49.5 million during the same period a year ago. The $14.5 million increase in packaging materials revenues resulted from a $15.2 million increase in wire revenues that were partially offset by a $0.7 million reduction in capillary revenues. The increase in wire revenue was due to a 44.1% increase in gold wire unit volumes (measured in Kft) due to increased orders from existing customers and two new customers in Taiwan. Wire average selling prices are not meaningful because they are heavily dependent upon the price of gold and can significantly fluctuate from period to period. Our capillary unit sales were lower in the current period due to a decrease in demand brought on by the downturn in the semiconductor industry. Blended average selling prices for our capillary products were down 1.1% during the quarter ended December 31, 2004, compared to the year ago quarter.

Our test segment net revenue decreased 1.4% to $23.0 million during the quarter ended December 31, 2004 from $23.3 million during the same period a year ago. The net reduction of $0.3 million primarily consisted of a $1.4 million reduction in sales of cantilever probe cards caused by lower demand from nearly all customers, mostly offset by a $1.1 million increase in our other test segment product lines, particularly our vertical pin probe card product line where net revenues increased $0.8 million due to increased demand from two existing customers. Blended average selling prices are not meaningful in the test business due to lack of a standard unit of measure and the large difference in part types sold. As such, blended average selling prices are not a metric used by management.

The majority of our revenue are to customers that are located outside of the United States or that have manufacturing facilities outside of the United States. Shipments of our products with ultimate foreign destinations comprised 83.3% of our total sales in the first three months of fiscal 2005 compared to 84.2% in the first three months of the prior fiscal year. The majority of these foreign sales were destined for customer locations in the Asia/Pacific region,

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including Taiwan, Malaysia, Singapore, Korea and Japan. Taiwan accounted for the largest single destination for our product shipments with 23.9% of our shipments in the first three months of fiscal 2004 compared to 35.2% of our shipments in the first three months of the prior fiscal year.

Gross Profit

Business segment gross profit and gross margin during the quarters ended December 31, 2004 and 2003 were as follows:

Overall, gross profit decreased $21.0 million during the quarter ended December 31, 2004, compared to the same period in the prior year. The lower gross profit is primarily due to reduced demand in the semiconductor industry, particularly for our automatic ball bonders within our equipment segment, and to a lesser extent higher unit costs within our test business segment as we increased production capacity at our China operations during the December 2004 quarter to provide for the planned transfer and shutdown of test segment production operations in Europe and the United States. Gross margin decreased to 22.7% during the December 2004 quarter, from 30.8% in the year-ago quarter due to product mix shift from higher margin equipment sales to lower margin package materials segment and the duplicate test segment production costs noted above.

Our equipment segment gross profit decreased $19.9 million, or 62.4% during the quarter ended December 31, 2004 compared to same period a year ago, as demand for our automatic ball bonders declined sharply. Gross margin increased to 41.0% from 39.4% from the year ago quarter. The increase in gross margin was primarily due to product mix, as sales of products with higher gross margins increased and sales of products with lower gross margins declined during the quarter ended December 31, 2004, compared to sales levels of these same products during the corresponding year ago quarter. Average unit costs of our equipment segment sales were generally the same during the quarters ended December 31, 2004 and 2003.

Our packaging materials segment gross profit increased $1.3 million, or 11.8% during the quarter ended December 31, 2004 compared to same period a year ago, as demand for our gold wire increased sharply. Gross margin decreased to 19.9% from 23.1% from the year ago quarter. The decline in gross margin was due to a higher percentage of lower margin wire sales compared to other packaging materials sold during the quarter, as wire sales increased 43.9% during the quarter ended December 31, 2004 from the year-ago quarter, and the increase in the price of gold, which makes up a significant portion of our wire cost of sales.

Our test segment gross profit decreased $2.4 million, or 60.2% during the quarter ended December 31, 2004 compared to same period a year ago. Our test segment gross margin also declined to 6.9% during the December 2004 quarter from 17.1% during the year ago quarter. The decline in gross profit and gross margin was due to higher unit costs during the period as we absorbed the increased costs associated with production capacity added to our China operations during the December 2004 quarter to provide for the planned transfer and shutdown of test operations in Europe and the U.S.

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Operating Expense

Operating expenses during the quarters ended December 31, 2004 and 2003 were as follows: