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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

Commission File Number 0-27712

OSE USA, Inc.

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number including area code: (408) 321-3600

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $.001 par value

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  ¨    NO  x

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

The aggregate market value of the voting stock held by persons other than those who may be deemed affiliates of the Company as of June 28, 2002, was approximately $494,000. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the Registrant’s Common Stock outstanding as of February 12, 2003 was 56,725,808. The Registrant also had 3,000,000 shares and 3,023,225 shares of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock, respectively, outstanding on such date which is convertible at any time by the holder into 41,246,312 shares and 41,565,626 shares, respectively, of Common Stock.

DOCUMENT INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant’s 2003 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

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PART I

This Annual Report of OSE USA, Inc. on Form 10-K contains forward-looking statements, particularly those identified with the words, “anticipates,” “believes,” “expects,” “plans,” and similar expressions. These statements reflect management’s best judgment based on factors known to them at the time of such statements. The reader may find discussions containing such forward-looking statements in the material set forth under “Risk Factors Affecting Operating Results” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as elsewhere in this Annual Report on Form 10-K. Actual events or results may differ materially from those discussed herein. The reader should carefully consider the risk factors discussed under “Risk Factors Affecting Operating Results” among others, in evaluating the Company’s prospects and future financial performance.

Item 1.    Business

Reporting Segments

OSE USA, Inc. (the “Company”) formerly Integrated Packaging Assembly Corporation, was incorporated in California on April 28, 1992 and reincorporated in Delaware on June 19, 1997. The Company has two operating segments: (1) manufacturing and (2) distribution.

The manufacturing segment assembles and packages integrated circuits from wafers consigned by its customers. The Company’s focus is on quad flat packages (“QFPs”), ball grid array packages (“BGAs”), mini ball grid array packages (LF-TFBGA) using wire bonded, flip chip interconnect and system in a package technology, which are used in complex integrated circuits with high pin-counts in the personal computer and telecommunications industries.

The distribution segment is the exclusive North American sales and marketing organization for Orient Semiconductor Electronics, Ltd. (“OSE”) of Taiwan, a public Taiwanese company and the Company’s principal stockholder. The Company is also the exclusive North American sales and marketing organization for affiliated company Orient Semiconductor Electronics Philippines, Inc. (“OSEP”). Revenues are derived from fees received on the sales of OSE and OSEP semiconductor assemblies and test services to customers headquartered in North America. The Company’s distribution operations are conducted through its wholly owned subsidiary OSE Inc. (“OSEI”), which contracts directly with OSE.

Strategy

The OSE Group consists of OSE, OSEP, OSEI, the Company, and other related entities. The role of OSEI in this Group is to serve as the North American sales agent for the Group’s factories in Taiwan (OSE) and the Philippines (OSEP). The role of the Company and OSEP in this Group is to perform low-volume, fast turnaround assembly and packaging for the wafers consigned by their customers.

The strategy of the OSE Group is to first capture North American customers during their development process by providing fast turnaround services from the Company in California for the customer’s R&D staff, and then, when the customer is ready for volume production, our goal is to facilitate the transition of the customer’s assembly and packaging requirements to the Taiwan (OSE) and Philippine (OSEP) factories.

Manufacturing

Semiconductor Packaging Services

The Company has focused on packages designed for assembly using Surface Mount Technology (“SMT”) in which leads on integrated circuits are soldered to the surface of the printed circuit board. Within the SMT market, the Company focuses on high pin-count packages, such as Quad Flat Packages (MQFP, LQFP and TQFP). The

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Company offers a variety of QFP packages with body sizes ranging from 7x7 mm to 32x32 mm and lead counts from 32 to 256 leads, Plastic Ball Grid Array (“PBGA”)/ Cavity Down Ball Grid Array (“CDBGA”) families with body sizes of 23x23 to 40x40 mm with ball counts from 204 to 688 balls, a variety of Low Profile Fine Pitch Ball Grid Array (“LFBGA”)/Thin Profile Fine Pitch Ball Grid Array (“TFBGA”) families with body sizes from 5x5 to 19x19 mm with ball counts from 6 to 280 balls. Integrated circuits packaged by the Company are used in the following applications: personal computers, modems, disk drives, automobiles, cameras and telecommunications, among others. Since the Company’s inception, QFPs and BGAs have accounted for substantially all of the Company’s packaging revenues.

Packaging involves several manufacturing operations, which are highly automated to facilitate high volume production. The typical assembly process begins with the mounting of a finished, tested wafer onto a carrier. After a dicing saw cuts the wafer into individual dies, the cut wafer is moved to a die bonder which picks each good die off the wafer and bonds it to a lead frame (or a substrate) with epoxy resin. A lead frame is a miniature sheet of metal, generally made of copper with selective silver-plating on which the pattern of input/output (I/O) leads has been cut. A substrate is essentially the same except that it is organic material with gold plated bond fingers and ball pads. Next, very fine (typically 0.001 inches in diameter) gold wires are connected to the die and the leads through the use of automated machines known as wire bonders. Flip chip interconnected technology is also use in place of wire bonding where applicable. These wire leads provide the electrical path necessary for the device to function. Each die is then encapsulated in a plastic casing and marked. The leads protruding from the finished casing are then plated with tin and lead composition to permit the leads to be connected to the printed circuit board. For BGA packages, solder balls will be attached to the packages. At the end of the packaging process, the leads are trimmed and formed into Jedec standard outlines. After this packaging process is complete, the devices undergo final inspection and are prepared for shipment.

The Company shipped approximately 15.8 million devices in 1999, approximately 19.5 million devices in 2000, approximately 5.3 million devices in 2001 and 4.3 million devices in 2002. The Company’s manufacturing capacity utilization is a function of the mix of different package types produced by the Company at any one time and the proportion of standard production runs compared to expedited production runs. Thus, as the Company shifts its production among different package types or allocates a different amount of available capacity to standard production runs, the rate of the Company’s capacity utilization changes, at times significantly.

The Company has made substantial investments in its manufacturing capacity during its operating history, in anticipation of increased future business. Since the fourth quarter of 1996, the Company has had excess manufacturing capacity. Since early 1997, the Company has incurred net losses as revenues dropped substantially, with the result that there was substantial underutilized manufacturing capacity. The Company continues to operate with significant underutilized capacity. There can be no assurance that the Company will receive orders from new or existing customers that will enable it to utilize such manufacturing capacity in a timely manner. The Company is developing a plan to reduce its excess production capacity by either transferring excess equipment to OSE and/or looking for buyers for certain older equipment.

The Company’s inability to generate the additional revenues necessary to more fully utilize its capacity has had and will continue to have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company intends to focus more of its operations on quick-turn and engineering lot assemblies to improve its profitability, due to the fact that quick-turn and engineering lot assemblies provide higher profit margins. To achieve this objective, the Company restructured its internal sales force in December 2001 and increased the frequency of customer contacts. The Company is also working on using outside sales representatives in promoting the Company to new customers throughout the United States.

The semiconductor packaging business is capital intensive and requires a substantial amount of highly automated, expensive capital equipment, which is manufactured by a limited number of suppliers, many of which

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are located in Asia or Europe. The Company’s operations are significantly dependent upon the Company’s ability to obtain capital equipment for its manufacturing operations in a timely manner. In this regard, the Company expects to continue spending to purchase capital equipment as required in the future in order to continue to meet new customer requirements. The Company has no long-term agreement with any such supplier and acquires such equipment on a purchase order basis.

Quality Control

The Company believes that total quality management is a vital component of customer satisfaction and internal productivity. The Company has established quality control systems, which are designed to maintain acceptable manufacturing yields at quick turn engineering lots and small scale production. The Company has also developed a sophisticated proprietary software program for material resource planning, shop floor control; work in process tracking, statistical process control and product costing. The Company obtained certification for its packaging operations pursuant to ISO 9002 in December 1996 and recertification in March 2002.

As of December 31, 2002, the Company’s quality control staff consisted of engineers, technicians and other employees who monitor the Company’s design and production processes in order to ensure high quality. These employees include line inspectors who work with members of the production staff to conduct examination, testing and fine-tuning of products during the production process. Quality control personnel are involved from initial design to production. The quality control staff also collects and analyzes data from various stages of the production process, which is used by the Company for statistical process control.

The semiconductor packaging process is complex and product quality and reliability is subject to a wide variety of factors. Defective packaging can result from a number of factors, including the level of contaminants in the manufacturing environment, human error, equipment malfunction, use of defective raw materials, defective plating services and inadequate sample testing. From time to time, the Company has experienced lower than anticipated production yields as a result of such factors. The Company’s failure to maintain high quality production standards or acceptable production yields would likely result in loss of customers, delays in shipments, increased costs, cancellation of orders and product returns for rework, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations.

Marketing and Sales

The Company’s business is substantially affected by market conditions in the semiconductor industry, which is highly cyclical and, at various times, has been subject to significant economic downturns and characterized by reduced product demand, rapid erosion of average selling prices and production over capacity. In addition, rapid technological change, evolving industry standards, intense competition and fluctuations in end user demand characterize the markets for integrated circuits. Because the Company’s business is entirely dependent on the requirements of semiconductor companies for independent packaging foundries, any downturn in the semiconductor industry is expected to have an adverse effect on the Company’s business, financial condition and results of operations. For example, delays or rescheduling of orders due to a downturn or anticipated downturn in the semiconductor industry have in the past and could in the future have a material adverse effect on the Company’s business, operating results and financial condition. The trend in the industry is that most high volume production will continue moving to the low manufacturing cost areas and the local manufacturers will serve the market where manufacturing offshore is restricted or not cost effective or where fast turn-around is required. The Company believes that it can serve both of these markets by transferring the high volume production to its parent OSE in Taiwan while maintaining appropriate manufacturing capacity in the U.S. for the quick turn and small volume production market.

In addition, the Company has been substantially dependent on US based customers within the semiconductor industry. The high concentration of business with a limited number of customers has adversely affected the Company’s operating results, when business volume dropped substantially for several customers.

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There can be no assurance that such customers or any other customers will continue to place orders with the Company in the future at the same levels as in prior periods. In recent years, the Company’s need for additional financing, and the uncertainty as to whether such financing could be obtained, adversely affected the Company’s ability to obtain new customers. The loss of one or more of the Company’s customers, or reduced orders by any of its key customers, would adversely affect the Company’s business, financial condition and results of operations. In order to deal with this, the Company intends to diversify its customer base by adding more new customers into its portfolio. By restructuring its sales force and using outside sales representatives, the Company believes it will mitigate the impact of customer concentration. The Company ships its products in accordance with customer purchase orders and upon receipt of semiconductor wafers from its customers. The Company generally ships products within one to five days after receiving the customer’s wafers, and accordingly, the Company has not, to date, had a material backlog of orders. The Company expects that revenues in any quarter will be substantially dependent upon orders received in that quarter. The Company’s expense levels are based in part on its expectations of future revenues and the Company may be unable to adjust costs in a timely manner to compensate for any revenue shortfall.

The Company’s marketing and sales efforts are focused on North American semiconductor companies that design or manufacture IC devices which are used in applications such as personal computers, modems, disk drives and telecommunication products. Within such markets, the Company emphasizes packaging complex, high pin-count products. The Company sells its services directly through its sales and customer support organization. The Company assists its customers in evaluating designs with respect to manufacturability and when appropriate recommends design changes to reduce manufacturing costs and lead times. The Company also offers design services for a fee.

Materials and Suppliers

The Company purchases all of its materials on a purchase order basis and has no long-term contracts with any of its suppliers. To maintain competitive manufacturing operations, the Company must obtain from its suppliers, in a timely manner, sufficient quantities of acceptable materials at expected prices. The Company obtains most of its raw materials, including critical materials such as lead frames and die attach compound, from a limited group of suppliers. Substantially all molding compound, a critical raw material, is obtained from a single supplier. From time to time, suppliers have extended lead times or limited the supply of required materials to the Company because of supplier capacity constraints and, consequently, the Company has experienced difficulty in obtaining acceptable raw materials on a timely basis. In addition, from time to time, the Company has rejected materials from those suppliers that do not meet its specifications, resulting in declines in output or yield.

Customers and Target Market

The Company provides services to a wide variety of customers, ranging from large multinational companies to smaller emerging technology companies, including start-ups. Because of the variety of services, it offers its flexibility in design and manufacturing and ability to respond to customer needs in a timely fashion, the Company believes that it is well positioned to offer services to customers in most market segments. For some customers, the Company serves both a design and production function, thereby permitting customers to concentrate on concept development, distribution and marketing, while accelerating their time to market, reducing their investment in engineering and manufacturing capacity and optimizing total product cost.

In 2000 and 2001, the Company had one major customer account for 32% and 14% of its revenue, respectively. In 2002, the Company had no concentration of customers.

Many of the Company’s large customers contract independently through multiple divisions, subsidiaries, production facilities or locations. The Company believes that in most cases its sales to one such subsidiary, division, facility or location are not dependent on sales to others.

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Competition

The semiconductor packaging industry is highly competitive. The Company currently faces substantial competition from established packaging foundries located in Asia, such as Advanced Semiconductor Assembly Technology in Hong Kong, Advanced Semiconductor Engineering, Inc. and Siliconware in Taiwan, Amkor Technology and ChipPAC in Korea, and other subcontractors in Singapore, Taiwan, Malaysia and Indonesia. Each of these companies has significantly greater manufacturing capacity, financial resources, research and development operations, marketing and other capabilities than the Company and has been operating for a significantly longer period of time than the Company. Such companies have also established relationships with many large semiconductor companies, which are current or potential customers of the Company. The Company could face substantial competition from Asian packaging foundries should one or more of such companies decide to establish foundry operations in North America. The Company also faces competition from other independent, North American packaging foundries. The Company also competes with companies with in-house packaging capabilities as current and prospective customers constantly evaluate the Company’s capabilities against the merits of in-house packaging. Many of the Company’s customers are also customers of one or more of the Company’s principal competitors. The principal elements of competition in the semiconductor packaging market include delivery cycle times, price, product performance, quality, production yield, responsiveness and flexibility, reliability and the ability to design and incorporate product improvements. The Company believes it principally competes on the basis of shorter delivery cycle times it can offer customers due to the close proximity of its manufacturing facility to its customers’ operations and the end users of its customers’ products.

For the past several years, the Company has experienced a decline in the average selling prices for a number of its products. During 2001 the manufacturing segment of the Company shifted its focus to lower volume, faster turnaround production, which generates higher average selling prices. The Company expects that average selling prices for its products will increase in the future due to this change in business strategy. The distribution segment of the Company will continue to follow the pricing guidelines set by OSE in order to compete in the global market.

Technology Development

The Company’s technology development efforts are focused on improving the capabilities of its production processes, and on developing new packages by making improvements upon commercially available materials and technology. Particular emphasis is on developing new packages and processes that will offer a wider range of services to its customers. BGA (ball grid array), LFBGA (low profile fine pitch ball grid array), and Flip Chip processes were placed into service in 2001. Developments for 2002 include enhancements to the Flip Chip process along with development of stacked die processes, flip chip/wire bond hybrid package and Systems in a Package (SIP) capability. These developments will enable the Company to provide new packaging services to its customers. The Company also works closely with the manufacturers of its packaging equipment in designing and modifying the equipment used in the Company’s production process.

As of December 31, 2002, the Company employed 6 persons in technology development activities. In addition, other management and operational personnel are involved in development activities. The Company supplements its technology development efforts with business and technological alliances. In 2000, 2001, and 2002 the Company’s technology development expenses were approximately $1,308,000, $1,285,000 and $1,227,000, respectively. The Company expects to continue to invest resources in technology development.

The Company has focused its manufacturing resources on plastic QFPs, LFBGAs, and BGA packages for use with SMT, and the Company has neither the capability nor the intent to provide services to other substantial segments of the semiconductor packaging market. Technological change in the semiconductor packaging industry is continuous and in the future semiconductor manufacturers are expected to require increased technological and manufacturing expertise. OSE provides the Company manufacturing and technology development support through providing engineering staff and engineering advice.

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Backlog

Sales are either made with purchase orders for current delivery—or agreements covering purchases over a period of time, which orders or agreements may be revised or canceled without penalty. The manufacturing segment of the Company receives little or no advance notice prior to a work order being received from our customers and the majority of our assembly and packaging services are completed in one to five business days. The distribution segment of the Company receives forecast information from customers in longer terms. However, due to the uncertainty of the economy, these forecast are subject to significant change.

Generally, we do not believe that such agreements and this environment provides meaningful backlog figures or are necessarily indicative of actual sales for any succeeding period.

Intellectual Property

The Company’s success depends in part on its ability to obtain patents and licenses and to preserve other intellectual property rights relating to its manufacturing processes. As of December 31, 2002, the Company held fourteen U.S. patents, which expire between 2012 and 2017. The Company expects to continue to file patent applications when appropriate to protect its proprietary technologies; however, the Company believes that its continued success depends primarily on factors such as the technological skills and innovation of its personnel rather than on its patents. The process of seeking patent protection can be expensive and time consuming. There can be no assurance that patents will be issued from pending or future applications or that, if patents are issued, they will not be challenged, invalidated or circumvented, or that rights granted thereunder will provide meaningful protection or other commercial advantage to the Company. Moreover, there can be no assurance that any patent rights will be upheld in the future or that the Company will be able to preserve any of its other intellectual property rights.

Environmental Matters

The semiconductor packaging process involves a small amount of chemicals and gases that are subject to governmental regulations. For example, excess materials on leads and moldings are removed from packaged semiconductors in the trim and form process. The Company has installed equipment to collect certain solvents used in connection with its manufacturing process and has contracted with independent waste disposal companies to remove such hazardous material.

The Company installed an advanced electroplating system at a leased facility in Milpitas, California and substantially all of the Company’s plating is performed at such facility. This plating operation involves the use of significant quantities of certain hazardous substances. Although the Company has designed procedures to ensure such materials are handled in compliance with applicable regulations, there can be no assurance that the operation of such facility will not expose the Company to additional costs in complying with environmental regulations or result in future liability to the Company.

Federal, state and local regulations impose various controls on the storage, handling, discharge and disposal of chemicals used in the Company’s manufacturing process and on the facility occupied by the Company. The Company believes that its activities conform to present environmental and land use regulations applicable to its operations and its current facility. Increasing public attention, however, has been focused on the environmental impact of semiconductor manufacturing operations and the risk to neighbors of chemical releases from such operations. There can be no assurance that applicable land use and environmental regulations will not in the future impose the need for additional capital equipment or other process requirements upon the Company or restrict the Company’s ability to expand its operations. The adoption of new ordinances or similar measures or any failure by the Company to comply with applicable environment and land use regulations or to restrict the discharge of hazardous substances could subject the Company to future liability or cause its manufacturing operations to be curtailed or suspended.

The Company’s OSEI subsidiary is not involved in manufacturing.

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Employees

As of December 31, 2002, the Company had 127 full time employees, 89 of whom were engaged in manufacturing, 6 in development, 18 in sales and customer service, and 14 in finance and administration. Among the 127 employees, 108 were working for the manufacturing segment and 19 were working for the distribution segment. The Company’s employees are not represented by any collective bargaining agreement, and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. The success of the Company’s future operations depends in large part on the Company’s ability to attract and retain highly skilled technical, manufacturing and management personnel. There can be no assurance that the Company will be successful in attracting and retaining key personnel.

Executive Officers

The executive officers of the Company are as follows:

Edmond Tseng has been President and Chief Executive Officer of the Company since November 2000 and President and Chief Executive Officer of OSEI since 1990. Mr. Tseng has been a Director and Chairman of the Board of Directors since April 1999. From June 1985 to December 1989, Mr. Tseng served as Director of Packaging Technology at Condata, Incorporated.

Elton Li joined the Company in December 2001 as Corporate Controller, and Chief Accounting Officer. From April 1995 to November 2001, Mr. Li served as Controller of A-Plus Manufacturing Corporation, an electronic manufacturing service (EMS) company. Prior to that, Mr. Li held various accounting positions in leading firms in the public accounting and hospitality industries.

Dave Tovar is a veteran of the semiconductor industry. He has held management level positions in domestic and foreign subcontractor organizations and has extensive skills in establishing strategic, developmental, operational, and logistic plans. Prior to joining the Company in 2000, Mr. Tovar was President of the Sales, Marketing, and Manufacturing organizations for PacTech USA’s Under Bump Metallization and Solder Ball attach operations. His earlier experience includes positions as Director of Laminate Products for ChipPAC, an international subcontract manufacturer and Director of Engineering and Operations at GateField, a manufacturer of Field Programmable Gate Arrays. Mr. Tovar was a Sr. Manager of Tape Automated Bonding, Packaging, Assembly, Electrical Test, Simulation/Modeling Departments for VLSI Technology.

Ho-Sheng Chien has seven years with OSE, Inc., six years at LSI Logic, seven years at Philips, two years at United Pacific Semiconductor (Taipei, Taiwan) and three years at OSE. Major experience includes IC package assembly, IC manufacturing process and material development, new package development, failure analysis, quality & reliability and customer service. Ho-Sheng received an M.S. degree in Electrical Engineering from Arizona State University in Tempe, Arizona and a B.S. degree in Electronic Engineering from Tamkang University in Taiwan.

Chris B.K. Ooi joined the Company in February 1996 as Director of Engineering and was appointed the Company’s Vice President of Operations in June 1999. In 2002, Mr. Ooi was appointed to lead the Sales and Marketing group. From 1994 to 1996, Mr. Ooi was Co-Founder and Executive Vice President of Ampac Enterprises, a semiconductor sales and marketing company. Prior to 1994, Mr. Ooi held various positions with National Semiconductor Corporation.

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The Company’s success depends to a significant extent upon the continued service of its key management and technical personnel, each of whom would be difficult to replace. The competition for qualified employees is intense, and the loss of the services of key personnel or the inability to attract, retain and motivate qualified new personnel could have a material adverse effect on the Company’s business, financial condition and results of operations.

Officers serve at the discretion of the Board and are appointed annually. There are no family relationships among the directors or officers of the Company.

Investor Information

The Company’s common stock is registered under the Securities Exchange Act of 1934 (the “Exchange Act”). Therefore, the Company files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

You can access financial and other information in the “Financials” section of our website. The address is www.ose-usa.com/company/financials/.

Item 2.    Properties

The Company’s principal operations are located in an approximately 82,000 square foot building, which it occupies under a ten-year lease, which expires in January 2008. The Company leases a separate 2,500 square foot building approximately 2 miles from the Company’s principal facility, for its advanced electroplating system. The Company also leases space for the sales offices of OSEI located in Boston, Massachusetts and Phoenix, Arizona. The Company believes its existing facilities are adequate to meet its needs for the foreseeable future. Since the Company does not currently operate multiple facilities in different geographic areas, a disruption of the Company’s manufacturing operations resulting from various factors, including sustained process abnormalities, human error, government intervention or a natural disaster such as fire, earthquake or flood, could cause the Company to cease or limit its manufacturing operations and consequently would have a material adverse effect on the Company’s business, financial condition and results of operations.

Item 3.    Legal Proceedings

None

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

No matters were submitted during the fourth quarter to a vote of security holders.

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Part II

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters

As of March 19, 2003, there were approximately 312 beneficial owners of the Company’s Common Stock. The Company’s Common Stock is listed for quotation on the OTC Bulletin Board under the Symbol “OSEE”. The following table sets forth for the periods indicated, the high and low prices of the Company’s Common Stock.

The trading price of the Company’s Common Stock is expected to continue to be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements of technological innovations or new products by the Company or its competitors, general conditions in the semiconductor industry, changes in earnings estimates or recommendations by analysts, the failure of the Company to meet or exceed published earnings estimates or other events or factors. In addition, the public stock markets have experienced extreme price and trading volume volatility in recent months. This volatility has significantly affected the market prices of securities of many high technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Company’s Common Stock.

The Company has not paid any cash dividends on its Common Stock and currently intends to retain any future earnings for use in its business. Accordingly, the Company does not anticipate that any cash dividends will be paid on the Common Stock in the foreseeable future. In addition, the Company’s bank line of credit does not permit the payment of dividends, except for certain dividends on the Company’s Series A and Series B Convertible Preferred shares. On August 9, 2002, the Company executed an agreement pursuant to which it rescinded its previous distribution of common shares from July 1999 through January 2002 paid to its majority shareholder, OSE, in settlement of a preferred dividend obligation of $1.6 million. Dividends on the Series A and B preferred stock are cumulative until paid. Under the terms of the agreement, OSE returned to the Company certificates representing 26,344,391 shares of Company common stock. In accordance with the terms and conditions of the Certificate of Designation for the Company’s Series A and Series B Preferred Stock, the Company agreed to accrue interest on the unpaid preferred dividends. As of December 31, 2002, the Company recorded accrued interest in the amount of $258,000 on unpaid preferred dividends. The decision to rescind the previous payment of dividends was made after the Company was advised by its counsel (and also by special counsel engaged for this purpose) that the Company’s surplus and earnings may have been insufficient to support the payment of the dividends under the law of Delaware, the Company’s state of incorporation.

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Item 6.    Selected Financial Data

Information listed below was derived from the audited financial statements of the respective years.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements contained herein are subject to certain factors that could cause actual results to differ materially from those reflected in the forward looking statements. Such factors include, but are not limited to, those discussed as follows and elsewhere in this Report on Form 10-K.

Overview

As a result of a reduction in orders from the Company’s customers, the Company has had significant excess production capacity since the first quarter of 1997. The reduction in revenues and underutilization of capacity and the resulting under absorption of fixed costs resulted in operating losses that continued in 2002. As a result of these circumstances, the Company’s independent accountants’ opinion on the Company’s December 31, 2002 financial statements includes an explanatory paragraph indicating that these matters raise substantial doubt about the Company’s ability to continue as a going concern.

In April 1999, Orient Semiconductor Electronics, Limited (“OSE”) for $6.8 million purchased 4,000,000 shares of the Company’s Series A Convertible Preferred Stock, convertible into approximately 55,000,000 shares of the Company’s Common Stock. As part of this transaction, the Company’s secured creditors agreed to terminate their legal actions and restructured the Company’s secured debt. On August 4, 1999, OSE converted 1,000,000 preferred shares into 13,748,771 shares of common stock. On December 26, 2000, OSE for $6.0 million purchased 3,023,225 shares of the Company’s Series B Convertible Preferred Stock, convertible into approximately 42,000,000 shares of the Company’s Common Stock.

OSEI was a privately held corporation that served as the exclusive North American distributor of OSE, a public Taiwanese company and the Company’s principal stockholder. OSEI derives its revenues exclusively from fees received on the sales of OSE’s semiconductor assembly and test services to customers headquartered in North America. On October 29, 1999, the Company acquired OSEI in a stock for stock exchange valued at approximately $4.7 million. In connection with the acquisition, the Company issued 25,910,090 shares of Common Stock to the OSEI shareholders. As a result of the transaction, the distributor, OSEI, is being operated as a wholly owned subsidiary of the Company. The Company has reported consolidated results with OSEI since the acquisition date.

Results of Operations For The Years Ended December 31, 2000, 2001, and 2002

The following table sets forth, for the periods indicated, certain items in the Company’s statement of operations as a percentage of revenues:

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Revenues

The Company’s manufacturing operating segment generally recognizes revenue upon shipment of its products. The distribution segment earns revenue through a distributor agreement with OSE where revenues are derived from fees received on the sales of OSE’s and OSEP’s semiconductor assembly and test services to customers headquartered in North America and revenues are recognized on a net commission basis. Total revenues decreased 12.7% to $10.3 million in 2002, from $11.8 million in 2001. Revenue decreased 51.2% to $11.8 million in 2001, from $24.2 million in 2000. The decrease in revenues in 2002 and 2001 was primarily due to the weakness in the overall semiconductor industry. Average selling price for the manufacturing segment of the Company went up from $0.85 to $1.35 in 2001 and from $1.35 to $2.32 in 2002 as the Company shifted its focus to lower volume, faster turnaround production. However, units shipped declined from 16,500,000 to 7,150,000 in 2001 and from 7,150,000 to 5,522,000 in 2002.

Gross Profit (Loss)

Cost of revenues includes materials, labor, depreciation and overhead costs associated with semiconductor packaging. There is no cost of service related to the distribution revenues. Gross loss of $346,000 in 2002 was a $1.84 million improvement from the $2.2 million gross loss in 2001. Gross loss of $2.2 million in 2001 was a $3.3 million decrease over the $1.1 million gross profit in 2000. The distribution segment recorded a gross profit of $4.8 million in 2002, $4.6 million in 2001 and $7.6 million in 2000. Excluding the distribution segment, the gross loss of $5.1 million in 2002 was a $1.7 million improvement from the 2001 gross loss of $6.8 million. The $6.8 million gross loss in 2001 was a $0.2 million increase from the 2000 gross loss of $6.6 million. The improvement in 2002 was due to decreased cost of revenue resulting from decreased assembly activity. The increase in 2001 gross loss, excluding distribution segment, was due to decreased assembly revenue, offset by decreased cost of revenue resulting from a work force reduction in October 2000, in response to continued weak demand.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of costs associated with sales, customer service, finance, administration and management personnel, as well as advertising, public relations, legal and accounting costs. Selling, general and administrative expenses were $4.9 million in 2002, $5.2 million in 2001 and $7.2 million in 2000. Selling, general and administrative expenses in 2002, 2001 and 2000 included $4.4 million, $4.1 million and $4.1 million, respectively, attributable to OSEI. Excluding OSEI, selling, general and administrative expenses decreased by $0.6 million in 2002, and by $2.0 million in 2001 due to reduced spending. The spending reduction was achieved mainly through the work force reduction.

As a percentage of revenues, selling, general and administrative expenses increased to 47.0% in 2002 compared to 44.2% in 2001 and 29.9% in 2000. The fluctuation from 2000 to 2001 in percentages was mainly caused by the 51.2% revenue decrease in 2001. The fluctuation from 2001 to 2002 in percentage was mainly caused by the 12.7% revenue decrease in 2002.

Research and Development

Research and development expenses consist primarily of the costs associated with technology development personnel, the cost of related materials and services, and the depreciation of development equipment. Research and development expenses were $1.2 million in 2002, $1.3 million in 2001 and $1.3 million in 2000.

As a percentage of revenues, research and development expenses were 11.9% in 2002, 10.9% in 2001 and 5.4% in 2000. The increase in research and development expenses as a percentage of revenue from 2000 to 2001 and from 2001 to 2002 resulted from the decrease in revenue in 2001 and 2002.

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Impairment of Assets

In 2000, the Company recorded a charge to operations related to the impairment of its manufacturing equipment of $1.4 million. The impairment was a result of continued adverse economic conditions in the semiconductor industry, and historical as well as forecasted manufacturing equipment underutilization, resulting in the estimation that the carrying value of the manufacturing equipment will not be fully recovered.

In 2002, the Company completed the two-step transitional impairment test for goodwill required by SFAS 142. Results from the test indicated that the book value of the reporting unit to which goodwill was assigned, exceeded its implied fair value. The Company determined the amount of goodwill impairment by allocating the implied fair value of the reporting unit to its assets and liabilities. The results of this allocation indicated that goodwill was fully impaired. The Company recorded the impairment loss of $1,400,000 as a cumulative change in accounting principle.

Interest and Other Income

Interest income in 2002, 2001 and 2000, was $21,000, $86,000 and $147,000, respectively. The decrease in 2002 and 2001 was due to lower interest rates and lower investment balances, which resulted from the loss from operations and capital expenditures. Other income in 2002, 2001 and 2000, was $0, $107,000 and $12,000, respectively. Other income was primarily from gains on disposal of equipment.

Interest Expense

Interest expense consists primarily of interest payable on bank debt. Interest expense for 2002, 2001 and 2000 was $0.7 million, $1.3 million and $1.8 million respectively. The decrease in 2002 and 2001 was due to lower debt balances, lower interest rates, and expiration of all of the Company’s capital leases.

Provision for Income Taxes

In 2002, provision for income tax was recorded even though the Company operated at a loss; a state income tax liability has been accrued based on tax criteria set by the state of Massachusetts. The income tax benefit for the year ended December 31, 2001, represents the reversal of an over accrual of income taxes resulting from a change in accounting estimate. The Company recognizes deferred tax assets if realization of such assets is more likely than not. Based upon available data, which includes the Company’s historical operating performance and the reported cumulative net losses in prior years, the Company has provided a full valuation allowance against the Company’s net deferred tax assets as the future realization of the tax benefit is not sufficiently assured.

Restatement

During 2002, the Company began to investigate data that suggested that the underlying information supporting its fixed assets did not reconcile to amounts recorded on the Company’s financial statements. The Company completed the investigation and determined that depreciation expense for the year ended December 31, 2001 was under-stated by $1,222,000. As a result, the Company restated its fiscal year 2001 financial statements and the related quarterly financial statements. Please see note 13 to the consolidated financial statements for further discussion of restatement and restated quarterly consolidated statement of operations.

Segment Reporting

The Company has two segments: manufacturing and distribution. Manufacturing comprises the semiconductor packaging services of packages designed for assembly using Surface Mount Technology (“SMT”) in which leads on integrated circuits are soldered to the surface of the printed circuit board. Within the SMT market, the Company focuses on high pin-count packages, such as Quad Flat packages (“QFP”) and thin Quad Flat packages (“TQFPs”). Distribution comprises the North American sales, marketing and technical support

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organization for OSE and OSEP. Commissions are earned from the sales for the semiconductor assembly and test services of OSE and OSEP. The customers are mainly US headquartered manufacturers of high-tech products such as video components, chip sets, graphics chips and logic components.

Liquidity and Capital Resources

During 2002, the Company’s net cash provided by operations was $1.2 million. Net cash provided by operations was comprised primarily of a net loss of $8.5 million, offset by $2.4 million of non-cash charges for depreciation and amortization, a $1.4 million cumulative change in accounting principle, and a net increase in working capital of $6.2 million. The net increase in working capital items reflected a $2.2 million increase in accounts payable and a $3.6 million decrease in accounts receivable. As of December 31, 2002, the Company had a cash balance of $1.5 million.

In 2002, $41,000 was used by investing activities for capital expenditures. Most of the Company’s production equipment has historically been funded either through capital leases or term loans. Future expenditures are expected to be funded out of internal cash flow through borrowing from OSE.

In 2002, $1.6 million was used in financing activities. This resulted primarily from $1.6 million pay down on the bank credit lines.

In April 1999, OSE for $6.8 million purchased 4,000,000 shares of the Company’s Series A Redeemable Preferred Stock, convertible into approximately 55,000,000 shares of the Company’s Common Stock. As part of this transaction, the Company’s secured creditors agreed to terminate their legal actions and have restructured the Company’s secured debt, including debt forgiveness. On August 4, 1999, OSE converted 1,000,000 preferred shares into 13,748,771 shares of common stock. On December 26, 2000, OSE for $6.0 million purchased 3,023,225 shares of the Company’s Series B Redeemable Preferred Stock convertible into approximately 42,000,000 shares of the Company’s Common Stock. The proceeds were used to reduce the payable to OSE.

As of December 31, 2002, the Company had a line of credit, as amended, with two banks that provided for advances up to the lesser of $15 million (committed revolving credit line) or the advance rate against qualified accounts receivable. Qualified accounts receivable is defined as eighty percent of eligible accounts receivable less than ninety days, excluding inter-company accounts. Over advances under this agreement are immediately payable to the lender. Borrowings under this line of credit accrue interest at the banks’ prime rate (4.25% at December 31, 2002) plus 0.50%, are collateralized by the assets of the Company and are guaranteed by OSE. Amounts outstanding under this line of credit were $9,978,000 at December 31, 2002. This line of credit expired on February 15, 2003. OSE, the guarantor of the line of credit is seeking to consolidate this line of credit with OSE’s other debt facility in Taiwan. OSE plans to gradually pay off this line of credit and continue using the Company’s qualified accounts receivable in negotiating a new line of credit with banks in Taiwan. The Company and OSE are seeking to confirm an arrangement agreed to informally by the Company’s banks. Pursuant to this

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arrangement, the Company will provide a borrowing base calculation to the banks on a weekly basis. The Company is allowed to use the extra portion of the cash if total cash plus the borrowing base exceeds the outstanding loan amount. Meanwhile, the banks are working on a payment schedule that will allow the Company to pay off the outstanding loan balance from the collection of its accounts receivable. The Company and OSE currently are seeking to confirm an extension of the existing line of credit for the purpose of formalizing this payoff procedure. The Company believes that this transaction should be completed in 2003.

Without the line of credit, the Company will require continued financial support from OSE to fulfill operating cash requirements. If OSE does not provide the Company with required cash, the Company will not be able to continue its operations.

As of December 31, 2002, the Company had the following contractual obligations and commercial commitments:

Critical Accounting Policies and Estimates

Discussion and analysis of the Company’s financial condition and the results of operations are based upon its consolidated financial statements and the data used to prepare them. The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. On an ongoing basis we re-evaluate our judgments and estimates including those related to bad debts, inventories, and long-lived assets. We base our estimates and judgments on our historical experience, knowledge of current conditions and future expectations based upon currently available information. Actual results may differ from these estimates under different assumptions or conditions. Our estimates are guided by observing the following critical accounting policies.

Revenue recognition

The Company’s revenues come from the manufacturing and distribution segments. Revenue from the manufacturing segment is recognized upon shipment of products. Revenue from the distribution segment is recognized, on a net basis, based on OSEI’s distribution agreement with OSE. Distribution revenue is recognized when the Company is informed by OSE that products have been shipped.

Sales returns have been immaterial in the past. As a result, sales returns are recognized as they occur and are recorded as a reduction to revenue.

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The Company maintains an allowance for doubtful accounts for losses that the Company estimates will arise from customers’ inability to make required payments. Based on the distributor agreements between OSEI, OSE, and OSEP, OSEI will be responsible for one third of any un-collectible amount that arises from customer sales. The Company makes its estimates of the uncollectability of its accounts receivable by analyzing the accounts receivable aging.

Valuation of inventory

The Company maintains an allowance for inventory obsolescence for probable losses that arise from estimated obsolescence or unmarketable inventory, equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, selling prices and market conditions. Our inventories include raw material supplies such as gold wire, lead frames and mold compound. Inventory is stated at the lower of cost, determined by the first-in, first-out basis, or market. The allowances for obsolete inventory were $892,000 and $985,000 at December 31, 2002 and 2001, respectively.

Valuation of long-lived assets

The Company’s business requires heavy investment in manufacturing facilities that are technologically advanced but can quickly become significantly underutilized or rendered obsolete by rapid changes in demand for semiconductors produced in those facilities. We estimate the useful life of our manufacturing equipment, which is the largest component of our long-lived assets, to be six years. We base our estimate on our experience with acquiring, using and disposing of equipment over time. Depreciation expense is a major element of our manufacturing cost structure. We begin depreciation on new equipment when it is put into use for production. Whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable, the Company estimates the future cash flows, undiscounted and without interest charges, expected to result from the use of those assets and their eventual dispositions. If the sum of the expected future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. In 2000, the Company recorded an impairment charge of $1.4 million related to its manufacturing equipment. In 2002, the Company completed the two-step transitional impairment test for goodwill required by SFAS 142, Goodwill and Other Intangible Assets. Results from the test indicated that the book value of the reporting unit to which goodwill was assigned, exceeded its implied fair value. The Company determined the amount of goodwill impairment by allocating the implied fair value of the reporting unit to its assets and liabilities. The results of this allocation indicated that goodwill was fully impaired. The Company recorded the impairment loss of $1,400,000 as a cumulative change in accounting principle.

Related Party Transactions

As disclosed in Note 14 in the accompanying financial statements, the Company is a member of a group of affiliated companies owned by Orient Semiconductor Electronics, Ltd. of Taiwan (“OSE”) and is a party to a number of significant related party transactions with OSE and its affiliates. Such transactions include:

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Risk Factors Affecting Operating Results

The Company’s operating results are affected by a wide variety of factors that could materially and adversely affect revenues, gross profit, operating income and liquidity. These factors include the Company’s ability to secure additional financing, the short term nature of its customers’ commitments, the timing and volume of orders relative to the Company’s production capacity, long lead times for the manufacturing equipment required by the Company, evolutions in the life cycles of customers’ products, timing of expenditures in anticipation of future orders, lack of a meaningful backlog, effectiveness in managing production processes, changes in costs and availability of labor, raw materials and components, costs to obtain materials on an expedited basis, mix of orders filled, the impact of price competition on the Company’s average selling prices and changes in economic conditions. The occurrence or continuation of unfavorable changes in any of the preceding factors would adversely affect the Company’s business, financial condition and results of operations.

Risk of lack in funding for operations and capital requirements

To meet the demands of its customers and the semiconductor industry, the Company must make strategic capital expenditures in 2003 and beyond. If the Company cannot generate the capital required for these capital expenditures and other ongoing operating expenses through operating cash flow and external financing activities, it may be materially adversely affected. These capital expenditures, together with ongoing operating expenses, will be a substantial drain on cash flow and will also decrease the Company’s cash balances. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms.

In addition, the Company’s our line of credit agreement expired on February 15, 2003 and the Company’s banks informed the Company that the line of credit would not be renewed. The Company expects that the outstanding balance of $9, 978,000 will be paid off in 2003 through the collection of the Company’s accounts receivable. The lack of local debt facility will make the Company primarily dependent on the funding support from OSE. Inability to generate needed cash from operations or debt financing would have a material adverse effect on meeting the Company’s debt obligation and funding continued operations.

Risk of dependence on raw material suppliers

To maintain competitive manufacturing operations, the Company must obtain from its suppliers, in a timely manner, sufficient quantities of acceptable materials at expected prices. The Company obtains most of its raw materials, including critical materials such as lead frames and die attach compound, from a limited group of suppliers. Substantially all molding compound, a critical raw material, is obtained from a single supplier. From time to time, suppliers have extended lead times or limited the supply of required materials to the Company because of supplier capacity constraints and, consequently, the Company has experienced difficulty in obtaining acceptable raw materials on a timely basis. In addition, from time to time, the Company has rejected materials from those suppliers that do not meet its specifications, resulting in declines in output or yield. Any interruption

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in the availability of or reduction in the quality of materials from these suppliers could materially adversely affect the Company’s business, financial condition and results of operations. The Company’s ability to respond to increased orders could also be adversely affected if the Company is not able to obtain increased supplies of key raw materials.

Risk of no long-term contracts with suppliers

The Company purchases all of its materials on a purchase order basis and has no long-term contracts with any of its suppliers. There can be no assurance that the Company will be able to obtain sufficient quantities of raw materials and other supplies. The Company’s business, financial condition and results of operations could be materially adversely affected if it were unable to obtain sufficient quantities of raw materials and other supplies in a timely manner or if there were significant increases in the costs of raw materials that the Company could not pass on to its customers.

Risk of under-utilization of the Company’s manufacturing capacity

The Company has been in a situation of over-capacity since 1997. This has in the past had, and in the future may have, a material adverse effect on the Company’s earnings and cash flow. There may also be situations in which the Company’s manufacturing facilities are inadequate to meet the demand for certain products. Inability to obtain sufficient manufacturing capacity to meet demand, either in the Company’s own facilities or through foundry or similar arrangements with others, could have a material adverse effect. At this time, the most significant risk is underutilization of manufacturing capacity.

Risk related to high fluctuation in the semiconductor industry

The Company’s business is highly related to the semiconductor industry. The semiconductor industry is comprised of different market segments based on device type and the end use of the device. Accordingly, within the semiconductor industry, demand for production in a particular segment may be subject to more significant fluctuations than demand in other segments. If any of the Company’s significant customers are in a segment, which has experienced adverse market conditions, there could be an adverse effect on the Company’s business, financial condition and operating results. There can be no assurance that reduced demand, or the general economic conditions underlying such demand, will not continue to adversely affect the Company’s results of operations. Furthermore, there can be no assurance that any such continuation or expansion of this reduced demand will not result in an additional and significant decline in the demand for the products produced by the Company’s customers and a corresponding material adverse impact on the Company’s business, operating results and financial condition.

Risk from international economic and political conditions

The economic slowdown in the United States and worldwide, exacerbated by the occurrence and threat of terrorist attacks and consequences of sustained military action, has adversely affected demand for products of our customers. A continued decline of the worldwide semiconductor market or a significant decline in economic conditions in any significant geographic area would likely decrease the overall demand for the Company’s products, which could have a material adverse effect. If the economic slowdown continues or worsens as a result of terrorist activities, military action or otherwise, the slowdown could adversely impact customers’ ability to pay in a timely manner.

Risk of losing technological and manufacturing expertise

The semiconductor packaging industry is continuously going through technological changes, which requires increased technological and manufacturing expertise. If the Company were behind in developing the required expertise or the introduction of new packaging technologies, or if there were a reduction in or shift away from the

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packages under development, such events could result in a material adverse effect on the Company’s business, financial condition and results of operations.

Risk related to patent infringement

As is typical in the semiconductor industry, the Company may receive communications from third parties asserting patents on certain of the Company’s technologies. In the event any third party was to make a valid claim and a license were not available on commercially reasonable terms, the Company’s business, financial condition and results of operations could be materially and adversely affected. Litigation, which could result in substantial cost to and diversion of resources of the Company, could also be necessary to enforce patents or other intellectual property rights of the Company or to defend the Company against claimed infringement of the rights of others. The failure to obtain necessary licenses or the occurrence of litigation relating to patent infringement or other intellectual property matters could have a material adverse effect on the Company’s business, financial condition and results of operations. At December 31, 2002, the Company was not a party to any litigation relating to patent or other intellectual property matters.

Risk from customer relationships with emerging companies

We currently anticipate that a significant percentage of our sales will continue to be to emerging companies, including start-ups. However, as with the Company’s other customer relationships, there are no volume purchase commitments under these new programs, and the revenues actually achieved may not meet expectations. In anticipation of future activities under these programs, the Company incurs substantial expenses to add personnel and manufacturing capacity and procure materials. Because emerging companies do not have a history of operations, it will be harder for the Company to anticipate needs and requirements than with established customers. The Company’s operating results will be harmed if sales do not develop to the extent and within the time frame it anticipates.

Customer relationships with emerging companies also present special risks. For example, because they do not have an extensive product history, there is less demonstration of market acceptance of their products. Also, due to the current economic environment, additional funding for such companies may be more difficult to obtain and these customer relationships may not continue or materialize to the extent planned or previously experienced by the Company. This tightening of financing for start-up customers, together with many start-up customers’ lack of prior earnings and unproven product markets, increase the Company’s credit risk, especially in accounts receivable and inventories. Although the Company adjusts its reserves for accounts receivable and inventories for all customers, including start-up customers, based on the information available, these reserves may not be adequate.

Risk related to political, economic, and military conditions in Taiwan

The Company could be significantly impacted by the political, economic and military conditions in Taiwan due to the Company’s subsidiary, OSEI, being a distributor for OSE whose operations are principally located in Taiwan. Taiwan and the People’s Republic of China are continuously engaged in political disputes. Such disputes may continue and even escalate, resulting in economic embargo, a disruption in shipping or even military hostilities. This could severely harm OSEI’s business by interrupting or delaying production or shipment of products OSEI distributes. Any kind of activity of this nature or even rumors of such activity could severely and negatively impact the Company’s results of operations and financial position.

Risk related to geographical location

The Company’s facilities are located in California near major earthquake faults. In addition, some of the Company’s suppliers are located near earthquake sensitive areas. In the event of a major earthquake or other natural disaster near its facilities, the Company’s operations could be harmed. Similarly, a major earthquake or

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other natural disaster near the Company’s suppliers, like the one that occurred in Taiwan in September 1999, could disrupt the operations of those suppliers, which could limit the availability of products for the Company to distribute and harm the Company’s business.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

With respect to our interest-bearing liabilities, approximately $10 million representing our line of credit outstanding at December 31, 2002 is subject to a variable interest rate (bank’s prime rate plus 0.5%, which was 4.75% as of December 31, 2002). The Company is subject to interest rate risk, and could be subject to increased interest payments if market interest rates fluctuate upward.

The above line of credit agreement expired on February 15, 2003. The bank has informed the Company that the line of credit will not be renewed. The Company expects that the outstanding balance of $9, 978,000 will be paid off in 2003 through the collection of the Company’s accounts receivable.

Without the line of credit with local banks, the Company will primarily depend on the cash generated from its operations and the financial support from OSE. If the Company’s operations do not generate sufficient cash and without the financial support from OSE, the Company will not be able to meet its debt obligation and continue its operations.

Item 8.    Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements:

Financial Statement Schedules:

All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of OSE USA, Inc.

We have audited the accompanying consolidated balance sheets of OSE USA, Inc. (formerly Integrated Packaging Assembly Corporation) (a Delaware corporation and a majority owned subsidiary of Orient Semiconductor Electronics Limited, a Taiwanese public company) and subsidiary as of December 31, 2001 and 2002, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in Note 13 to the financial statements, the Company has reconstructed it’s fixed asset subsidiary ledger and related accumulated depreciation and has restated its 2001 financial statements.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of OSE USA, Inc. (formerly Integrated Packaging Assembly Corporation) and subsidiary as of December 31, 2001 and 2002, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the consolidated financial statements, the Company incurred a net loss of $8,533,000 during the year ended December 31, 2002, and, as of that date, the Company’s current liabilities exceeded its current assets by $30,356,000 and its total liabilities exceeded its total assets by $26,339,000. These factors, among others, as discussed in Note 1 to the consolidated financial statements, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/    GRANT THORNTON LLP

San Jose, California

March 12, 2003

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OSE USA, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

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

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OSE USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)