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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended December 31, 2004

For the transition period from                      to                     

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) 383-0818

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 February 22, 2005, was approximately $869,000. 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 22, 2005 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 2005 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,” 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 Operation” 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., 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. The Company discontinued manufacturing operations during 2003 (see further discussion under the heading “Discontinued Operations” below), and on September 8, 2003, completed the sale of assets of its manufacturing division to a third party whose owner was previously affiliated with the Company. 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. On June 28, 2004, the Company filed a complaint in the Superior Court of Santa Clara County, California against the purchaser in order to resolve disputes concerning the assets to be transferred and the security for the note. See further discussion of this lawsuit under Item 3, “Legal Proceedings,” which is incorporated here by reference. Due to the uncertainty of collection, the Company determined during 2004 to fully reserve the $500,000 promissory note.

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. of Taiwan (“OSET”), 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 OSET and OSEP semiconductor assembly and test services to customers headquartered in North America, in accordance with a distribution agreement executed in October 1999 when the Company acquired OSEI in exchange for the issuance of common stock to OSET.

Strategy

The OSE Group consists of OSET, OSEP, OSEI, the Company, and other related entities. The role of the Company, after discontinuing its manufacturing segment, has been identical to the role of OSEI, which is to serve as the North American sales agent for the OSE Group’s factories in Taiwan (OSET) and the Philippines (OSEP). OSEI is an integral part of OSE Group and is fully dependent on the operations of the OSE Group and without it, its operations would be adversely affected. As the holding company of OSEI, the Company and OSEI

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focus on maintaining existing customers and developing new customers in the North American region for OSET and OSEP. The role of OSET in this Group is to produce high volume, high pin count advanced assembly packaging and test services for worldwide customers located in Asia, North America, and Europe. The role of OSEP in this Group is to perform high-volume, low to medium pin count traditional assembly packaging and test service for its worldwide customers.

Discontinued Operations

On April 21, 2003, the Company announced the planned shut down of its US manufacturing business on or before June 30, 2003. The reason for this decision was that the manufacturing segment of the Company had been incurring significant net operating losses since 1997, especially during 2001 and 2002 when the overall technology sector suffered sizable downturn. Despite the effort to reduce employee headcount and operating expenses, the manufacturing segment continued to incur substantial net losses each year. Therefore, the management of the Company decided to dispose of the manufacturing segment.

On September 8, 2003, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Integrated Packaging Assembly Corporation, a newly-formed Delaware corporation (“IPAC”), for the sale to IPAC of the Company’s manufacturing business, including related equipment, inventory, books and records, permits and licenses, and intellectual property.

IPAC is an independently owned corporation organized by Victor Batinovich, who was a co-founder of the Company and its chief executive officer from 1992 to 1997. The Company was originally organized as Integrated Packaging Assembly Corporation in California and reincorporated in Delaware under the same name prior to changing its name to OSE USA, Inc. in June 2001. Mr. Batinovich, IPAC and their affiliates have no current relationship with the Company.

Pursuant to the Agreement, IPAC acquired the Company’s manufacturing assets for a total of $1 million, including $500,000 in cash and a three-year secured note in the amount of $500,000. The price of the assets and the manner of payment were determined in arm’s length negotiations between the parties and their representatives. As a result of significant disputes between the Company and IPAC concerning matters governed by the Agreement, the Company subsequently instituted a lawsuit against IPAC, details concerning which are described in Item 3 (“Legal Proceedings”) below, and established a reserve for the full amount of the note.

Approximately 100 employees were laid off as a result of the discontinuation of manufacturing operations, and the Company’s remaining distribution staff consists of 13 persons.

Marketing and Sales

After the sale of its manufacturing segment, the Company has focused on maintaining existing customers and developing new customers in the North American Region for OSET and OSEP. Both OSET and OSEP specialize in volume production. OSET focuses mainly on high pin count and advanced packages. OSEP focuses mainly on low to medium pin count and traditional packages. The goal of the Company is to promote both OSET and OSEP based on customer needs. For traditional packages like PDIP (Plastic Dual In Package), SOIC (Small Outline Integrated Circuit), TSSOP (Thin Shrink Small Outline Package) and PLCC (Plastic Lead Chip Carrier), the Company will promote OSEP based upon its lower manufacturing cost. For advanced packages like BGA (Ball Grid Array), SIP (System In Package), Flip Chip, and CSP (Chip Scale Package), the Company will promote OSET based upon its greater experience and more advanced manufacturing technology.

The Company’s business is substantially affected by market conditions in the semiconductor industry, which is highly cyclical. The Company’s business 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

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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 like the one in the latter part of 2004 in the semiconductor industry is expected to have an adverse effect on the Company’s business, financial condition and results of operation. 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 Company, with the capacities and capability provided by OSET and OSEP, can service North American customers who are seeking low cost high volume contract manufacturers in the Asia region.

As dictated by the 1999 distribution agreement, the Company (through OSEI) is the exclusive North American sales agent for OSET and OSEP. Therefore, the Company has been entirely dependent on US based customers within the semiconductor industry. In 2002 and 2003 three major customers accounted for 44% and 36% of revenue respectively. In 2004, two major customers accounted for 34% of revenue.

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. 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. 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 in its portfolio. By restructuring its sales force, using outside sales representatives, and effectively managing its global sales and business development team, the Company believes it will mitigate the impact of customer concentration.

Customers and Target Market

The Company acts as the sales agent and provides distribution services for OSE and OSEP to a wide variety of customers, ranging from large multinational companies to smaller emerging technology companies, including start-ups. 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.

Because of the variety of design and manufacturing services offered by OSET and OSEP, the Company believes that it is well positioned to offer their 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.

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.

Competition

The semiconductor packaging industry is highly competitive, and the market is essentially global. The Company, together with the OSE Group, 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 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 OSE Group and has been operating for a significantly longer period of time. Such companies

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have also established relationships with many large semiconductor companies, which are current or potential customers of the Company. The OSE Group could face substantial competition from Asian packaging foundries should one or more of such companies decide to establish foundry operations in North America. The OSE Group 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 OSE Group’s customers are also customers of one or more of its 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.

For the past several years, the OSE Group has experienced a decline in the average selling prices for a number of its products. During 2003, the Company discontinued its manufacturing segment in the US and concentrated its efforts on promoting its offshore affiliates in Taiwan and Philippines. In the first half of 2004, average growth in the semiconductor industry was 20% over the same period of 2003. However, industry growth slowed down starting the second half of 2004 as a result of inventory correction from the end customers. This trend is expected to continue into the first half of 2005 and volume is expected to pick up starting the second half of 2005.

Employees and Executive Officers

As of December 31, 2004, the Company had 16 full time employees, 13 in sales and customer service, and 3 in finance and administration. 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 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 period, Mr. Li held various accounting positions in leading firms in the public accounting and hospitality industries.

The Company’s success depends to a significant extent upon the continued service of its key 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.

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Investor Information

The Company’s common stock is registered under the Securities Exchange Act of 1934 (the “Exchange Act”). The Company files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”) electronically; this information may be viewed and downloaded from the SEC’s Internet site (http://www.sec.gov). Such information also 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.

The Company’s principal operations are located in an area approximately 20,000 square foot in size, which it occupies under a ten-year lease, which expires in January 2008. Approximately half of this area has been subleased since September 1, 2004, and the rental income is recorded as a deduction from the Company’s rent under the master lease. See Note 4 to the financial statements. 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.

On June 28, 2004, the Company filed a complaint (OSE USA, Inc. v. Batinovich and Integrated Packaging Assembly Corporation, et al., Santa Clara County Superior Court Case No. 104CV022361) against Integrated Packaging Assembly Corporation (“IPAC”), the purchaser of the assets of the manufacturing segment of the Company on September 8, 2003. This action for money damages; specific performance; and declaratory, equitable, and injunctive relief arose out of defendants’ failure to provide an executed deed of trust securing IPAC’s $500,000 promissory note to the Company in conjunction with the sale of the Company’s manufacturing assets to IPAC in 2003. Defendants allege that the deed of trust was not executed or delivered because of OSE’s failure to turn certain assets over to IPAC pursuant to the asset purchase agreement. Although discovery has been propounded in the action, responses have been held in abeyance pending possible resolution. The parties have been engaging in settlement discussions to resolve the dispute.

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

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Part II

As of February 22, 2005, there were approximately 320 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 normally subject to fluctuations in response to variations in operating results, announcements of technological innovations or new products, general conditions in the semiconductor industry and in the public stock markets, and other events or factors. The trading price has declined steadily since the Company encountered financial difficulties in 1997 and has remained at penny-fraction levels for more than a year. In these circumstances, it is not possible to predict with any certainty whether, when, or by how much the trading price of the Common Stock may decline further or increase in value.

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. 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, OSET, 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, OSET 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, 2004, balances of unpaid preferred dividends and accrued interest on unpaid preferred dividends are $4,273,000 and $764,000, respectively. The decision to rescind the previous payment of dividends during 2002 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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Information listed below was derived from the audited financial statements for the respective years.

See Note 1 of Notes to Consolidated Financial Statements for an explanation of the method used to determine shares used in computing per share amounts.

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This Management’s Discussion and Analysis of Financial Condition and Results of Operation 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 had significant excess production capacity after the first quarter of 1997. The reduction in revenues and underutilization of capacity and the resulting inability to absorb fixed costs resulted in operating losses that continued through 2004. The Company’s independent registered public accounting firm’s audit report on the Company’s December 31, 2002, 2003 and 2004 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, a public Taiwanese company (“OSET”) 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, OSET converted 1,000,000 preferred shares into 13,748,771 shares of common stock. On December 26, 2000, OSET 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.

On October 29, 1999, the Company acquired OSEI, a wholly owned subsidiary of OSET serving as its exclusive North American distributor, 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 OSET. Since its acquisition, OSEI has been operated as a wholly owned subsidiary of the Company, which has reported consolidated results with OSEI. OSEI derives its revenues exclusively from fees received on the sales of OSET and OSEP semiconductor assembly and test services to customers headquartered in North America.

On April 21, 2003, the Company announced the planned shut down of its US manufacturing business on or before June 30, 2003. The reason for this decision was that the manufacturing segment of the Company has been posting significant operating losses since 1997, especially during 2001 and 2002 when the overall technology sector suffered a sizable downturn. Despite the effort of cutting back in employee headcount and operating expenses, the manufacturing segment continued to incur substantial operating losses each year. The management of the Company decided to dispose of the manufacturing segment.

On September 8, 2003, the Company sold its manufacturing business, including related equipment, inventory, books and records, permits and licenses, and intellectual property to Integrated Packaging Assembly Corporation, a newly-formed Delaware corporation (“IPAC”).

Discontinued Operations

The Company’s manufacturing segment, after the sale of its equipment, inventory, books and records, permits and licenses, and intellectual property, has been treated as discontinued operations and has been presented in the Company’s financial statements as such. Losses from discontinued operations for the years ended December 31, 2002, 2003, and 2004 are $7.6 million, $5.5 million, and $0 respectively. Detailed financial results from discontinued operations are presented in note 2 to the consolidated financial statements.

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Results of Operations For The Years Ended December 31, 2002, 2003, and 2004

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

Revenues

The distribution segment earns revenue through a distributor agreement with OSET; revenues are derived from fees received on the sales of OSET’s and OSEP’s semiconductor assembly and test services to customers headquartered in North America and are recognized on a net commission basis. Revenue related to manufacturing is included in discontinued operations and presented on a net basis. Total distribution revenues increased 30.3% to $4.3 million in 2004, from $3.3 million in 2003. Revenue decreased 31.3% to $3.3 million in 2003, from $4.8 million in 2002. The increase in revenue in 2004 was due to the rebound of the semiconductor industry in the first half of the year. The decrease in revenue in 2003 was primarily due to the weakness in the overall semiconductor industry. In 2003, management decided to disengage from several major accounts, which were not sufficiently profitable. Also, OSET and OSEP lost some orders from major customers such as ATI to competitors due to lack of upgraded testing capability.

Selling, General and Administrative Expenses

Selling, general and administrative expense consists 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 $3.7 million, $4.0 million, and $3.7 million for the years ended December 31, 2002, 2003, and 2004, respectively. Selling expenses were mainly attributed to OSEI. The decrease in selling, general and administrative expenses in 2004 was mainly due to a decrease in payroll expenses as a result of a reduction in sales force in late November 2003. As a percentage of revenues, selling, general and administrative expense decreased to 85.2% in 2004 from 119.4% in 2003 but higher than the 77.0% in 2002. The percentage decrease in 2004 was due to lower payroll expenses and higher revenue. The fluctuation from 2002 to 2003 in percentages was mainly caused by the 31.3% revenue decrease in 2003.

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Impairment of Assets

In 2002, the Company completed the two-step transitional impairment test for goodwill and distribution agreement required by Statement of Financial Accounting Standards (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 effect of a change in accounting principle. In 2003 and 2004, the Company performed similar test on its distribution agreement and concluded no impairment needed to be recorded.

Interest and Other Income

Interest and other income from continuing operations in 2002, 2003 and 2004, was $93,000, $22,000 and $78,000, respectively. Other income mainly consists of gain or loss resulting from the disposal of assets. The decrease in interest and other income in 2003 from 2002 was due mainly to lower interest rates and lower investment balances, which resulted from the net loss from operations and capital expenditures. The increase in 2004 from 2003 was mainly due to (1) a $12,000 payroll tax refund after a government audit related to the 2003 reduction in work force and (2) a forfeiture of $49,000 wafer ring deposit from former manufacturing segment customers who failed to return wafer rings.

Interest Expense

Interest expense consists primarily of interest payable on bank debt and inter-company loans. Interest expense for 2002, 2003 and 2004 was $0.71 million, $0.53 million and $0.83 million respectively. The decreases in 2003 and 2002 were due to lower debt balances and lower interest rates.

On October 1, 2003, the Company paid off its line of credit with the banks. As of December 31, 2003, the Company recorded $0.22 million as interest related to these lines of credit.

During 2003, $26.1 million was converted from an inter-company payable to two inter-company loans each due in one year from their inception dates. As of December 31, 2004, the Company accrued $1,135,000 of interest payable with respect to these loans.

Provision for Income Taxes

The income tax benefit for the year 2003 represents the reversal of an over accrual of income taxes resulting from a change in accounting estimate. The income tax provision for the year 2004 represents income tax liability to the state of Massachusetts even though the Company is operating at a loss. 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.

Liquidity and Capital Resources

During 2004, the Company’s net cash used in operations was $55,000, comprised primarily of a net loss of $115,000, offset by $977,000 of non-cash charges for depreciation and amortization expenses, a net increase in working capital of $314,000, offset by an amortization of deferred gain in 1998 on sale of facility of $138,000 and net cash used by discontinued operation of $465,000. The net increase in working capital items reflected mainly an $866,000 decrease in accounts payable and a $529,000 decrease in accounts receivable. As of December 31, 2004, the Company had a cash balance of $533,000.

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In 2004, $3,000 was used in investing activities as capital expenditure.

Cash provided by or used in operating, investing, and financing activities for the years ended December 31, 2002, 2003, and 2004 are summarized in the following table.

The decrease of $8.7 million in cash provided by operating activities from 2003 to 2004 was mainly due to (1) a $115,000 net loss in 2004 compared with a net loss of $1.1 million in 2003 (2) a $529,000 decrease in accounts receivable in 2004 compared with a $9.6 million decrease in 2003 (3) a $867,000 decrease in accounts payable and loan payable in 2004 compared with a $2.7 million increase in 2003 (4) a $500,000 decrease in notes receivable in 2004 compared with no change in 2003.

Cash used in discontinued operation in operating activities in 2004 was $465,000 compared with $2.7 million in 2003 as the segment was winding down its operations.

The increase in cash provided by investing activities in 2003 was mainly due to the $500,000 cash proceeds from the sale of the assets of the discontinued operations.

The increase in cash used in financing activities in 2003 was due to the increase in payments on the bank debt. Payments on bank debt for years 2001, 2002, and 2003 were $6.4 million, $1.6 million, and $10.0 million respectively. Payments on bank debt increased in 2003 as a result of pay-off of the lines of credit.

As of December 31, 2002, the Company had a line of credit 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 were defined as eighty percent of eligible accounts receivable less than ninety days, excluding inter-company accounts. Over advances under this agreement were immediately payable to the lender. Borrowings under this line of credit accrued interest at the banks’ prime rate (4.25% at December 31, 2002) plus 0.50%, were collateralized by the assets of the Company and were guaranteed by OSET. The amount outstanding under this line of credit was $9,978,000 at December 31, 2002. On October 1, 2003, the Company paid off the line of credit through collection of accounts receivable and funding from OSET.

Without the line of credit, the Company will require continued financial support from OSET to fulfill operating cash requirements. If OSET does not provide the Company with required cash, the Company will not be able to continue its operations. As shown in the consolidated financial statements, the Company incurred a net loss before stock dividends of $115,000 during the year ended December 31, 2004, and, as of that date, the Company’s current liabilities exceeded its current assets by $36,770,000 and its total liabilities exceeded its total assets by $35,403,000. 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.

In 2003, the Company converted $26.1 million of its payable to OSET to two one-year loans, including a loan of $17.5 million that bore interest at the rate of 3.5% and a loan of $8.6 million that bore interest at the rate of 3%. The $17.5 million loan was due on June 26, 2004 and the $8.6 million was due on December 29, 2004. In

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June 2004, OSET extended the $17.5 million loan to December 26, 2004 with reduced interest at the rate of 3% per annum. In December 2004, OSET extended the $17.5 million loan to December 25, 2005 and extended the $8.6 million loan to June 29, 2005. 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 OSET does not renew the loans in 2005, the Company will not be able to continue its operations.

The management of the Company believes that, after the closing of its manufacturing segment, the Company will be less dependent on OSET’s funding support except for servicing the aforementioned loans. Without the manufacturing segment and with its distribution operation, the Company believes that it will not require any major capital expenditures. With a revised organization and cost structure, the Company believes that it may have the ability (except for the payables to OSET) to support its operating cash requirement internally during the present fiscal year.

On August 18, 2004, the Company entered into a twelve-month lease agreement to sublease approximately 7,000 square feet of space in its headquarters to a third party tenant commencing September 1, 2004. The tenant will have two options to renew the lease for additional twelve-month periods beginning September 1, 2005 and September 1, 2006. The Company records the sublease rental income as a deduction to its lease expense pursuant to the master lease.

As of December 31, 2004, 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.

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Revenue recognition

The Company’s current revenues come from distribution, which is recognized, on a net basis, based on OSEI’s distribution agreement with OSET, when the Company is informed by OSET that products have been shipped.

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, OSET, 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 with respect to the recording of accounts receivable derived from products shipped from OSET 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 OSET directly. The accounts receivable related to products shipped from OSEP as of December 31, 2004 were $1.7 million. The Company no longer records accounts receivable for OSET. All other terms and conditions of the distribution agreement remain in effect.

Valuation of long-lived assets

Prior to the sale of its manufacturing segment in September 2003, the Company’s business required 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 estimated the useful life of our manufacturing equipment, which was the largest component of our long-lived assets, to be six years. We based our estimate on our experience with acquiring, using and disposing of equipment over time. Depreciation expense was a major element of our manufacturing cost structure. We began depreciation on new equipment when it was 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 estimated 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 was 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 2003 before the sale of its assets of its manufacturing segment, the Company evaluated the recoverability of the property and equipment that were held for sale and determined that the fair value was less than the carrying amount by $795,000, and accordingly recognized an impairment charge. Due to the fact that the Company sold the assets of its manufacturing segment, the above two impairments are included in the discontinued operations. After disposing of its manufacturing segment and the related equipment, the Company is operating in the distribution segment only.

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 10 in the accompanying financial statements, the Company is a member of a group of affiliated companies owned by Orient Semiconductor Electronics, Ltd. of Taiwan (“OSET”) and is a party to a number of significant related party transactions with OSET 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 OSET’s and OSEP’s production capacity, long lead times for the manufacturing equipment required by OSET and OSEP, evolutions in the life cycles of customers’ products, timing of expenditures in anticipation of future orders, lack of a significant backlog, effectiveness of OSET’s and OSEP’s management of their 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 operation.

Risk of lack in 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 a local debt facility will make the Company primarily dependent on the funding support from OSET. 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 related to dependence on OSET and OSEP factory capacity and capability

The Company’s operating revenue derives solely from commissions revenue generated from business solicited by OSEI in North America and passed to OSET 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 OSET and OSEP are also serving customers located in other regions of the world. If OSET 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.

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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 operation. Furthermore, the Company cannot assure that 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.

Risk from terrorist activities and other political conditions

The economic slowdown in the United States and worldwide, exacerbated by the occurrence and threat of terrorist attacks and the consequences of sustained military action, has adversely affected customers’ demand for our products. A continued decline of the worldwide semiconductor market or a significant decline in economic conditions in any significant geographic area would likely further 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 require increased technological and manufacturing expertise. If OSET 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 operation.

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 OSET’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, possibly resulting in economic embargo, a disruption in shipping or even military hostilities. Such events 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 operation 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 promulgated new rules on a variety of subjects. These developments increase our accounting and legal compliance costs 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.

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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 disrupted. 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.

On October 1, 2003, the Company paid off its line of credit with local banks through collections from accounts receivable and funding from OSET. As of December 31, 2003 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 OSET.

The Company has no trading portfolio, and its only market risk sensitive asset is the three-year $500,000 note received from IPAC 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 unresolved disputes among the parties. (See discussion of this matter in Item 3.) Due to the uncertainty of the collection of this note and the unresolved dispute between the Company and the purchaser, the Company decided in 2004 to fully reserve the note. At the same time, the purchaser continues to make required payments of interest. These interest payments have not been recorded as income to the Company. Under these circumstances, it is the Company’s belief that any market risk sensitivity attached to the note does not and will not affect the Company.

The Company has two principal interest-bearing liabilities: (1) approximately $26.1 million in payables to the Company’s parent OSET 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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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements:

Financial Statement Schedules:

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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2004 and 2003, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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, 2004 and 2003, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2004, 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 before stock dividends of $115,000 during the year ended December 31, 2004, and, as of that date, the Company’s current liabilities exceeded its current assets by $36,770,000 and its total liabilities exceeded its total assets by $35,403,000. 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 Francisco, CA

February 18, 2005

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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)

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

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OSE USA, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(In thousands)

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

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OSE USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)