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UNITED STATES

SECURITIES & EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 26, 2004

OR

For the transition period from              to             

Commission file number: 0-27712

OSE USA, Inc.

(Exact name of registrant as specified in its charter)

(408) 383-0818

(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  ¨    No  x

Number of shares of common stock outstanding as of November 5, 2004: 56,725,808. As of November 5, 2004 the Company also had 3,000,000 shares of Series A Convertible Preferred Stock and 3,023,225 shares of Series B Convertible Preferred Stock, outstanding, which are convertible at any time by the holder into 41,246,312 shares and 41,565,626 shares, respectively, of common stock.

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TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OSE USA, Inc.

Condensed Consolidated Balance Sheets

(In thousands except share and per share data)

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

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OSE USA, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

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

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OSE USA, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

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

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OSE USA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OSE USA, Inc., formerly Integrated Packaging Assembly Corporation, (the “Company”) was incorporated in California on April 28, 1992 and reincorporated in Delaware on June 19, 1997. The Company changed its name on June 6, 2001 in connection with its strategic reorganization. The Company has operated historically within two segments of the semiconductor industry: (1) manufacturing and (2) distribution.

Within manufacturing, the Company’s business had been to assemble and package integrated circuits from wafers consigned by its customers. The Company’s focus has been on quad flat packages (“QFPs”), thin quad flat packages (“TQFPs”), ball grid array packages (“BGAs”), flip chips, and chip scale packaging (“CSPs”), which are used in complex integrated circuits with high pin-counts in the personal computer and telecommunications industries. The Company also provided advanced design and assembly services to satisfy its customers’ requirements. On September 8, 2003, the Company completed the sale of assets of its manufacturing division to a third party. The assets sold included equipment, inventory, permits and licenses, and intellectual property, for a total of $1 million, composed of $500,000 in cash and a $500,000 note receivable. All of the original contractual terms on the $500,000 note receivable have not been completed by the purchasing party as of September 26, 2004. On June 28, 2004, the Company filed a complaint in the Superior Court of Santa Clara County, California against the purchaser. The Company decided to fully reserve the $500,000 promissory note due to the uncertainty of collection.

Within the distribution segment, the Company through its subsidiary OSE, Inc. (“OSEI”) 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 controlling 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 exclusively from fees received on the sales of OSE and OSEP semiconductor assembly and test services to customers headquartered in North America, in accordance with a distribution agreement. The Company entered this segment of the market in October 1999 with the acquisition of OSEI from OSE and with the sale of the assets of the manufacturing segment currently operates in one segment.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not have the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included.

The financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2003 included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

The results of operations for the three and nine-month periods ended September 28, 2003 and September 26, 2004 are not necessarily indicative of the results that may be expected for any subsequent period or for the entire year ending December 31, 2004.

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The Company has experienced fluctuating levels of demand and ongoing net operating losses and has negative stockholders’ equity of $45.2 million as of December 31, 2003. As a result of these circumstances, the Company’s independent accountants’ opinion on the Company’s December 31, 2003 consolidated financial statements included an explanatory paragraph to indicate that these matters raise substantial doubt about this Company’s ability to continue as a going concern.

NOTE 2. DISCONTINUED OPERATIONS

On September 3, 2003, the Company signed an agreement with an unrelated third party to sell the Company’s manufacturing operation (including related equipment, inventory, and intellectual property) for a total of $1,000,000, comprised of $500,000 in cash and a $500,000 note bearing interest at the prime rate. The principal of the note is due at the end of a three-year period, following consummation, and interest is due monthly. The sale of assets was substantially completed as of September 8, 2003. Pursuant to SFAS No.144, these former activities have been accounted for as discontinued operations in the financial statements. Condensed financial information for these discontinued operations is summarized below for the three and nine-month periods ended September 28, 2003 and September 26, 2004.

As of December 31, 2003 and September 26, 2004, the Company had the following assets and liabilities remaining in its discontinued operations: (In thousands)

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NOTE 3. STOCK-BASED COMPENSATION

The Company accounts for stock-based awards to employees using the intrinsic value method. Accordingly, no compensation expense has been recognized in the accompanying consolidated financial statements for stock-based awards to employees when the exercise price of the award is equal to or greater than the quoted market price of the stock on the date of grant. The fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company’s stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company’s fair value calculations for awards from stock option plans were made using the Black-Scholes option pricing model with the following weighted average assumptions:

If the computed fair values of the stock-based awards had been amortized to expense over the vesting period of the awards, net loss and net loss per share, basic and diluted, would have been as follows (in thousands, except per share amounts):

NOTE 4. ACCOUNTS RECEIVABLE

The majority of the Company’s accounts receivable is due from semiconductor companies. Credit is

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extended based on evaluation of each customer’s financial condition and, generally, collateral is not required. A majority of accounts receivable are due within 30 days and are stated net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to bad debt expense, included in selling, general and administrative expenses.

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.

Effective May 1, 2003, the Company and OSE amended the distribution agreement related to the recording of accounts receivable derived from products shipped from OSE Ltd to customers in North America. The Company no longer records accounts receivable generated from such shipments, and payments related to invoices dated after May 1, 2003 have been remitted to OSE directly. The accounts receivable related to products shipped from OSEP as of December 31, 2003 and September 26, 2004 were $2.2 million and $2.4 million, respectively. All other terms and conditions of the distribution agreement remain in effect.

Changes in the Company’s allowance for doubtful accounts are as follows:

NOTE 5. INCOME TAXES

Provision for income taxes was recorded for the three and nine-month periods ended September 28, 2003 and September 26, 2004. 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 Company believes the realization of its deferred tax assets is unlikely and accordingly, has recorded an offsetting valuation allowance.

NOTE 6. NET LOSS PER SHARE

Net loss per basic and diluted share for the three and nine-month periods ended September 28, 2003 and September 26, 2004 was computed using the weighted average number of common shares outstanding during the period excluding the dilutive potential of common shares from assumed conversions because of their anti-dilutive effect. Dilutive potential of common shares includes conversion of preferred shares (Note 8), using the if-converted method and outstanding stock options and warrants, using the treasury stock method. At September 28, 2003, there were options and warrants outstanding to purchase an aggregate of 9,221,431 shares of Common Stock. At September 26, 2004, there were options and warrants outstanding to purchase an aggregate of 5,073,586 shares of Common Stock.

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The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands):

NOTE 7. LOANS PAYABLE – RELATED PARTY

The Company has been withholding payments obtained from customers of OSE in order to support its operational cash requirement. This withholding was recorded as accounts payable – related party. In August 2003, OSE decided to convert part of this withholding to two interest-bearing loans.

The Company accrued interest expense of $195,000 and $629,000 for the three and nine-month period ended September 26, 2004 related to these loans.

Loan payable to related party at December 31, 2003 and September 26, 2004 consists of:

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NOTE 8. CONVERTIBLE PREFERRED STOCK

As of September 26, 2004, the Company had 3,000,000 shares of Series A convertible preferred stock, and 3,023,225 shares of Series B convertible preferred stock outstanding. Each share of Series A and Series B Preferred is convertible into 13.7487705 shares of the Company’s common stock at the option of the holders.

The holders of shares of Series A Preferred and Series B Preferred are entitled to dividends at the rate of $0.136 and $0.159, respectively, per annum per share, payable semi-annually on January 1 and July 1 each year. The dividends on Series A and Series B Preferred are payable in cash, shares of common stock or any combination of cash and shares of Common Stock, at the option of the holders of Series A and Series B Preferred. The holders of the Series A Preferred and Series B Preferred are entitled to the payment of $1.70 and $1.98 per share, respectively, in the event of any liquidation, dissolution, or winding up of the Company, including any consolidation, merger or other reorganization whereby the existing shareholders of the Company own less than 50% of the Company’s voting power subsequent to the transaction. In accordance with terms and conditions of the preferred stocks, dividends and interest on unpaid dividends of approximately $3.86 million and $4.74 million are included in accrued liabilities as of December 31, 2003 and September 26, 2004, respectively.

NOTE 9. SEGMENTS

The Company is left with the distribution segment after eliminating its manufacturing operations. The operating results shown on the face of the Condensed Consolidated Statements of Operations under continuing operations represents the three and nine month operating results from the distribution segment for the periods ended September 28, 2003 and September 26, 2004.

ITEM 2. 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 below and elsewhere in this report on Form 10-Q.

Overview

As a result of a reduction in orders from the Company’s customers, the Company had significant excess production capacity from the first quarter of 1997 until the closing of the Company’s manufacturing operations during 2003, as described below. The reduction in revenue and underutilization of capacity and the resulting under-absorption of fixed costs resulted in operating losses that continued through the third quarter of 2003. As a result of these and other related circumstances, the Company’s independent accountants’ opinion on the Company’s December 31, 2003 financial statements, and the Company’s independent accountant’s opinion on the Company’s financial statements for each of the prior fiscal years 1998 through 2003, included an explanatory paragraph indicating that these matters raise substantial doubt about the Company’s ability to continue as a going concern.

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On September 8, 2003, the Company completed the sale of assets of its manufacturing division to a third party. The assets sold included related equipment, inventory, permits and licenses, and intellectual property, for total consideration of $1 million, comprised of $500,000 in cash and a $500,000 three-year note.

OSE, Inc. (“OSEI”) serves as the exclusive North American distributor for OSE, a public Taiwanese company and the Company’s principal stockholder. OSEI also serves as the exclusive North American distributor for the affiliated company OSE Philippines (“OSEP”). OSEI derives its revenues exclusively from fees received on the sales of OSE’s and OSEP’s semiconductor assembly and test services to customers headquartered in North America.

The Company’s business is substantially affected by market conditions in the semiconductor industry, which is highly cyclical and subject historically, to significant economic downturns characterized by reduced product demand, rapid erosion of average selling prices and excess production capacity. In addition, rapid technological change, evolving industry standards, intense competition and fluctuations in end-user demand characterize the markets for integrated circuits. Since the Company’s business is entirely dependent on the requirements of semiconductor companies for independent packaging foundries, any future downturn in the semiconductor industry is expected to have an adverse effect on the Company’s business, financial condition and results of operations. These general industry conditions continue to affect the Company’s business for the nine-month period ended September 26, 2004.

Results of Continuing Operations

The following discussion compares results from continuing operations for the three and nine-month periods ended September 28, 2003 and September 26, 2004. All amounts have been reformatted to reflect the impact of the discontinued operations for all periods presented.

Revenues

The distribution segment earns revenue through a distribution agreement with OSE, pursuant to which revenues derived from fees received on the sales of OSE’s and OSEP’s semiconductor assembly and test services to customers headquartered in North America are recognized on a net commission basis. Revenue related to manufacturing is included in discontinued operations and presented on a net basis.

Total revenues increased 50% to $1,240,000 for the three-month period ended September 26, 2004 from $828,000 for the three-month period ended September 28, 2003. Total revenues increased 46% to $3,470,000 for the nine-month period ended September 26, 2004 from $2,380,000 for the period ended September 28, 2003. Revenue increased as a result of overall recovery of the semiconductor industry. Both OSE and OSEP have experienced increased orders from customers during the first nine months of 2004. However, it is expected that the growth of the semi-conductor industry will slow down for the fourth quarter of 2004 and the first quarter of 2005.

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 for the three and nine-month periods ended September 28, 2003 were $980,000 and $3,323,000, respectively. Selling, general and administrative expenses decreased 14% to $844,000 and decreased 10% to $3,006,000 respectively, for the three and nine-month periods ended September 26, 2004. The $136,000 and $317,000 decrease for the three month and nine-month periods was due primarily to decreased spending in payroll and traveling expenses.

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As a percentage of revenues, selling, general and administrative expenses decreased from 118% and 140% for the three and nine-month periods ended September 28, 2003, respectively, to 68% and 87% for the three and nine-month periods ended September 26, 2004, respectively. These decreases were mainly due to the lower spending and higher revenue levels in 2004. Despite of slowing down revenue growth for semiconductor industry in the fourth quarter and first quarter of 2005, the Company expects that selling, general and administrative expenses will remain at the current level.

Interest and Other Income

Interest income is primarily comprised of interest earnings from investments in cash equivalents. Interest and other income increased from $4,000 to $8,000 for the three month-periods ended September 28, 2003 and September 26, 2004, respectively. Interest and other income decreased from $23,000 to $16,000 for the nine-month periods ended September 28, 2003 and September 26, 2004, respectively. The increase for the three-month period was mainly due to higher cash balance. The decrease for the nine-month periods was due to lower interest rates and lower cash balances in the first six months of 2004.

Interest Expense

Interest expense consists of interest payable on bank debt and and inter-company loans payable to OSE. Interest expense increased from $20,000 and $214,000 for the three and nine-month periods ended September 28, 2003, respectively, to $195,000 and $629,000 for the three and nine-month periods ended September 26, 2004, respectively. Interest expense increased as a result of interest charges from inter-company loans offset by pay-down of the Company’s bank debt and lower interest rates.

Provision for Income Taxes

The Company recorded a $4,000 and $16,000 provision for income tax for the three and nine-month period ended September 28, 2003 compared with $2,000 and $4,000 for the three and nine-month period ended September 26, 2004 for Massachusetts state income tax.

Liquidity and Capital Resources

During the nine-month period ended September 26, 2004, the Company’s net cash provided by continuing operations was $26,000. Net cash provided by operations was comprised primarily of a net loss of $153,000, increased by $281,000 of non-cash charges for depreciation and amortization and $500,000 of bad debt reserve, reduced by a non-cash $69,000 amortization of gain on sale of facility, and a $499,000 net increase in working capital items. The net increase in working capital items reflected a $194,000 increase in accounts receivable, a $47,000 increase in prepaid and other current assets, a $246,000 decrease in accounts payable, and a $12,000 decrease in accrued liabilities. At September 26, 2004, the Company had cash and cash equivalents of $307,000.

Cash provided by or used in operating, investing, and financing activities for the nine-month periods ended September 28, 2003 and September 26, 2004 are summarized in the following table. (in thousands)

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The decrease of $9.4 million in cash provided by operating activities from 2003 to 2004 was mainly due to:

(1) A $10.2 million difference in changes in accounts receivable. Accounts receivable decreased by $10.0 million during the nine-month period in 2003 compared with a $0.2 million increase during the same period in 2004. The decrease in accounts receivable in 2003 was mainly caused by the amendment of the distribution agreement between the Company and OSE (Please refer to Note 4 of the Financial Statements).

(2) A $2.4 million difference in changes in accounts payable and accounts payable related party Accounts payable increased by $2.2 million during the nine-month period in 2003 compared with a $0.2 million decrease during the same period in 2004. Company increased its borrowing from OSE in 2003 to pay off its bank debt) offset by,

(3) A $1.8 million difference in cash used in discontinued operations Cash used in discontinued operation in operating activities was $2.2 million during the nine-month period in 2003 compared with $0.4 million during the same period in 2004. The decrease was due to a reduction in loss from the manufacturing segment in 2004 as the segment has been fully closed,

(4) A $1.0 million difference in net loss from continuing operations (Net loss from continuing operations for the nine-month period in 2003 was $1.2 million compared with $0.2 million for the same period in 2004). Net loss from continuing operations decreased because of improved commission revenue and lower operating cost and

(5) A $0.5 million difference in bad debt reserve from continuing operations. The Company recorded a bad debt reserve for the nine-month period ended September 26, 2004 for the $0.5 million note receivable (Please refer to Note 1 of the Financial Statements)

The decrease of $8.9 million in cash used in financing activities from 2003 to 2004 was due to a decrease in the Company’s bank loan obligation.

In 2003, the Company converted $26.1 million of its payable to OSE to two one-year loans. $17.5 million of principal bears interest at 3.5% and $8.6 million of principal bears interest at 3%. The $17.5 million loan is due on June 26, 2004 and was extended to December 26, 2004 with revised interest rate at 4.0% effective June 27, 2004. The 4% interest was subsequently revised back to 3.5% with no interest rate change in effect. The $8.6 million is due on December 29, 2004. The Company does not believe that it will have the ability to settle the loans on the due dates either through its operations or through financing from banks or other third parties. If OSE does not renew the loans in 2004, the Company will not be able to continue its operations.

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Without any debt facilities with a bank, 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 may not be able to continue its operations. Currently, OSE is providing the Company with needed operating cash.

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 OSE’s and OSEP’s production capacity, long lead times for the manufacturing equipment required by OSE and OSEP, 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 conditions in any of the preceding factors would adversely affect the Company’s business, financial condition and results of operations.

Risk of lack of funding for operations

If the Company cannot generate the cash for its ongoing operating expenses through operating cash flow and external financing activities, it may be materially adversely affected. The Company paid off its bank line of credit in 2003. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms. The lack of local debt facility makes 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 with OSE and funding continued operations.

Risk related to dependence on OSE and OSEP factory capacity and capability

The Company’s operating revenue consists solely of commission revenue generated from business solicited by OSEI in North America and passed to OSE and OSEP factories. If the factories cannot produce products satisfactory to the end customers due to lack in manufacturing technology or capacity constraint, the Company will not be able to retain the customers. Both OSE and OSEP are also serving customers located in other regions of the world. If OSE and OSEP have to allocate their factory resources to other customers, the sales volume to North American customers might decline with an adverse impact on the Company’s revenue.

Risk related to high fluctuation in 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 products by the Company’s customers and a corresponding material adverse impact on the Company’s business, operating results and financial condition.

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Risk from terrorist activities and other political conditions

The occurrence and threat of terrorist attacks and consequences of sustained military action, has adversely affected demand for products of our customers. A slowdown of the worldwide semiconductor market recovery 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 semiconductor market recovery slows down or worsens as a result of terrorist activities, military action or otherwise, the change in recovery could adversely impact customers’ ability to continue to place orders and to pay in a timely manner for existing or future orders.

Risk of losing technological and manufacturing expertise

The semiconductor packaging industry is continuously going through technological changes, which require increased technological and manufacturing expertise. If OSE and OSEP 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 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 political, economic, and military conditions in Taiwan

The Company could be significantly impacted by the political, economic and military conditions in Taiwan, where OSE’s operations are principally located. 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 the Company’s business by interrupting or delaying production or shipment of products, which OSEI distributes. Any 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 recently enacted and proposed changes in securities laws and regulations

The Sarbanes-Oxley Act (“the Act”) of 2002 has required changes in some of our corporate governance and securities disclosure and/or compliance practices. As part of the Act’s requirements, the Securities and Exchange Commission has been promulgating new rules on a variety of subjects, in addition to other rule proposals, and the NASDAQ Stock Market has enacted new corporate governance listing requirements. These developments have and will continue to increase our accounting and legal compliance costs, particularly in 2004, and could also expose us to additional liability. In addition, such developments may make retention and recruitment of qualified persons to serve on our board of directors or executive management more difficult. We continue to evaluate and monitor regulatory and legislative developments and cannot reliably estimate the timing or magnitude of all costs we may incur as a result of the Act or other related legislation or regulation.

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 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, thus limiting the availability of products for the Company to distribute and harming the Company’s business.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

On October 1, 2003, the Company paid off its line of credit with local banks through collections of accounts receivable and funding from OSE. As of September 26, 2004 and currently, the Company has no bank or other third party financing and will depend upon cash generated from its operations and continued financial support from OSE.

The Company has no trading portfolio, and its only market risk sensitive asset is the three-year $500,000 note received in connection with the sale of the Company’s manufacturing assets on September 8, 2003. See the discussion of this transaction in Item 1 under the heading “Discontinued Operation.” The Company’s agreement requires that the Company assign the note to the Company’s landlord and that the note be secured by the purchaser; however, this assignment has not yet occurred, and the Company continues to hold the note as an asset, due to an unresolved dispute between the purchaser and the landlord as to the sufficiency of the offered collateral. Due to the uncertainty of the collection of this note and the unresolved dispute between the Company and the purchaser, the Company decided to fully reserve the note. As of September 26, 2004, the purchaser has made required payments of interest directly to the landlord. These interest payments have not been recorded as income to the Company, since the Company and all parties involved in the transaction have consented that such interest payments are to be paid directly to the landlord.

The Company has two principal interest-bearing liabilities: (1) approximately $26.1 million in payables to the Company’s parent OSE which were converted into loans during 2003, and (2) interest on unpaid dividends on the Company’s Series A and B Preferred Stock. These items accrue interest at fixed rates and hence are not sensitive to market risk.

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ITEM 4. CONTROLS AND PROCEDURES

Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report, have concluded that as of that date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in this quarterly report is accumulated and communicated by our management, to allow timely decisions regarding required disclosure.

There were no significant changes in our internal controls during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On June 28, 2004, the Company filed a complaint in the Superior Court of Santa Clara County, California against Integrated Packaging Assembly Corporation, the purchaser of the assets of the manufacturing segment of the Company on September 8, 2003. The complaint asserts several causes of action but alleges primarily that the purchaser has not performed all of its obligations with respect to the $500,000 promissory note issued by the purchaser as part of the consideration for the purchase of the Company’s manufacturing assets. Defendant filed a responsive pleading on August 13, 2004, and discovery in the case has been initiated.

ITEM 6. EXHIBITS

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SIGNATURES

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

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